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A second income of £350 a week, or £18,000 a year, would be a real boost in retirement. It won’t buy a life of luxury, but it would make later life a lot more comfortable.
This sum can be generated from a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP), provided investors get stuck in early and give their money time to grow.
Building the pot
There are two main routes to generating £18,000 a year. The first is the so-called 4% rule. This suggests that by withdrawing around 4% of capital each year, the investor should never run out of money. To do that, they’d need roughly £450,000 invested.
The second way is to live off the passive income paid from dividends paid by the underlying companies in the portfolio. If shares in the portfolio yields 5%, it would only require about £360,000 to throw off £18,000 a year.
Hitting these six-figure sums isn’t an overnight job, but it is achievable with time. The trick is to let compound growth do the heavy lifting.
An investor could hit that £450,000 target by investing £500 a month for 25 years, compounding at an average return of 8% a year. They could hit that lower £360,000 target by investing £400 a month over the same period.
UK blue-chips pay some of the most generous dividends in the world, with the FTSE 100 yielding around 3.25% on average. Some stocks yield 5%, 6%, 7% or even more. The key is to reinvest those dividends while still working. That way each payout buys more shares, which in turn generate more dividends that roll up over time.
Admiral shares sail on
One FTSE 100 stock worth considering is insurer Admiral Group (LSE: ADM). Best known for car insurance, it also sells home and travel policies.
It’s having a good run. On 14 August, it reported a 69% increase in first-half profits to £521m, helped by better margins as insurance prices fell. The board responded by lifting the dividend by an impressive 62%, from 71p to 115p.
Today Admiral offers a trailing yield of 4.31%, which is now forecast expect to top 6% over the next year.
Investors have enjoyed capital growth too, with the Admiral share price up 14% over one year and 57% over three. The stock may pause for breath after such a run, but it still looks reasonably valued with a price-to-earnings ratio of 14.75.
Dividend income and growth
There are risks. Analysts have warned that underwriting margins could shrink as claims rise. Further interest rate cuts could hit investment returns. If earnings weaken too much, the dividend could come under pressure. Even so, Admiral has a track record of rewarding shareholders, and I think it could play a role in helping to build that £18,000 annual income target.
I never put too much money in one company. A balanced portfolio of 15 to 20 FTSE 100 stocks spreads the risk. Time is an investor’s best friend. The earlier the get started, the longer their wealth has to compound and grow.
That £350 a week target won’t come easy, but with discipline, time and smart investment, it’s well within reach. That’s what long-term investing is all about.