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I don’t know about you, but I don’t plan on working beyond the State Pension age. The thing is, I don’t expect the government pension to give me enough money to live on. It’s why I’m targeting a second income by building wealth with a portfolio of UK and US shares.
I’m doing this with the use of tax-efficient Stocks and Shares ISAs. They can save investors like me thousands of pounds in capital gains and dividend tax, money that can instead be invested to accelerate long-term portfolio growth.
But how much would one need in a Stocks and Shares ISA to make a £2,000 monthly second income?
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Here’s the answer
The answer depends on how we plan to use our nest egg in retirement. If used to purchase a range of 7%-yielding dividend shares, for instance, you’d have a chance of hitting that £2k monthly passive income with an ISA of £343,000.
That’s a decent chunk of change. But if given enough time to grow, this is a very achievable portfolio target, in my view. Let’s say you have the means to invest £500 a month, and 25 years until you plan to retire. That £343,000 could be reached with an average annual return of 9%.
Diversifying for high returns
Is that sort of high-single-figure return a realistic one, though? I think it is, based on the stock market’s long-term return of 8%-10%.
This isn’t guaranteed, though, unlike a Cash ISA which pays a stable rate of return. But a diversified portfolio can dampen volatility and better harness the wealth-building power of the stock market.
I think a portfolio of at least 20 shares is a good way to potentially target a large ISA. This approach effectively spreads risk and gives rise to a multitude of different growth and income opportunities. Yet there can be drawbacks, such as higher costs for portfolio building and extra homework researching different stocks to buy.
Making things simple
This is why I think investment trusts can be a great ‘cheat code’ for both new and experienced investors. They utilise the expertise of professional fund managers, while also supporting a variety of investing styles.
Scottish Mortgage Investment Trust (LSE:SMT) is one of London’s most successful (and high performing) trusts I think’s worth considering. Since 2015, it’s delivered an average annual return of 16.4%.
This basket of hand-picked tech shares is more vulnerable than trusts that invest across different sectors. But with 98 different holdings, it still provides an effective way to capitalise on the booming digital economy in a diversified way.
Major holdings include chipbuilder Nvidia — the world’s first $4trn company — alongside Amazon, Meta Platforms, and Space Exploration Technologies. Its high weighting of US shares also leverages the long-term outperformance of Wall Street stocks.
There’s no guarantees, as I say. But history shows a balanced portfolio of trusts like this alongside individual shares can eventually yield a substantial second income. It’s why I use this strategy for my own ISA.
