Image source: Getty Images
The stock market is my number one choice for building passive income because I want to make the most of my retirement.
Actually, I’m going to narrow it down. The FTSE 100 stock is the best way I know to target passive income. Mainly because I can buy it on the Stock and Stock ISAs, where all of my dividend income and share price growth has to be completely tax free.
Lifetime income, tax free
If I were younger and didn’t have long-term savings, I’d want to do it without delay. Now is a great time to start investing, as FTSE 100 stocks look cheap and many offer dividend yields of over 6% a year.
Some of us feel refreshed these days, and the young are having it really hard. Yet a 30 year old who can afford to put £5 a day away for their retirement will be rewarded a lot in the long run (provided they stick with it).
Many young people think investing in stocks is risky, and it’s true that the stock market can be very volatile in a short time. However, history shows that over the long term, equities outperform almost any other investment. Over the past 20 years, the FTSE 100 has generated an average total return of 6.89% annually, from both dividends and growth.
Now let’s say a 30 year old starts investing £5 a day, which amounts to just over £150 a month, or £1,825 a year. Then let’s assume they increase it by 3% a year, to help defend its value against inflation.
If their portfolio matched the FTSE 100 average long-term return, they would have a whopping £440,393 at 67 years of age. Their contribution will total £120,768, but their profits will far exceed £319,625.
This is a long term process
Under other assumptions, suppose their portfolio is generating a dividend income of 5% per year at that time. This will generate a passive income of £22,020 a year. Their £5 a day will turn into £60 a day. If lucky, this income will continue for life. Maybe even grow.
Please note that tax treatment depends on individual client circumstances and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and for obtaining professional advice before making any investment decisions.
These numbers are not guaranteed, stock investing never existed. My 30 year old theoretical could earn a lot less than that, or a lot more. It depends on how the market performs and stock taking. Equity offers the potential for higher returns, but comes with higher risks.
Also, that £22,020 in earnings will be worth less than it is now, unfortunately, due to inflation. Personally, I would recommend investing more than £5 a day if possible. I also suggest starting well before 30.
There are a lot of FTSE 100 stocks I want to buy right now. In the last few weeks, I’ve added Lloyds Banking Group, Legal & General Group, wealth manager M&G and consumer goods giant Unilever to my portfolio.
I will reinvest all my dividends back into my portfolio today, and withdraw them as passive income when I retire.