Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

An ISA can be a great way to generate passive income in the short term, by investing in equity shares. There is no shortage of options in the London market at the moment that offer an opportunity for income.

But as an investor who believes in a long-term approach to investing, I think an ISA can be useful when it comes to retirement planning.

To keep things simple, let’s say I currently have a £20k Stocks and Shares ISA and plan to retire in 30 years.

Over £10,000 a year, every year – for doing nothing

Assume that I compound that at a rate of 7% per year over 30 years. That is above average yield FTSE 100 shares, but I think it is affordable in the current market.

That alone would mean that, three decades from now, I’ll have a portfolio worth just over £162k. At a 7% yield, that should earn me £11,363 in passive income. If I just take dividends then and don’t touch the capital, I can hopefully get that amount every year.

i say “hopefully” because benefits are never guaranteed. I may suffer a reduction in some of my holdings, which means less income. But the opposite is also true. I could earn more each year, if the stocks I own are the same Diageo continued their decades-long practice of increasing their annual dividends per share.

Setting up a five-figure annual income strategy

So, how do I go about this?

The truth sounds, perhaps, disappointingly unappealing.

I aim to find companies that offer unique solutions to large, permanent markets. I look for firms that generate far more money than they need to keep their business afloat. I also consider the share price and what valuation means, as smart investors don’t overpay even for top businesses.

By building a diversified portfolio in my ISA of such shares (diversification matters because even large businesses can disappoint), I aim to build a steady stream of income over time.

Applying the theory

So much for the idea. What about the truth?

Let me illustrate by discussing one FTSE 100 share that I own, Legal & General.

Yes, it has a pretty good yield above my example of 7% (which, to be fair, is close to double the current FTSE 100 average yield). Currently, it stands at 9.4%.

And yes, even though it plans to lower the annual growth rate in the dividend per share, the company is still targeting increase each year.

In fact, that has happened every year bar one since the financial crisis. At that time, the payment was stopped. I see the danger of that happening again if the economy suddenly enters a turbulent period, if policyholders take out more money than they put in.

But remember – my investment approach is based on a long-term view.

I expect Legal & General to experience some turmoil from time to time, as a nearly 190-year-old company should. But I also hope it will continue to be worth a place in my ISA because of its ongoing income potential.