How to use £3 a day to target passive income for life

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Generating a good level of income for retirement takes time and hard work. I can’t just sit back and let the income roll in when I quit. I have to start early and stick with it.

One of the best ways to generate income in retirement is to invest in shares of UK companies. FTSE 100 And FTSE 250. They pay some of the most generous portions in the world.

Today, the FTSE 100 yields 3.53%, all capital gains are high. Many companies listed on the stock exchange pay very high dividends. Insurer Phoenix Group Holdings It currently yields 8.13% per year, while the fund manager abrdn 9.6% and gives a huge yield of minerals Antofagasta It pays 10.08%. There are many more high dividend stocks to choose from.

I am passionate about building passive income

While the FTSE 250 comprises smaller, faster-growing companies focused on generating growth and earnings, the index still returns 2.71 per cent per annum.

Investing £3 a day to build your pension is unheard of. But money is tight for almost everyone right now and investing something is always better than doing nothing. Any money I can save today will reap rewards later in life.

Investing £3 a day works out to £90 a month or £1,095 a year. If I invest that in a Self-Invested Personal Pension (SIPP) and get my 20% tax relief, the government will add £274. That brings my total pension contributions up to £1,369 a year.

If I were a 40% ratepayer, the real value of that £1,369 contribution would drop to £821 after claiming back the difference between basic and higher rate tax relief. How much pension £1,369 gives me depends on how much I invest and how fast my portfolio grows.

If I invest £1,369 a year and it grows at an average of 7% a year after charges (of course, unguaranteed), I’ll have £293,432 after 40 years. That’s a fair sum even if its fair value is eroded by inflation. That’s why I aim to increase the £3 a day contribution over time.

I buy FTSE 100 shares for their products.

Let’s say I increase my contribution by 5% every year. After 40 years I will have an even more impressive total of £581,132. Of this I invested £165,375, with the remaining £415,758 earning interest. No wonder physicist Einstein called compound interest.The eighth wonder of the world“.

The earlier I start investing £3 a day the better. A delay of 10 years will cost me dearly. The pension would be just £240,987 instead of £581,132, if I draw the same amount over 30 years instead of 40. That 10-year delay would have more than halved my pension pot.

The first £1 invested is always the most valuable, as it has a long time to compound and grow. That’s whether you invest £3, £5, £10 or whatever sum a day.

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