A $50,000 passive income sounds like a dream, but can you really achieve it with ASX shares?
How to make a $50,000 passive income with ASX shares
I think making an annual $50,000 passive income via ASX shares is very achievable, but it won't happen overnight. $50,000 is a sizeable amount of money and it takes disciplined savings and savvy investing to deliver.
Sure, you could put all of your money into hot stocks like Altium Limited (ASX: ALU) and then sell your stake slowly, but that's a risky strategy. If you're going to retire and live off your investments, a diversified portfolio is the key.
Let's assume we invest in a mix of ASX dividend shares. I like the look of Scentre Group (ASX: SCG), Fortescue Metals Group Limited (ASX: FMG) and Harvey Norman Holdings Limited (ASX: HVN) right now.
While dividend yields can be misleading at the moment, let's assume these yields are constant for now. Scentre shares are yielding 8.46% while Fortescue and Harvey Norman are paying 7.35% and 11.22% respectively, at the time of writing.
This means an equally-weighted portfolio comprising these 3 ASX shares would deliver a yield of 9.01% per annum. Let's say a 25-year-old investor starts with nothing and invests $10,000 per year until they're 65.
If that 9.01% remains constant throughout their 40-year investing journey, their portfolio would be worth over $3 million by age 65. The yearly distributions would total a whopping $305,249 (before tax). That's much more than $50,000 of passive income, but I wouldn't necessarily bank on this.
If you're at or approaching retirement age, it's unlikely you'll want all of your money invested in ASX shares. Shares can offer great returns, but they also come with higher risk than safer investments like bonds and cash.
A blended portfolio, on the other hand, still has the potential to generate a $50,000 income from ASX shares whilst better protecting your net worth. And given we're after $50,000, not $300,000, your real return could be much lower than 9% per annum while still achieving your goal.
Foolish takeaway
Clearly, our example investor's scenario has been simplified down. But the fact is that compounding returns work and are the key to building a $50,000 income using ASX shares for your future retirement.
