How much do investors need in an ISA to target a £31,353 yearly passive income

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Fancy giving up work and living off the passive income from a Stocks and Shares ISA? That’s certainly my goal. I may not retire early, but I’d like the freedom to do so. But how much do you need in an ISA, to generate enough income to quit work?

There’s no fun retiring if all you do is sit at home all day, counting the pennies. So you need a pretty decent income. Here’s how much, according to the Retirement Living Standards survey:

Lifestyle required	One person	Two people
Minimum	£ 13,400	£ 21,600
Moderate	£ 31,700	£ 43,900
Comfortable	£ 43,900	£ 60,600

Those are challenging numbers. Especially since they assume you live either mortgage or rent-free. It becomes easier once you include the State Pension. Let’s take the example of a single person targeting a comfortable retirement, who gets the full new State Pension, now worth £12,547 a year.

How much do you need to retire in ease?

For a comfortable lifestyle – because who doesn’t want to be comfortable? – they’d need a second income stream of £31,353 a year. Right now, a popular choice for long-term investors seeking income is to build a diversified spread of dividend-paying FTSE 100 shares. Now let’s say their portfolio generates an average yield of 5% a year. To hit that income target, they’d need £627,060. Which is a lot of money. But it’s possible to get there by investing little and often in a combination of FTSE growth and income stocks.

This FTSE 100 company has long been a red-hot favourite among ISA investors – British American Tobacco (LSE: BATS). For decades, it’s offered both dividend income and share price growth, in large amounts. Today, it boasts a generous trailing yield of 5.66%. As a further inducement to shareholders, British American Tobacco is also planning a £1.3bn share buyback for the current year.

Can the dividends keep rolling?

The cigarette maker has an impressive track record of increasing dividends every year this millennium, and the shares have been flying too. The British American Tobacco share price is up 31% over the last 12 months, and 52% over five years. Those who reinvested every dividend they received would have got even more than that.

Tobacco stocks aren’t for everyone. I don’t buy them myself. That’s a personal decision. And of course there are risks. Smoking has been falling out of favour in the West for years. British American Tobacco and its rivals are promoting alternatives, such as vaping, but these remain controversial and subject to stiff regulation. Every stock has risks, which is why it’s important to build a balanced portfolio of companies, covering different economic sectors.

I think British American Tobacco looks well worth considering for investors seeking long-term income and growth. And it’s not even the most generous dividend stock on the FTSE 100. It’s possible to bag yields of up to 7% or 8%, boosting your passive income potential and bringing retirement even closer.

The post How much do investors need in an ISA to target a £31,353 yearly passive income appeared first on The Motley Fool UK.

More reading

• State Pension of £12,548 not enough? Here’s how to aim to add another £31,352 to your retirement income
• 5 steps that could turn £5 a day into a £500 a month passive income
• I’m targeting £9,089 a year in dividends from £20,000 in this powerhouse FTSE income share
• Got a spare £3 a day? Here’s the passive income you could earn from it!
• How to earn £596 a year in second income from 1 FTSE stock

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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