Let’s say I had £20k in my ISA account. I think I could turn it into a second income of over £17,000 a year, or £17,423 to be precise.
Per month, that’s about £1,500. I’d love that kind of money flowing in. I could use it to top up a pension, cut down on hours at work or even retire earlier.
And if I’m smart with how I manage it, I could keep a nest egg of a few hundred thousand. I’d sleep well with a rainy day fund like that. It could even be something to leave behind, eventually, to loved ones as well.
A Stocks and Shares ISA is how I’d work towards this income. It can help me build wealth perhaps better than any other option I’ve got here in the UK. I might aim for a yield of 8-10% on the money I put in and, because it’s an ISA, my returns are not taxed.
Other options aren’t nearly as good, I feel. Buy-to-let is popular and can be lucrative. But if I went for that, I reckon I’d be worse off. The average rental yield in the UK is only 3.63% right now, and there’s tax to think about on top of that.
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.
4,000 millionaires
These ISA accounts are fairly popular these days too. I think it’s fair to say many Britons are using stocks to make money. And a recent report showed the number of ISA millionaires had tripled and was now up to around 4,000.
Let’s see what I could achieve with my £20k ISA. I’ve also included what happens if I top it up with £100 a month. If I drip-feed even a little extra from a day job, it can make a life-changing difference to the final total.
| £20k ISA | £20k ISA + £100 p/m | |||
| Deposit | With 9% | Deposit | With 9% | |
| 1 year | £20,000 | £21,800 | £21,200 | £23,049 |
| 5 years | £20,000 | £30,772 | £26,000 | £38,246 |
| 10 years | £20,000 | £47,347 | £32,000 | £66,319 |
| 20 years | £20,000 | £112,088 | £44,000 | £175,973 |
| 30 years | £20,000 | £265,354 | £56,000 | £435,565 |
These sums look pretty nice to me, especially when I look at how small the deposits are. But I have to point out that I might not achieve a 9% annual return and could even lose money.
Of course, the nest egg isn’t useful to me just sitting there in my account. I want to use it to give me a second income, and the term ‘safe withdrawal rate’ (SWR) is useful here.
An SWR refers to how much I can withdraw with still a good chance to keep the nest egg intact. A 4% withdrawal – usually considered pretty safe over decades – eventually gives that £17,423 second income each year.
A lot of people will like the look of that figure but be put off by the risks. It’s true that nothing is certain with the stock market. There will be ups, downs, crashes and corrections. It’s perhaps not for the faint of heart. And inflation means that amount will be worth less in the future.
But if I do want to invest in stocks, then every day or week I put off or delay my decision could cost me a lot in the long run.
20 best days
In fact, over a recent 20-year period, all the returns from the stock market came from the best 20 days. Even a missed day or two could seriously dent the amount I make. It’s one reason why “time in the market beats timing the market”.
That’s why if I was starting from scratch, I’d look to invest in a Stocks and Shares ISA today. With the right choices, I’d look to turn my cash into a sizeable income.
The post How to turn a £20k ISA into a £17,423 yearly second income appeared first on The Motley Fool UK.
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John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
