Imagine having a passive income stream of $53,600 per year. Work would become optional, you could travel more, finally do that long-overdue renovation perhaps, or even help in purchasing an investment property.
Achieving this level of passive income is not easy. But it can be done with ASX shares. All you need is a consistent investing strategy and time.
So many ASX shares pay dividends to their investors, which is the primary source of passive income you can get from this asset class. There are also franking credits to consider as well, of course. But it's dividends that are the true breadwinner.
Some ASX dividend shares are inconsistent dividend payers, or perhaps have reduced the income they pay to their investors over time. But the best ASX dividend shares periodically increase their payouts, the more consistently the better.
So let's look at how ASX shares can get you to a passive income stream worth $53,600 per year.
Getting a portfolio to a point where it is throwing off that kind of cash is tricky. Say an ASX share portfolio yields 5% per annum in dividend income. That would mean we'd have to get to a portfolio worth approximately $1.07 million to receive $53,600 in dividends every year.
Now, this might seem like a hard ask. But let's break down the numbers on how one might get there.
How to get to a passive income of $53,600 per year
Over the past two decades or so, an index fund tracking the S&P/ASX 200 Index (ASX: XJO), which comprises the 200 largest companies on the ASX, has averaged an annual return of around 8%.
If an investor put $50,000 in an ASX 200 index fund today, invested an additional $500 per month, and managed to get an average 8% per anum going forward, it would take them just under 28 years to get to a portfolio capable of throwing off $53,600 per year in dividends at a 5% yield. That's assuming our investor reinvests any dividend returns received along the way too.
If that investor started from scratch and just invested $500 per month, this would stretch out to around 37 years.
So that's a lot of years to consider. But it certainly shows that a young investor starting out today can just invest in a simple index fund over their working life, and achieve a retirement income that is well above the aged pension. And that's without considering their superannuation either, which could boost their retirement income even further.
But say an investor actively invests their money instead of going down the index fund route. It will be tricky but say our investor achieves a 10% annual return on average instead of the market's 8%. Well, then our time taken to hit the magic $1.07 million figure would fall to 25 years for our investor with $50,000 to start, and just under 30 years if they start from scratch.
This is the magic of compound interest, and what it can do for your retirement. Successful investing takes time, patience, and a lot of capital. But your older self will certainly thank you if you get the ball rolling – the earlier the better.
