The Motley Fool

How much do I need to invest in UK shares to stop working and live off passive income?

Story by Royston Wild

The Motley Fool

To my mind, the best way to try and create a passive income is to invest in a broad range of UK shares.

What about savings accounts? Well, with interest rates falling again, I’m expecting these products to start delivering mediocre returns again.

Past performance is no guarantee of future returns. But with the Stocks and Shares ISA delivering an average annual return of 9.64% (according to Moneyfarm research) in the past decade, I think building a portfolio of British stocks will be the best way to go.

But how much would I need to invest so I can stop work and live off the passive income?

Hitting a £50k income

The first thing I need to consider is how much my everyday expenses will be. I also must think about what luxuries I want to enjoy. After all, none of us want to work for decades without having some lavish living to look forward to.

It says the average single person needs £43,100 a year to live a comfortable retirement. People in this bracket will get to enjoy regular holidays in the UK and overseas, a new car every few years, and a four-figure kitty to spend on clothes.

For this exercise, I’ll round my annual income target up to £50,000 to give me a margin of safety. So how much will I need to invest each year to reach this?

If I can manage to hit that 9.64% average return that ISA investors enjoy, I’ll need to spend £8,376 a year on UK shares for 25 years, reinvesting any dividends I receive along the way.

At this point, I’ll have built a nestegg north of £833,420.

Source: thecalculatorsite.com

I could then invest this in 6%-yielding dividend shares to target just over £50,000 in passive income each year. Remember, however, that dividends are never guaranteed.