How much do you need in a Stocks and Shares ISA for a £500 monthly retirement income?

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Investors have just two more weeks left to contribute to this year’s Stocks and Shares ISA allowance. So there’s no time to lose.

Many will have been deterred by recent stock market volatility. As the Iran war rages, it seems like a dangerous time to buy equities. At The Motley Fool, we take a different view. History shows that markets are always bouncing up and down. The best time to buy shares is when prices are down, as they’re typically cheaper, and dividend yields are higher too. Aim to hold for years though, to give markets plenty of time to recover.

FTSE 100 is holding up

Short-term volatility is the price equity investors pay for long-term outperformance. The FTSE 100 is actually up around 20% on this time last year, with dividends on top. Despite recent worries, investors are comfortably ahead.

With the 5 April ISA deadline looming, there’s no time to waste. But the Stocks and Shares ISA isn’t just a great way to generate share price growth — it can also give investors bags of income, from company dividends. So how long would investors need to generate a tax-free monthly income of £500 in their ISA?

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

That adds up to £6,000 a year. Now let’s say their portfolio produces an average dividend yield of 5%. To hit that £6k target, they’d need £120,000. That may sound daunting, but investors can get there by tucking away relatively small amounts over a long period. Time is the equity investor’s biggest friend.

Let’s imagine our investor is 30 years from retirement, and they build a balanced portfolio of individual FTSE 100 and FTSE 250 stocks that delivers an average annual return of 7%.

If they tucked away just £100 a month, or £1,200 a year, they’d end up with £121,287. Personally, I’d suggest they invest a lot more than that, and build an even bigger retirement pot.

However, if they only have 20 years to retirement, they’d need to up their monthly contribution to £250. Clearly, the earlier investors start, the better. But which shares to buy?

British American Tobacco shares fly

Ultimately, investors should aim for a balanced portfolio of at least a dozen stocks. For those happy to invest in cigarette makers, British American Tobacco (LSE: BATS) could be a good place to start. 

The FTSE 100 stock has a brilliant track record of long-term growth and income. Impressively, it’s increased dividends every year this millennium. The British American Tobacco share price is up an impressive 42% in the last year, and 95% over two years. And it still boasts a trailing dividend yield of 5.4%.

Tobacco stocks are seen as defensive, as people keep smoking throughout the economic cycle. The shares have held up during the Iran conflict, at least so far. There are long-term risks, as smoking kills, and regulators are always looking to tighten up. 

But a balanced portfolio of shares like these are a terrific way to produce a high and rising passive income for retirement, free of tax inside a Stocks and Shares ISA. And there are plenty more blue-chip bargains out there today.

The post How much do you need in a Stocks and Shares ISA for a £500 monthly retirement income? appeared first on The Motley Fool UK.

More reading

• How much do you need in a Stocks and Shares ISA for a £100 monthly passive income?
• Is this 5.6% yielding dividend share a brilliant defensive bolthole as war rages?
• I asked ChatGPT if ISA investors should consider investing their money in a SIPP instead this year
• A 6%+ forecast yield and 37% under ‘fair value’! Time for me to buy more of this FTSE 100 gem?
• Here’s how many British American Tobacco shares it takes to earn a £1,000 monthly second income

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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