On the MamaFurFur Youtube channel, Jennifer Kempson explained the maths behind achieving this dream using an investment ISA. In eight years, Britons can achieve passive income of £20,000 each year which could help them retire early. This can be withdrawn tax free and can be used to support one’s life.
She explained that this method is flexible, and she is giving an ideal scenario of what could possibly happen in eight years.
When investing in the stock market, people can create a lump sum of money with the interest that is created on their money over time.
As this interest is measured as growth, it can be withdrawn and hopefully topped back up the following year to withdraw again without touching the original amount that has been invested.
The benefit of using an investment ISA for one’s money is that it is a tax-free wrapper. People also do not need to pay any tax for capital gains growth, or for withdrawal. That is “the magic area”, Ms Kempson explained.
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She stressed the importance of compounding being vital to the journey, and the benefit of years in the stock market.
She then discussed how to approximately make the tax free £20,000 a year as income in eight years.
Ms Kempson used a compound interest calculator to show the growth that is possible in eight years.
If people have an initial balance of zero but invest £1,167 each month with 9.8 percent growth each year, they can achieve the £20,000 a year tax free income in eight years.
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She explained that an interest rate of 9.8 percent may seem high, but this has been the yearly average of the SNP 500 index fund for the last 90 years, and this is “the best-case scenario”.
Assuming people will only have this one ISA account, investing £1,667 monthly in an index low-cost tracker fund, will maximise the account each year as an overall £20,000 would have been invested through the year.
By maxing out the account each year, for eight years, the total amount deposited would have been £160,000.
The “key thing” she highlighted was the year-on-year growth from the account.
She said: “This is where reinvesting and keeping the fund topped up and leaving it to grow is key because the size of your portfolio keeps growing so the amount you receive equally keeps growing.
“As it builds up, at year eight, you can see growth worth £20,000 for that year and the total portfolio is around £238,000.
“There’s only two days that matter with investment ISAs – the day you buy and the day you sell.
“So, if you were investing, this is …….
