How much should a 40-year-old put into an ISA to get an income of £2k a month by age 65?
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A Stocks and Shares ISA is an excellent way to generate a large income in retirement. All capital gains and dividends are tax free for life, as are withdrawals. Every penny belongs to the investor. HMRC can’t touch it. So where can you start?
Building the wealth needed to generate £2,000 every second month takes time. That works out to £24,000 a year, so it’s worth it. By subscribing as much as possible to an annual allowance ISA, money can compound and build over time.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice.
Let’s take the example of a 40-year-old person, who plans to retire in about 25 years. How big does their ISA need to be to get that second income?
Stocks and Shares ISAs for income
The answer depends on how much income their portfolio has. Suppose an investor has a portfolio of FTSE 100 shares, yielding an average yield of 5%. To make £24,000 a year, they would need a pot of £480,000.
That may seem difficult, but remember, the investor has a quarter of a century to get there. At such times, the stock market can really use money. Let’s assume that their portfolio delivers an average return of 7% per annum, roughly in line with the long-term FTSE 100 average, with all profits reinvested.
Let’s also imagine that our 40-year-old child is starting from scratch. If so, they would need to invest £600 a month, and would end up with £487,270. Stock market recovery is not guaranteed, of course. They can produce less than 7% per year, or they can produce much more.
Building a diversified portfolio of individual stocks gives investors the opportunity to outperform the market, rather than simply track it.
IM&G has a high yield
It is one dividend stock that I hold and I really rate the wealth manager IM&G (LSE: MNG). Free float on FTSE 100 insurance Prudential in 2019, and has done very well since, apart from the chaos caused by the pandemic, the cost of living crisis and now the Iran war.
Its shares are up nearly 39% in the past 12 months. That’s despite a 5% dip in recent weeks. Even better, it offers a trailing yield of nearly 7%, raising the one-year total return to 45%. Of course, investors cannot expect such returns every year.
IM&G makes its money from ‘asset management’. Basically, managing wealth on behalf of clients, and using funds to invest. This puts it ahead of today’s stock market volatility, which can affect client inflows and the amount of assets under management. IM&G also has to prove its long-term value, by outperforming cheaper tracker competitors.
But in the long run, I think it’s worth considering as part of a balanced, cash-oriented portfolio. The yield is one of the highest in the FTSE 100 but looks sustainable to me, as the board plans to increase shareholder payouts by 2% annually in the future.
No share is risk free which is why building a basket of diverse shares is so important. Rewards should flow during retirement, in the form of tax-free secondary income.
