£20,000 in savings? Here’s how ISA investors can target a monthly income of £2,000

Over time, buying stocks and other assets in a Stocks and Shares ISA can save the average investor tens of thousands of pounds in tax.

Accountancy firm BDO estimates that all ISAs – including interest-paying Cash ISAs – cost the UK Treasury around £5bn every year in tax relief.

Increasing returns

By saving more money in tax, ISA customers can greatly increase their chances of making a life-changing return on their money. This is becoming increasingly important as the amount of money needed to retire comfortably increases dramatically.

The Living Wage Foundation says the average Brit needs an annual salary of £19,300 a year to get by on a basic standard of living. However, the exact amount could be as high as £28,400, depending on the individual’s relationship and state of residence.

By following these steps, an ISA investor can save themselves from worrying about poverty in retirement. I calculate that they would enjoy an annual income of £23,352 on top of their State Pension.

Building a winning portfolio

Investors have thousands of global shares to buy from an ISA. This provides a world of opportunities for individuals to spread their money across many different companies, industries, and regions.

As a result, stock investments can be used to help individuals manage their risk. And if done right, investors can limit the risk to their capital without sacrificing the opportunity to make monster returns.

Harry Markowitz, investment guru and founder of Modern Portfolio Theory, famously said “diversification is the only free lunch in investing“. And investors don’t have to accomplish this by building a large portfolio of individual stocks.

Tech titan

Investing in a trust can be a quick and cost-effective way to achieve instant diversification. IF&C Investment Trust (LSE:FCIT), which has shares in 400 companies spanning 35 countries, is one company that I think investors should consider.

With assets of £6bn today, it has been around since 1868, making it the oldest investment trust in the world. About two-thirds of its funds are tied up in North American stocks, while it also offers strong exposure to the UK and Mainland Europe.

It is also very tech heavy, with Nvidia, Microsoft, an apple, Alphabetsagain Amazon which marks its five major areas.

This overweighting of tech stocks can leave investors vulnerable during a recession. But it also offers a positive thanks to the potential of such developments as cloud computing, robotics, and artificial intelligence (AI).

Income of about £2,000

Over the past 10 years, F&C Investment Trust has delivered an average annual return of 11.3%. This is the best proof of Markowitz’s theory that diversification does not mean negative returns.

Past performance is no guarantee of future returns, of course. But if the trust’s recent rate of return continues, a £20,000 lump sum today could turn, after 30 years, into a pension pot of £583,982.

Deducting 4% of this each year would provide a monthly income of £1,946.