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Many of us who chase passive income aim to eventually generate permanent income. The process of creating an income stream that can continue indefinitely is conceptually simple. The first part is saving and investing, the second part is withdrawing.
That first part requires a number of years – i investment timeline. This timeline means years for the investor to withdraw cash from the day’s work, while still allowing enough time for compound interest to work.
For those of us over 40, something like a 20-year investment timeline is probably right. Twenty years from now takes us to 2046. So how much money might an investor need to put in over time? And how much money could be in the Stocks and Shares ISA at the end of it?
The magic of compounding
A recent study found that the average amount Britons save is £227 a month. Let’s go with that and see where we end up. After 20 years of financial guidance, the total saved is £54,480. Not a bad start.
What happens when we invest that money? The final amount depends entirely on the rate of return from the investment. Many choose 10% as the target as it is closer to historical rates. Applying a 10% rate over the same period means our nest egg is now £163,044.
It is worth highlighting the difference between those last two figures. By investing in the stock market, we earned an extra £100k. That means around 67% of the value of our ISA is coming not from what we have saved, but the interest generated from the share capital or dividends.
We must remember, however, that 10% is not guaranteed. We may produce less than that.
And then, we’re going to want to dial down the percentage when we start withdrawing. Something like 4% is considered safe in the event of a market downturn to keep our total in balance. Using that as a sliding scale gives an annual income of £6,521. It’s good to go.
Cornerstone
The basis of a good investment strategy is – surprise surprise – a good investment. That’s why many of us don’t just rely on index trackers and like to add individual stock picks to the mix. By investing our money with a company that can grow above average over time – like a British tablet games maker Games Workshop (LSE: GAW) – we could grow that revenue even further.
In the case of Games Workshop, that involved going from a popular-but-niche hobby, to having a cult following around the world. The share price has increased by 3,253% in the ten years that it has seen its models from Warhammer again Warhammer 40k increase in popularity in the world.
I think that long-term decision-making and management – for example, not skimping on quality and continuing to produce all models in British factories – would mean there is still a long way to go here. That said, the cost of maintaining such quality standards can be a hindrance as well.
There are many British stocks available now that will grow rapidly over the coming years. It’s not always easy to pinpoint them, but I wouldn’t be surprised to see Games Workshop as a big winner in 10 or 20 years. One to consider, if you ask me.
