No savings at 30? Here’s how I’d aim for passive income of £3,000 a month

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Earning a decent stream of passive income can be critical in funding a successful retirement. For instance, a tax-free sum of £36k a year might sound appealing to many investors. It would mean being above the UK’s average full-time salary in 2022. And that’s before tax!

It’s an ambitious target, but if I was starting at 30 with zero in the bank, could I still achieve this goal by investing in the stock market?

Yes, I believe so. Here’s why.

Building wealth

Securing a passive income stream of £3,000 a month — or £36,000 a year — is no mean feat. Using a 4% dividend yield across my assets as a benchmark, I’d need a portfolio valued in the region of £900k to reliably enjoy that kind of income for a 30-year retirement.

Accordingly, if I was making my first foray into stock market investing at 30, this would be a long-term ambition. Building a big stock market portfolio demands a risk appetite and an abundance of patience.

My preferred strategy is to buy-and-hold quality shares for long time periods, aiming to harness the power of compound returns through a blend of growth and income investing styles.

For instance, my portfolio currently spans stocks such as US tech giants Alphabet and Microsoft as well as FTSE 100 shares like pharma giant GSK and mining conglomerate Rio Tinto.

Tax and government bonuses

With long-term objectives and tax optimisation in mind, I’d use investment vehicles such as a Stocks and Shares ISA and a Lifetime ISA.

Prospective investors should note that there are withdrawal penalties on Lifetime ISAs before the age of 60 or if the cash is not used for a first home purchase.

However, the 25% government bonus on up to £4k of contributions each tax year is a very attractive proposition. Accordingly, the Lifetime ISA would sit at the heart of my strategy.

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.

Crunching the numbers

If I wanted to achieve my goal by 60, the contributions I’d need to make to secure a £900k portfolio would vary significantly depending on the compound annual growth rate (CAGR) across my stock market positions. To illustrate this, the table below models three different scenarios.

Each scenario assumes I receive an additional £1k government bonus by maximising my £4k annual Lifetime ISA contributions. Any remainder, I’d invest in a Stocks and Shares ISA.

6% CAGR 8% CAGR 10% CAGR
Yearly contributions
£9,740 (+£1k) £6,357 (+£1k) £4,000 (+£1k)

If my stocks collectively grew at a 10% CAGR, three decades of investing in a Lifetime ISA would deliver a £904.7k portfolio — so I wouldn’t need a Stocks and Shares ISA at all!

Risk management

However, that’s a higher rate of return than the 6-8% annual gain that the FTSE 100 index has averaged historically. There’s a risk my stocks could underperform, which would demand a longer time horizon or higher contributions.

Nonetheless, with a sensible risk management strategy, earning £3k in tax-free passive income a month is an achievable aspiration. For instance, I diversify my positions across different companies and sectors and I also plan to boost my exposure to fixed income assets, such as gilts, later down the line.