How much would someone need to invest in the stock market to retire and live off passive income?

Some people dream of quitting work and simply living off the dividends from stock market investments.

For others, that’s a reality.

So, how much would someone need to invest in order to quit work and live off their dividends?

Setting a financial target

The answer will depend on the specific investor’s needs and lifestyle.

For example, someone who retires young with an active social life and fondness for exotic travel may have very different requirements to someone who retires at an older age with a modest lifestyle and few spending commitments.

In this example, to keep things simple, let’s use the amount of £286 per week the government identified as the average 2023 weekly income for single male pensioners (markedly higher than the £259 figure for single female pensioners).

£286 per week is equivalent to roughly £14,900 per year so let’s say £15K.

If investing at an average dividend yield of, say, 7%, that would take an investment of £214,300 in the stock market.

Thinking about risks

But that might not be enough in practice.

Retirement can last for decades. Some years will likely bring unforeseen sudden expenses. Inflation will almost definitely mean that, a few years let alone few decades from now, the purchasing power of £286 will be less than today.

Dividend growth could be one solution to that (some shares like National Grid aim to grow their annual dividend in line with inflation) but, as with any share, dividends are never guaranteed.

If I threw a dart at the FTSE 100, I would say it is more likely that the share it hits cuts its dividend in the next 30 years than that retirees’ living costs fall during that period!

So diversifying the portfolio’s critical from a risk-management perspective. Ideally I think a smart investor will have an emergency fund of money or financial margin of safety to help deal with both life’s unexpected challenges and the corrosive financial effect of inflation.

Taking a staged approach

Besides that, at a bare minimum, putting £214,300 into the stock market today could do the trick.

But it’s also possible to aim for early retirement by building up a stock market pot over time, even from a standing start.

For example, putting £100 each week into the market and compounding it at 7% annually, an investor could have a Self-Invested Personal Pension (SIPP) or Stocks and Shares ISA worth over £214,300K in just two decades.

One share to consider

I think a well-known stock market name investors eyeing such an approach should consider is Legal & General (LSE: LGEN).

It yields 8.6% and plans to keep raising its dividend annually, as it’s done over recent years.

The company has a large and resilient target market it can compete in with its well-known brand and market expertise. Its large customer base and proven cash-generation capabilities appeal to me.

The FTSE 100 firm has cut its payout per share in the past. A recently announced plan to sell off a US business ultimately risks a lower long-term dividend per share once the initial sale proceeds have been distributed.

But I continue to hold Legal & General shares for the reasons I outlined above. As part of a big enough diversified portfolio, it could potentially help an investor aim to retire early.