Here’s how I’m trying to build my ISA to get an income of £10,000 each year

I am confident that I know my best opportunity to build income from long-term investments. I think it should be a stocks and shares ISA.

It opens me up to more risk than a Cash ISA, as it offers guaranteed interest rates. Well, as long as the latest contract, at least. But if the Bank of England (BoE) reduces monetary policy to its 2% target, I think we’ll be lucky to see Cash ISA rates above 1%.

I don’t see much point in trying to save tax on that level of income, not if it’s perfect FTSE 100 returns averaged 6.9% per year over the long term. It’s not guaranteed, of course, but history is behind you.

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Bad spells

Taking home £10,000 a year in my ISA, I’d like to not be able to draw down too much. If the BoE hits its inflation target, I’ll want to leave enough in my ISA to match.

That suggests I can take 4.9% of the 6.9% annual rate, and leave another 2% to keep up with rising prices. So how much would I need?

My calculations suggest a pot of around £204,000. If the UK stock market continues the way it has for the last century or so, I should be able to take my £10,000 out of that and leave enough to keep up with inflation.

What is the best way to get cash? For me, that’s where the benefits come in. Let’s choose an FTSE 100 stock to use as an example.

Bank shares

I will go Lloyds Banking Group (LSE: LLOY), because it has the closest share among the funds I hold in that income at 4.9%.

In fact, Lloyds currently has a dividend yield of 5.4%, so I might leave a bit to cover for next year and beyond.

But this brings me to my first important point of caution. Shares are never guaranteed, and Lloyds is a good example of that. The bank had to suspend its distribution when the pandemic hit and the stock market crashed in 2020.

In fact, most of my benefits went down that year. So if I was getting income I would need to sell some shares to meet my goal.

Financial crash

Looking back at the financial meltdown of 2008, Lloyds suffered a lot at the time and it took time to return to sustainable profitability.

What is the way to reduce such risk? In short, diversity. I particularly like investment trusts for that and hold several. And I always aim to keep a variety of stocks from different sectors.

Oh, and I’m basing these figures on historical returns, which we may not get in the future. It’s better to steer clear, I think, than to be wrong.

For many of us, building a pot of £200,000 or more could take several decades. Fortunately, I started investing in ISAs a long time ago. And I think my goals are realistic.