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It’s never too late to begin investing for a large passive income in retirement. Here’s how a £500 monthly investment could generate a passive income of £23,974 after just 25 years.
1. Sidestep the taxman
The process of investing can be expensive business. Brokerage fees, software costs, and website subscriptions can all cost a pretty penny when added up.
However, the biggest expense by far is what we have to pay the taxman. Over many years this can add up to tens or even hundreds of thousands of pounds.
Fortunately investors can minimise or even eliminate their tax obligations by using an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP). With these products, an individual doesn’t pay HMRC any capital gains or dividends they receive.
Stocks and Shares ISAs have an annual investment limit of £20k. For a SIPP, this sits at £60k, or a sum equal to one’s yearly salary, whichever is lower. These tend to be more than enough for the vast majority of Brits.
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.
2. Build a diversified portfolio
With their SIPP and/or ISA set up, an investor could then consider building a diverse portfolio to maximise their long-term returns.
They can do this by purchasing:
- Different types of assets to manage risk, from safe-haven bonds to riskier shares.
- Multinational companies offering access to a variety of regions.
- Businesses operating across different industries and sub-sectors.
- A blend of value, growth, and dividend shares to provide a stable return across the economic cycle.
Diversification isn’t just an effective way to reduce risk. An investor who spreads their capital can also enjoy stronger returns by gaining exposure to various growth and income opportunities.
3. Look far and wide
Modern investors have the opportunity to buy a wide range of shares, trusts, and funds. So investors should consider looking past the London stock market to see what other share exchanges also have to offer.
Consider Nvidia (NASDAQ:NVDA), for instance. UK investors can gain exposure to artificial intelligence (AI) through various London-listed stocks including Sage and Kainos Group. But in my opinion, these domestic companies don’t have the considerable growth potential of this US-listed company.
This is because Nvidia’s high-power graphic processing units (GPUs) are critical for the growth of AI. While competition from other chipbuilders is growing, Nvidia currently sets the industry standard, and its newly launched Blackwell chip might see it move further away.
With strong cash flows and a capital-light business model, Nvidia has the financial clout to accelerate product innovation, too, and to dominate the AI sphere for years to come.
A near-£24k passive income
With these three strategies, an investor could reasonably target an average annual return of 9.4%. This number is based on the average annual returns delivered by the FTSE 100 and S&P 500 during the past decade
With a £500 monthly investment, this person would have made a healthy £599,362 over 25 years if their plans work out. This would then provide an £23,974 passive income for around three decades, based on an annual drawdown rate of 4%.
