How I’d invest £1k a month to build passive income for life

Invest in FTSE 100 stocks are a great way to build passive income for retirement. Many of the stocks listed in the index pay outstanding dividends, and aim to increase them every year. That will not only give me a passive income that I don’t have to lift a finger to receive, but one that increases over time, with luck.

Many companies offer share buybacks above, which is another way to return cash to investors. In fact, AJ Bell reckons that if you combined the two, the FTSE 100 would have delivered a combined total return of 6.6% this year. If I buy shares today, I can lock into this and hopefully watch it go up over time.

This is how to make passive income

Apart from dividends, there is an opportunity to grow the share price. If the FTSE 100 goes up, it will protect the value of my portfolio, so I won’t lose too much by making income withdrawals in retirement.

So FTSE 100 stocks for me, everything. But I also understand the risks. Dividends can be cut at any time, as we saw during the financial crisis and the early stages of the Covid pandemic. It is not the only danger. Even FTSE 100 stocks may fall out of favor or even fall.

This is why a portfolio of FTSE 100 shares always contains a minimum of 12 to 15 companies. This will spread the risk so that one or two failures will not do irreparable damage to the overall value of my portfolio.

Investing £1,000 a month is quite high, especially given the cost of living crisis. It adds up to £12,000 a year. Most of us can’t spend much, but investing is better than doing nothing.

Dividends reinvested roll up

It’s a handy figure to use as a benchmark, to see how the value of my portfolio will roll up over time. The total long-term return on the FTSE 100 is approximately 7% per annum, with dividends reinvested. Someone who starts investing £1,000 a month at age 45 will have £576,069 by age 66, before charges.

That’s a tidy sum, even if inflation means the money won’t buy as much as it does now.

Ideally, most people will start saving before the age of 40. Someone who invests £1,000 a month at 35 will have a portfolio of more than £1.3 million by 66. Now that starts to look like serious money, and it will certainly be enough to generate passive income generous

I will look to build a balanced spread of dividend paying companies, which may include top financial stocks such as Aviva, Barclaysand Lloyds Banking Groupminers such as Anglo American and Rio Tintoand possibly energy giants like BP or shell.

Home builders such as Barratt’s Development, persimmonand Taylor Wimpey will also be on the target list. As a dividend hero British American Tobacco, Diageo, Tescoand Unilever.

There are top dividend stocks like this in the FTSE 100, and I will be adding more over time. When I retire, I will sit down and start taking those dividends as income.