Investing in ASX shares can be an effective way to build passive income. But how much would one need to invest on the Aussie stock market to build $65,000 of annual retirement income?
Well, that depends on many factors. Namely, an investors' time frame, risk tolerance, and investing strategy.
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Investing for retirement income
Building a retirement income on the ASX might sound daunting, or even daring, but it needn't be. Buying ASX shares is essentially buying a piece of a business.
Businesses with strong track records, experienced management, and competitive business models are likely to continue operating, and growing, for years and decades to come.
Take the likes of Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), and the company behind Bunnings and Kmart, Wesfarmers Ltd (ASX:WES), for example.
Many such businesses will even offer those invested in their shares a portion of their profits in the form of cash – known as dividends. Dividend income can help Australians fund their lifestyles through retirement.
Of course, how much income one might need to retire depends on a multitude of variants. If you're unsure how much you might need, you can take a look at The Motley Fool Australia's guide on retirement planning.
But if you've already crunched the numbers and found you need around $65,000 a year, here's how big your ASX portfolio would need to be.
An ASX portfolio capable of providing $65,000 annually
The first figure to contemplate when investing for a set among of retirement income is your expected dividend yield. That's the amount a company pays in dividends each year relative to its share price, expressed as a percentage.
Most S&P/ASX 200 Index (ASX: XJO) stocks offer a dividend yield of around 4% to 5%. Let's assume one can realise the higher end of that range.
A portfolio would need to be worth $1.3 million to bring in $65,000 at a 5% yield.
However, plenty of shares offer more income than that.
For instance, Harvey Norman Holdings Ltd (ASX: HVN), Woodside Energy Group Ltd (ASX: WDS), and Fortescue Metals Group Limited (ASX: FMG) boast an average dividend yield of 9.7% between them right now.
At that rate, a portfolio of ASX shares would need to be worth around $670,000 to offer $65,000 of annual retirement income.
However, typically, higher dividend yields carry a greater risk of being cut than lower yields.
It's also worth factoring in things like tax and inflation into your calculations when assessing your retirement income needs. Both things can quickly eat into your funds, potentially leaving you in sticky situations.
Starting from scratch
The prospect of investing such a wad of cash might sound intimidating. But there's no need to invest it all in one go.
If one were to consistently invest a manageable amount in ASX growth shares each week, or compound their gains by reinvesting their dividends, their portfolio could grow to such a size in a matter of a few short years or decades.
Though, no investment is guaranteed to provide returns or downside protection.
