Constructing a second earnings is likely one of the largest motivations for investing, particularly for many who need the liberty to retire after they’ve had sufficient of working. With £20,000 of financial savings and a 25-year time horizon, a 40-year-old could also be shocked to see simply how a lot their cash might develop in FTSE 100 shares.

Compounding does the heavy lifting

Now let’s say they make investments their full £20,000 Shares and Shares ISA right this moment, then by no means add one other penny. Let’s additionally assume their portfolio generates a median annual compound complete return of seven%, roughly in step with the long-term FTSE 100 common.

By age 65, their £20,000 would have grown to £108,549. That’s greater than 4 occasions the unique funding, simply by sitting tight and being affected person.

As soon as-and-done investing like this has its limitations. The true rewards come from placing cash into the market month after month, yr after yr. If that very same investor chipped in £5,000 a yr and loved the long-term return, they’d retire with a portfolio value round £446,931. Now that’s extra prefer it.

Sainsbury’s: dividends and development

A gentle ISA portfolio doesn’t need to be constructed on high-flying development shares. Lengthy-term compounders with dividends can do the job too. One enterprise traders would possibly think about shopping for is J Sainsbury (LSE: SBRY).

Usually overshadowed by its greater rival Tesco, Sainsbury’s has quietly delivered a stable efficiency of its personal. The share price is up 8% over the past yr and 45% over 5 years. That’s first rate somewhat than dazzling, however doesn’t embrace dividends.

Proper now, the shares supply a trailing yield of three.35%, broadly in step with the FTSE 100 common. Add that to capital development, and the returns begin to look extra respectable.

On 17 April, Sainsbury’s posted its full-year 2024 outcomes exhibiting group gross sales excluding gas rose 4.2% to £26.6bn. Working revenue elevated 7.2% to £1.04bn.

The group additionally generated £531m in free money move, finishing a £200m share buyback and hiked its dividend by 4% to 13.6p. Administration plans to return one other £250m to shareholders courtesy of a particular dividend, funded by the sale of its banking arm.

I don’t count on the Sainsbury’s share price to go gangbusters. Competitors’s fierce, with Aldi, Lidl and Asda respiration down its neck, whereas its 15% share of the grocery market nonetheless trails far behind Tesco’s 28%. There’s a continuing grocery store price conflict happening, resurgent inflation might squeeze margins, and consumers aren’t precisely feeling flush.

However over 20-25 years, I reckon Sainsbury’s shares might ship a wholesome mixture of capital development and compounding dividend earnings.

Passive potential

A £446,931 ISA might generate £17,877 a yr utilizing the 4% ‘safe withdrawal’ rule. That’s a good stream of passive earnings.

That type of sum might assist fund a snug retirement, particularly when mixed with the State Pension or different financial savings. After all, inventory market returns are by no means assured. Some years will disappoint, others will exceed expectations.

However the market tends to reward persistence. And people rewards are felt most keenly in later life, when a well-built ISA portfolio begins to ship that all-important second earnings.