How much does a 43-year-old need in an ISA to get an income of £30,000 a year?

A Stocks and Dividends ISA is perhaps the best way for us to start building on our income. However, few of us have it! Only one in six people (16%) in the UK have opened one of these types of investment accounts. And the average age to start is 43, which means not too many are starting early.

Let’s take that average age as an example. Is an income of £30,000 each year possible starting from an empty ISA? How much will need to be in the account to achieve that?

Short term?

One of the first things a new investor can do is find their inventory FTSE 350 stocks and sort by ‘dividend yield’. Finally, we can see some strong looking percentages that could return double digit amounts in the first year alone. Doing it myself, I see yields of about 12.94%, 15.41% and 15.69%. Sounds good?

Well, maybe. High yields can be rewarding, in the short term at least. But the beauty of fixed income investing is looking at long-term horizons. Ideally, we want a strong profit that will continue to grow year after year – even if it’s not the biggest right now.

Take one of the FTSE 100The most popular dividend stocks: British American cigars (LSE: BATS). The company paid a dividend of 5.46 %.

But here’s the trick. It’s a dividend that has been growing steadily for decades, increasing the return on investment every year the stock is held. And if those shares are reinvested, it will multiply the effect.

Is it worth investing today? It must be said that the business of selling cigarettes is a unique case. Many will want clarity for moral reasons. After all, the company sells cigarettes. And the use of such products – thanks to our health – is widespread in the developed world.

But this has been very profitable for the business because of the lack of competition. No entrepreneur thinks of entering the tobacco biz and there are many laws that prevent new companies from being established. I’d say it’s worth considering.

All the difference

Let’s go back to the Stocks and Shares ISA. How much money needs to be put in there to get an income of £30k? Assuming we could get the usual 5% in equity shares, the value would be around £600k – the kind of sum most don’t have.

But wait a minute. Let’s say a 43-year-old wants to start retirement at age 58. I think that is the perfect time for those looking for a second supplemental income or to help with early retirement. What kind of impact would that 15 years have?

With a 5% growth rate of benefits over 15 years, the amount needed to set up an ISA is reduced to £120k (the final balance would have come to £339,664 due to those compounding benefits). Not bad! And while there are no guarantees of beating the previous numbers – and it requires a good selection of shares – I think it’s a strategy worth considering.