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How you can FIRE on $50,000 per year with this $500,000 ETF portfolio

The key to being financially independent and retired early (FIRE) is keeping expenses low and channelling excess income into passive, income-generating assets.

While many Fools are looking for the next top growth stock, a $500,000 investment split across these three diversified exchange-traded funds (ETFs) could easily generate a $50,000 per year passive income and leave you with more time to do what you want in retirement.

  1. Vanguard Australian Shares Index ETF (ASX: VAS)

Vanguard is one of the largest and lowest cost ETF providers in the world and the VAS fund is no exception with a 0.15% per annum management fee.

The ETF seeks to track the performance of the S&P/ASX300 Index (ASX: XJO) and therefore provides investors with significant exposure to the Financials and Materials sectors.

The VAS market price is up 13.2% so far this year and could be set to soar higher as global equity markets rebound from a volatile end to 2018. VAS has also held up over the last 10 years, delivering investors an average return of ~9% per annum in a testament to Vanguard’s ability to mirror market performance.

I’d be allocating 25% of the portfolio ($125,000) to VAS which provides pure Australian exposure diversified across the ASX300, which would also allow investors to benefit from the franking credits available on Australian equities.

  1. Vanguard MSCI Index International Shares ETF (ASX: VGS)

The VGS fund seeks to track the MSCI World (ex-Australia) Index in Australian dollars which encompasses many of the world’s largest listed companies.

The fund’s largest holdings are in many of the FAANG stocks including Apple Inc. (NYSE: AAPL), Microsoft Corp. (NYSE: MSFT) and Inc. (NYSE: AMZN) with China-based Nestle SA (SWX: NESN) being the largest non-US exposure.

With a management fee of just 0.18% p.a., VGS is a great complement to VAS and provides a globally diversified portfolio with a 2.41% yield.

It’s worth noting that many of international funds have lower dividend yields due to tax differences (i.e. no franking credit benefits) and will, therefore, be expected to deliver more capital growth than income over the life of the investment.

A 40% allocation ($200,000) to VGS provides exposure to much of the S&P 500 Index (NYSE: INX) and is hedged back to the Australian dollar.

  1. Vanguard All-World ex-US Shares Index ETF (ASX: VEU)

VEU rounds out the three-ETF strategy and seeks to track the FTSE All-World (ex-US) Index with large portfolio allocations to Japan (17.3%), UK (11.8%), China (7.5%) and France (7.0%).

The VEU has just a 0.09% p.a. management fee which makes it a great value investment, and I’d be allocating the remaining 35% of the portfolio funds ($175,000) to VEU which creates the ultimate globally diversified portfolio, weighted to markets which I feel can provide long-term growth.

With these allocations, I estimate that with a 9% return on equity (ROE) and dividends reinvested, Fools could see a sustainable $50,000 per year income from the portfolio (using an assumed 5% withdrawal rate) within a 10-year timeframe without drawing down on the nearly $1,000,000 principal amount.

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Motley Fool contributor Lachlan Hall owns shares of Vanguard Australian Shares Index and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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