How much is needed in an ISA to target a £3,150 monthly passive income?

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The long-term aim of many investors is to build a pot big enough to generate lots of passive income. But how much would be enough?

Well, according to the Office for National Statistics, the median gross annual salary for someone aged over 60 in the UK is currently £37,804. Or the equivalent of £3,150 per month.

To earn this much from dividends each year inside a Stocks and Shares ISA would be a significant achievement, in my opinion. Remember, this figure would be tax-free, unlike the gross salary figure cited above (a fair chunk of which would usually be taxed).

So, how long could it take someone starting from scratch to reach this amount? Let’s dive straight in.

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.

An illustration

A portfolio of dividend shares yielding 5% would need to be worth just over £756,000 to throw off £37,804 a year. However, with a 6.5% yield, a £582,000 ISA would do the trick. That’s quite a big difference.

Either way, they’re not puny sums. But the good news is that it would take around 21 years to reach £582k by investing £700 per month.

I don’t think that’s a pie-in-the-sky target, for someone who is willing to prioritise long-term wealth creation.

However, this figure assumes three things:

• A 10% average annual return
• Dividends are reinvested (rather than spent)
• No platform fees are incurred during this period

In reality, a 10% return isn’t assured, while even ‘free’ investing apps come with some sort of cost. Meanwhile, dividends can be suspended or axed completely, as well as rise higher. So this is just an illustrative example.

Still achievable

That said, a 10% return isn’t out of the ordinary. It’s only slightly higher than the FTSE 100‘s annualised total return over the past decade (9.17%). The S&P 500‘s total return is even higher, at closer to 14%.

FTSE 100 trailing total returns (annualised)

3 years	5 years	10 years
13.95%	12.82%	9.17%

What’s more, a wide variety of FTSE 100 stocks have delivered truly exceptional 10-year returns. These include Games Workshop (+3,827%), Diploma (+856%), Rolls-Royce (+392%), BAE Systems (+310%), 3i Group (+453%), and Antofagasta (+630%).

Of course, I’m cherry-picking some of the best performers here. But these are hardly secret stocks — they’ve been knocking about for decades!

Investing in the future

Sticking with the FTSE 100, a stock that I think is worth considering for the long term is Polar Capital Technology Trust (LSE:PCT). As the name suggests, it’s an investment trust focused on technology.

Let’s face it, the world is only going to get more digital in future, especially with game-changing technologies like AI and quantum computing advancing at a rapid pace. This trust offers wall-to-wall exposure through 96 holdings, including Nvidia, Alphabet, Taiwan Semi, Meta Platforms, and Broadcom.

The big risk to performance would be a sell-off in companies that are benefitting from the global AI buildout. However, it’s worth mentioning that the portfolio managers have their finger firmly on the pulse when it comes to emerging (and shifting) Silicon Valley trends.

As such, I feel the portfolio is in very good hands, with room to pivot away from danger if necessary. For example, its exposure to software, which has been under massive pressure due to AI disruption fears, is highly selective.

The post How much is needed in an ISA to target a £3,150 monthly passive income? appeared first on The Motley Fool UK.

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Ben McPoland has positions in 3i Group Plc, BAE Systems, Games Workshop Group Plc, Nvidia, Rolls-Royce Plc, and Taiwan Semiconductor Manufacturing. The Motley Fool UK has recommended Aj Bell Plc, Alphabet, BAE Systems, Diploma Plc, Games Workshop Group Plc, Meta Platforms, Nvidia, Rolls-Royce Plc, and Taiwan Semiconductor Manufacturing. 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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