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Instead of working for the rest of their lives, investors can aim to live on passive income generated by an intelligently-constructed investment portfolio. Given enough time, even small monthly contributions can be the key to unlocking financial freedom. In fact, with just £99 a month and a 30-year runway, it’s possible to unlock a passive income of up to £57,256! Here’s how.
Investing for the long run
One of the easiest ways to jump-start an investing journey is to leverage the power of a low-cost index fund. Most Britons tend to track the UK’s flagship FTSE 100, which has historically generated an average return of around 8% a year. However, in the pursuit of maximising wealth growth, the S&P 500 might be a better fit, albeit more volatile.
By comparison, the leading US stock market index has typically generated an average return of around 10% a year. And over the span of four decades, that extra 2% can make a world of difference.
Starting from scratch with an extra £99 added each month at this rate is enough to reach £223,788 within 30 years. By comparison, with only an 8% return, the portfolio would struggle to surpass the £150,000 threshold.
Following the 4% withdrawal rule with a near-quarter-of-a-million-pound portfolio generates a passive income of £8,952 a year. That’s nothing to scoff at. But it’s hardly enough to be describes as financial freedom. Fortunately, investors can potentially do far better.
The power of stock picking
Rather than relying on index funds, investors can take control of their wealth directly by investing in individual stocks. This investing approach is far more hands-on and often requires a stronger stomach for volatility as well as emotional discipline. Yet, it also opens the door to market-beating returns.
Take a look at Microsoft (NASDAQ:MSFT) as a prime example to consider. Over the last 30 years, the leading tech giant has delivered a jaw-dropping 14,510% total return. That’s the equivalent of earning 18.1% a year – almost double the S&P 500’s long-term average. And at this rate, a portfolio would grow to an impressive £1,431,403.
Following the same rules as before, that’s enough to generate a passive income of £57,256 a year – notably ahead of the £43,900 passive income experts believe is needed to achieve a comfortable lifestyle in the UK.
Too late to buy?
In 2025, the firm’s rapid rollout of artificial intelligence (AI)-powered productivity tools is evolving enterprise workflows. And with businesses becoming increasingly dependent on the Microsoft ecosystem, the tech giant’s gaining increasing levels of pricing power despite ample competition.
Of course, this progress is coming at a significant cost. The company’s investing over $80bn in AI infrastructure and model training in 2025 alone.
It’s certainly not the only industry giant opening its pocketbooks. But if AI-related revenue falls short of expectations, such aggressive levels of investment could erode profit margins. And with its shares trading at a rich valuation of 37 times earnings, declining profitability and slower growth will likely lead to volatility.
With a market-cap of $3.8trn, Microsoft’s days of delivering near-20% annualised returns are likely in the rearview mirror. But that doesn’t mean it can’t continue to outperform. As such, investors aiming to generate chunky passive income in the long run may still want to consider this enterprise.
