When the time comes to retire, you'll hopefully have a bountiful superannuation balance to support your dream lifestyle.
But what if you don't want to settle for that? What if you could have a $5,000 monthly paycheck all through retirement on top of your super without needing to work for it?
I know I'd be happy with that! But is it achievable?
The good news is that it certainly is possible if you have both time and patience.
How to retire with a $5,000 paycheck?
A monthly passive income of $5,000 equates to $60,000 annually. So, in order to generate this level of income we will need to bring in the latter in dividends each year to fund our lifestyle.
The S&P/ASX 200 Index (ASX: XJO) traditionally provides investors with an annual dividend yield of approximately 4.5%.
If this proves to be the case in the future, we're going to need to build an investment portfolio worth $1.3 million that is filled with dividend-paying ASX 200 shares like Macquarie Group Ltd (ASX: MQG) and Telstra Group Ltd (ASX: TLS).
Building your portfolio
According to Fidelity, over the last 30 years, the Australian share market has generated an average annual return of 9.6% per annum.
While past performance is not a guarantee of future performance, these returns are in line with long term returns generated across the world. So, I would be disappointed if the next 30 years didn't deliver something similar.
In order to grow your portfolio to $1.3 million from zero, investors could put $650 of their earnings into the market each month for a period of 30 years. If these investments earned the average annual return of 9.6% per annum over this period, they would grow to $1.3 million after three decades.
Once the portfolio reaches that level, you would be earning $60,000 a year ($5,000 a month) from dividends if you're commanding a dividend yield of 4.5%.
Different time horizons
If you don't have as long as that to build your portfolio, don't worry. It's still possible, you'll just need to dig deeper into your pockets. For example, if you're able to invest $1,850 per month, then you could get there in 20 years by generating that 9.6% per annum average annual return.
Conversely, if you have even more time on your side, then the periodic investment required to achieve this goal would be even smaller.
Thanks to the power of compounding, a $260 per month investment over a 40-year period would grow to be worth $1.3 million if it earns the aforementioned annual return. And a 50-year investment period would require only a $100 investment.
I feel the latter really demonstrates why starting as early as possible is the best way to generate wealth from the share market.
