If you want to retire rich, you have a few options at your disposal. You can save, you can invest, or you can try and win the lottery.
While the latter would be nice, the odds are stacked firmly against you. So, it would probably be advisable to not bet your whole retirement on winning the Powerball at some point between now and then.
Of the two remaining options, investing has historically provided investors with much stronger returns.
For example, ASX shares have provided investors with an average total return of 9.6% per annum over the last 30 years. This is vastly superior to the average interest rate you would have received from a savings account over the same period.
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Retire rich with ASX dividend shares
If I wanted to retire rich, I would focus on making long-term investments in ASX shares that pay dividends.
And while you could cash out your dividends when they are paid, I think it would be better to reinvest them each year in order to take full advantage of compounding.
Moving on. There's no guarantee that ASX shares will continue to generate 9.6% annual returns over the next 30 years, but we're going to assume this will be the case and base our calculations on this historical return.
If you were able to invest $20,000 each year into a high-quality group of ASX shares, such as CSL Limited (ASX: CSL) or TechnologyOne Ltd (ASX: TNE), and earned the market return, your portfolio would grow to be worth $1 million at the end of the third decade.
Alternatively, if you don't have as much capital to invest but have time on your side, you could invest $10,000 per year for 43 years to arrive at the same figure.
Turn your portfolio into a passive income machine
Now we have a million-dollar portfolio, it's time to start thinking about generating an income.
At present, there are plenty of ASX dividend shares that offer potential yields of 6% or above. This includes Rio Tinto Ltd (ASX: RIO) and Westpac Banking Corp (ASX: WBC) in FY 2024, according to Goldman Sachs.
If this continues to be the case in 30 years (or 43 years) then you could aim to build a balanced income portfolio filled with ASX dividend shares offering 6% yields.
Doing so would result in an annual paycheck of $60,000, with the potential to grow each year thereafter. That's a good retirement if you ask me!
