This is how you earn $60,000 in retirement

The problem most people have in planning for a comfortable retirement is, well, they don’t plan.

Which is a shame, because a sensible plan is relatively straightforward to put together. And with just a small amount of discipline, a sensible plan — coupled with a sound investment strategy — can ensure you set yourself up for a very comfortable retirement.

There are three key ingredients to planning for a comfortable retirement:

  • Spend less than you earn.
  • Invest your savings sensibly.
  • Let time, and the power of compounding, work it’s magic.

Your goal of a comfortable retirement is made that much easier thanks to the benefits of superannuation. Contributions are taxed at a very low rate, and after you reach ‘preservation age’ — usually at 60 — your income is likely tax free.

Also, if you are invested in quality companies that pay fully franked dividends, you will be able to claim back those franking credits as cash!

And if, by following those three principles of long term wealth creation, you have amassed a sufficient amount of capital, you can generate a very comfortable income in retirement without ever having to touch your nest egg.

Investing for income is important for many Australian retirees

How to earn $60,000 per year in retirement

First, we need to make some assumptions. The most important, being the rate of return our investments can generate.

Though the past 30 years has seen an average annual return of 11.1%, let’s err on the side of caution and stick to 10% per annum. It’s a nice round number.

According to CommSec, the average dividend yield on the ASX is 4.3%, but we’ll assume 4% for our example. We’ll also assume all dividends are fully franked — after all, that’s what you are likely to focus on if you are in retirement.

Working backwards, if we want $60,000 after tax income from our Self Managed Super Fund (SMSF), and we are getting a 4% fully franked dividend yield, we’d need a portfolio of $1,050,000.

If you are 10 years away from retirement, you’ll need to invest about $405,000 today in order to reach your targeted amount.

You can however reduce that to $373,000 if you are able to save $100 each week and invest the savings at the end of each year. If you can save $200 per week, you’ll need to invest $341,000 today to reach your goal.

Of course, there are a range of possibilities, but the following table may help as a rough guide:

Chart

As you can see, the goal of $60,000 in after tax income in retirement isn’t as farfetched as you might imagine — provided you have a sensible plan.

The scenarios sketched out here are of course just a guide, but should serve to help you determine how well you are placed to meet your goal.

Earn even MORE than $60,000 per year, tax free

A case in point is the “under the radar” ASX company my colleague Scott Phillips has just named his #1 dividend stock of 2015-16. It’s cheap, growing fast and currently sporting a grossed-up dividend yield of 5.7%!

For a strictly limited time, Scott is giving away its name and stock code FREE in his brand-new investment report!

Simply click here, enter your email address and we’ll send you the report titled, “The Motley Fool’s Top Dividend Stock For 2015.”

No credit card details or payment required!

Success! Loading...

This is a FREE service from The Motley Fool. Credit card is NOT required.

The Motley Fool's disclosure policy is accountable. Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. The Motley Fool does not guarantee the performance of, or returns on any investment. All figures are accurate as of 29 July 2014. Authorised by Bruce Jackson.

Any and all advice contained in the above content is general advice that has not taken into account your personal circumstances. Please refer to our Financial Services Guide (FSG) for more information.

By submitting your email address, you consent to receiving our free product Motley Fool Take Stock, and other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms of Service.

© 2009 - 2016 The Motley Fool Australia Pty Ltd. All rights reserved.