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Passive income can play a huge role in softening the transition into retirement. Many people only begin to feel the creeping urgency of retirement once they hit their 40s.
According to the Office for National Statistics (ONS), the average 40-year-old in the UK has only around £40,000 set aside for retirement. For those with no plan or savings at all, it might look especially daunting.
The good news? Even starting at 40, there’s still time to put together a realistic strategy.
How to aim for £1k a month
A common rule of thumb is withdrawing 4% of an investment pot annually. To target £12,000 a year – or £1,000 a month – an investor would need roughly £300,000 in a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP).
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.
If someone already has the average £40,000, they could reach that target in around 29 years based on a market average 7% annual return.
However, for those with no savings, significant monthly contributions would be required. By investing £300 a month from age 40, it would take about 28 years to grow the pot to £300,000 (assuming the same 7% return). Bumping monthly contributions to £360 would reduce the timeframe to 25 years, aligning with a traditional retirement at 65.
Of course, £360 a month is a meaningful sum. But with tax relief on pension contributions, or the dividend and capital gains tax advantages of an ISA, it’s achievable for many households.
What could achieve a 7% return?
A simple FTSE 100 tracker might do the job. Historically, the index has delivered around 7% a year over the long term, including dividends. But heavy concentration in a single market carries its own risk. Many investors prefer to diversify across geographies and sectors.
A convenient option to consider is a multi-asset investment trust like Alliance Witan (LSE: ALW). This global investment trust holds assets spread across the US, UK, Europe and Asia. It holds everything from S&P 500 giants like Microsoft, Amazon and Visa to FTSE 100 defensive stalwarts such as Diageo and Unilever. It also dips into technology, healthcare, financials and industrials, offering built-in diversification.
Performance has been impressive. Over the past decade, Witan’s returned 155% – that’s an annualised 9.8%, comfortably exceeding the rough 7% target. Valuation looks appealing too. It trades on a low price-to-earnings (P/E) ratio of 8. On top of that, it offers a modest dividend yield of 2.13%, with an eight-year record of continuous growth. Dividends have increased 6% annually, supported by a very safe payout ratio of just 16.9%.
But like many investment trusts, Alliance Witan often trades at a discount to the value of its underlying assets. While this can offer a bargain, that discount can also widen in times of market stress or if investor sentiment sours, which could magnify losses. Investors might not just suffer from falling asset values — they could also see the stock trade at an even deeper discount, hitting the share price harder.
Still time…
Passive income might feel out of reach at 40 with little saved. But with sensible contributions into an ISA and a diversified growth-focused trust like Witan, building a £1,000 monthly second income is still a realistic goal.
For investors planning for retirement, it’s a trust worth a closer look.
