Many of us chasing passive income aim to eventually withdraw an income indefinitely. The process of creating an income stream that could run forever is theoretically simple. The first part is saving and investing, the second part is withdrawing.
That first part requires a number of years — an investing timeline. This timeline mean years for the investor to squirrel away cash from the day job, while also giving enough time to let compound interest work.
For those of us over the age of 40, something like a 20-year investing timeline might be about right. Two decades from now takes us to 2046. So how much might an investor need to put in over the timespan? And how much might be in a Stocks and Shares ISA at the end of it?
The magic of compounding
A recent study found the average saving amount for Britons is £227 a month. Let’s go with that and see where we end up. After 20 years of financial discipline, the total saved is £54,480. Not a bad start.
What happens if we invest that amount? The end total depends entirely on the rate of return from investments. Many choose 10% as a target as it’s close to historical averages. Applying a 10% average over the same timeframe means our nest egg is now £163,044.
It’s worth highlighting the difference between those two end figures. By investing in the stock market, we’ve earned an extra £100k. That means around 67% of the amount in our ISA comes not from what we’ve saved, but the interest generated from share price appreciation or dividends.
We have to remember, though, that 10% isn’t guaranteed. We may generate less than that.
And of course, we’re going to want to dial down the percentage when we start withdrawing. Something like 4% is considered safe in the event of market downturns to keep our sum total in-tact. Applying that as a drawdown rate gives a passive income of £6,521 a year. Nice going.
Cornerstone
The cornerstone of a great investing strategy is — surprise surprise — great investments. This is why many of us don’t just rely on index trackers and like to add individual stock picking into the mix. By throwing our money in with a company capable of above-average growth over the long run – like British tabletop games maker Games Workshop (LSE: GAW) – we might boost that passive income even higher.
In Games Workshop’s case, that involved going from a popular-but-niche hobby, to having a cult following around the world. The share price has risen 3,253% in a decade that has seen its models from its Warhammer and Warhammer 40k world surge in popularity.
I think long-term decision-making and management – for example, not shirking on quality and continuing to produce all models in British factories – could mean there’s plenty of road left to run here. That said, the expense of maintaining such quality levels could be a hindrance too.
There are undoubtedly many British stocks available now that will grow precipitously in the years ahead. It’s not always simple to identify them, but I’d not be surprised to see Games Workshop as a terrific winner in 10 or 20 years’ time. One to consider, if you ask me.
