New investors often ask how much they have to save to generate a reasonable level of income.
Investment experts will generally answer ‘it depends’ and give a list of variables like attitude to risk, how much disposable cash the saver has and how much income they might need.
To help, the Association of Investment Companies (AIC) has carried out some research that calculates how much someone needs to invest to give a useful return.
A spokesman for the AIC explained that investors do not have to save as much as they would believe to generate an income.
“Putting £5,000 in a fund yielding 3% would produce a quarterly dividend of £37.50,” said the spokesman.
The trick is matching the income you would like to receive against the likely yield of an investment.
Reinvesting dividends is best strategy
An investor planning a £25,000 a year income before tax would need a fund of around £830,000 with a yield of 3% to hit the goal.
If the fund yields 5%, the savings target is a more modest £500,000.
The AIC communications director Annabel Brodie-Smith said: “Seasoned investors will say that the best long term gains come from reinvesting dividends rather than taking them as an income.
“It’s generally in later life investors what income rather than growth to help offset their living costs in retirement.
“You do not need a massive share portfolio to provide a modest income, just a few thousand invested sensibly can produce an extra few hundred pounds a year.”
How do you build an investment fund?
Most experts agree the best way to build an investment fund is to start stashing cash as early as you can and putting the money into shares that you can leave to rely on to grow.
This is called a buy-and-hold strategy that involves picking shares that offer better than average growth. They are out there, but not necessarily cheap nor easy to find.
Buying a basket of investments to hold
How much income your savings can offer
| Value of portfolio | % yield | £ yield | Quarterly dividend | Bi-annual dividend |
| £5,000 | 3 | £150 | £37.50 | £75 |
| £5,000 | 5 | £250 | £62.50 | £125 |
| £10,000 | 3 | £300 | £75 | £150 |
| £10,000 | 5 | £500 | £125 | £250 |
Note: No tax is deducted from example payments
Source: AIC
