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Is investing £3 a day enough to fund a generous passive income for life?

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I’m looking to generate passive income in retirement by investing in a spread of FTSE 100 shares, taking advantage of the generous dividends they pay.

The bigger my portfolio, the more income it will generate. But how much do I need to invest to fund a comfortable retirement?

It’s a daft question, of course. One that falls into the ‘how long is a piece of string?’ category. Obviously, I should be investing as much as possible, for as long as possible, to generate the maximum possible return.

How I’d get maximum passive income

In practice that isn’t easy for anybody, as we all have more immediate calls on our pocket. So it’s useful to set a benchmark and work from there. So here goes.

By investing in a balanced portfolio of individual UK shares, I would hope to make a long-term total return averaging 7% a year. I will do that by re-investing all the dividends I receive, until I stop working and start drawing them as income instead.

Now let’s assume I invest £1 a day, which works out at £365 a year. As a further assumption, let’s say I increase that contribution by 3% each year, to keep pace with inflation. 

If I was a youthful 25-year-old and carried on investing for 42 years, I would have £133,603 in my retirement portfolio by age 67. In total I would’ve invested £29,938. Compound interest would have given me £103,664, the bulk of my return.

That’s a pretty decent return, although in four decades’ time my £133,603 would have less buying power than today. So even starting at a young age, investing the equivalent of £1 a day won’t generate the passive income I need to have fun in my final years.

Investing £3 a day is more like it

£1 a day is only £30 a month, which isn’t much. Investing something is always better than nothing, but I would need to work harder to fund my dream retirement. If I was starting from scratch at 45, my index-linked £1 a day would only be worth just £24,549 by age 67. I will have paid less money in over the shorter timeframe, with fewer years to compound and grow.

These are tough times but if my 25-year-old could stretch to £3 a day, that’s £90 a month or £1,095 a year, they would triple their total return to £400,809.

Now that is starting to look like real money, and will generate a passive income worth having. My 45-year-old would have to work a lot harder though. Investing £3 a day would only give them £73,647 by age 67. Again, that’s nice to have, but it could be a struggle making that last for the average 20-year retirement. Late starters have to work harder to play catch-up.

In conclusion, investing £1 a day is a commendable goal for someone who is currently investing nothing at all but, for me, it would only be a starting point. I would want to build on that, and invest more sooner rather than later. £3 a day is better, but I’d always aim to invest more.

The post Is investing £3 a day enough to fund a generous passive income for life? appeared first on The Motley Fool UK.

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Harvey Jones doesn’t hold any of the shares mentioned in this article. 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.