How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

I’m looking for passive income that can supersize my earnings in retirement. The current full State Pension is £185.15 a week. That amounts to just under £10,000 a year.

I’m considering a plan to invest in UK shares to double this annual income. Can it be done by investing £290 a month? I reckon it can but there are a few considerations.

The passive income plan

Investing in shares tends to perform best over the long term. The more time I allow my investments to grow, the larger my pot can become. For instance, if I start early and allow 35 years before needing to withdraw any income, I can invest relatively small amounts.

I’d need to consider the effects of inflation when targeting future passive income. In 35 years, £10,000 is unlikely to hold the same purchasing power as today.

Note that between 1989 and 2022, the inflation rate in the UK averaged around 2.5%. If I use this assumption for the next 35 years, I’d need to earn almost £24,000. That’s more than double the current State Pension.

So how much do I need to save to be able to withdraw this sum every year? I calculate that I’d need to build a pot worth a whopping £595,000.

It sounds like a lot, but let’s take a look at what I’d need to invest to reach such a sum. The long-term stock market return is around 8% a year. Using this assumption for future returns, my calculations suggest that I’d need to invest £290 every month.

Which UK shares?

The simplest way to invest in UK shares might be for me to buy a FTSE 100 index tracker. This would be a low-cost way to track the performance for this leading stock index.

Alternatively, I could do some diligent homework and pick and choose individual shares. Several British shares have achieved over 20% in annual returns over the past decade. If I can pick even a few of these big winners, I’d be able to start withdrawing my passive income much earlier than planned.

To find the shares with most potential, there is much to consider. I’d look for good quality shares. By that I mean they should have a high return on capital employed. That’s a key measure of business quality and shows how efficiently a company uses its available funds.

Many years ago, popular investor Warren Buffett popularised the term moat to mean businesses that hold a sustainable competitive advantage. For instance, they might have a strong brand or key patents that can prevent competition. It’s certainly a factor I’d look for when looking for the best shares.

Right now, shares that fit my criteria include Rightmove, Howden Joinery Group, and Diageo.

Juicy dividends

Once I’ve built my pot, I’d look to switch strategies. I’d want to find shares that give me the best passive income. At that stage, I’d want to protect my hard-earned investment by lowering my risk.

That’s why I’d consider more mature companies but high dividend payers such as Imperial Brands, Legal & General, and Vodafone. On average, they pay a 7% dividend. Although not guaranteed, that kind of yield should be more than enough to beat the State Pension.

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