How much do you need in a Stocks and Shares ISA to target a £20,000 retirement passive income?

The annual ISA contribution limit is £20,000 per year. Let’s see how we might turn it round to produce a £20,000 annual passive income for retirement.

There are a few personal factors to consider. How motivated are we? Can we put aside spending too much on short-term pleasures? A look at the financial struggles so many pensioners face today can be a big incentive.

But should we live a pauper’s life just to die with vast sums in the bank? I read stories of old folk who never spent an unnecessary penny all their lives, but left millions in their estate. And they’re held up as shining examples of careful savers and investors.

But I see people like that as perhaps wasting precious opportunities to make the best lives for themselves that they could. For me, it’s all about seeking a balance between a secure retirement and a comfortable life right now. I aim to invest as much as I comfortably can every month, but without living like Scrooge.

How much?

Some investors use the 4% rule for income, which means withdraw 4% of the pot every year so as to preserve long-term capital. With that approach, we’d need to build a pot of £500,000 in our ISA. That’s a fair bit, but more than 4,000 millionaire ISA investors in the UK have accumulated at least twice that.

I go for dividend stocks, and intend to eventually withdraw the dividend cash to provide my passive income — and while I’m still investing, I’ll buy more shares with it. Can I get 8% a year in dividends? I’d only need £250,000 in my ISA to pay out the target £20,000.

I chose 8% because it’s the forecast dividend yield from M&G (LSE: MNG). And that’s one of the stocks I’m considering for my next investment, for two main reasons.

Firstly, M&G is in investment management, handling around £350bn in investors’ assets. If I expect the UK stock market to outperform other investments — which I do — it makes sense to me to be part of the business itself.

Dividends

Then there’s the dividend, with the company committed to a progressive dividend policy. I must stress that dividends aren’t guaranteed, and I expect M&G’s to vary from year to year. And in bad stock market years, I’d expect M&G to underperform the market average — and be at risk of a dividend cut.

But the stock market, over the long term, has had far more up years than down years. And I think a stock like this has the potential to be a long-term cash cow, even with the short-term risk. It has to be part of a diversified portfolio of UK shares, mind. But I see plenty of other high-dividend FTSE 100 options to choose from.

How close, and how soon, we can reach a £20,000 annual passive income depends on how much we can invest each year. And on how many years we have ahead of us. But I think it’s clear that we shouldn’t need to match the ISA millionaires to get there — by targeting what I see as a realistic range of between 4% and 8% per year.