Reaching retirement can be a very important milestone for Australians, but there's no need to stress about reaching our golden years.
Building up a large enough nest egg is one thing, but ensuring that the money lasts all through retirement is another factor, and so on. ASX dividend shares can help with this.
We don't need to have a net worth of $100 million to have a good retirement. For starters, there are numerous ways that the government can help older Aussies such as the age pension, rental assistance and various concessions for the primary place of residence.
There are probably numerous elements that could be applicable for retirees to be aware of, so it's worthwhile getting personal financial advice to understand the specific circumstances and what's possible.
Having said that, there are three steps that every retiree, and retiree-to-be should take note of.
Figure out the retirement number
Everyone has different finances. Everyone might have a different idea of what they want to spend in retirement. An annual target of $75,000 might be sufficient for one household, while $200,000 could be the goal for another household. How much does someone need to retire?
We can define the retirement number in a couple of different ways. Do they want to try to aim for a certain amount of cash flow? Or would a total nest egg value be an easier target to work towards?
The Motley Fool retirement guide states:
The Association of Superannuation Funds of Australia (ASFA) has estimated that to support a 'modest' lifestyle in retirement, singles need a yearly income of $29,139 and couples $41,929. A 'comfortable' lifestyle, with a broader range of leisure activities, requires a yearly income of $45,962 for singles and $64,771 for couples.
As a starting point, check out the Australian preservation and age pension eligibility guidelines as well as the AFSA Retirement Standard.
These numbers are likely to increase a bit over the years due to inflation.
Investors may decide that aiming for a total value, such as $1 million would be a better target for the retirement fund than a cash flow figure.
But, keep in mind that the age pension can provide a significant chunk of the desired money, the age pension is not expressed as having a 'capital value' for the retiree, but it's certainly valuable.
Consider how to access cash flow
Whether a retiree aims for a fund total or a spending goal, the expenses do come out of the bank account. So, how do we get cash flow going into the account?
With a retirement investment portfolio there are two different ways – investment income, and crystallising capital gains. It depends on what the investment portfolio looks like.
An ASX dividend share, income-focused portfolio could deliver everything that a retiree needs with dividends, distributions and interest. Between the age pension and dividends, most households might be able to generate enough desired income.
Another strategy could be to sell a certain percentage of the nest egg each year, such as 4%. This strategy can also be boosted by the age pension.
My preferred investment method is to choose investments that pay good dividends to achieve solid cash flow – that's how I'm building my own portfolio for the future.
Having this plan in the background of how to access the cash flow is a reassuring part of the plan for me.
Resilient ASX dividend shares could be the answer
If I'm relying on dividends for my retirement, I'd want to make sure I'm invested in businesses that have already demonstrated a strong track record of dividend stability and growth over time.
There are a few defensive ASX shares that have already achieved strong track records of dividend growth including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Sonic Healthcare Ltd (ASX: SHL), APA Group (ASX: APA), Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL) and Pacific Current Group Ltd (ASX: PAC).
Soul Pattinson and Brickworks are two of the largest positions in my portfolio.
One of the best things about owning ASX dividend shares is that they can attach franking credits to dividends, boosting the after-tax yield of the investment.
Retirees can go for companies that pay a solid dividend yield. But, targeting exceptionally high yields could be a risky strategy.
By building a quality portfolio of ASX dividend shares, people can benefit from dividends, compound growth and resilience as they grow the nest egg value and cash flow.
