The passive income potential offered by ASX shares offers a great pathway to a wealthier retirement.
And with the franking credits that come with some of the top ASX dividend-paying stocks, many retirees will find they can keep a lot more of that passive income in their pockets come tax time.
Depending on your personal situation, you may even get a refund from the ATO relating to the 30% in taxes the ASX companies have already paid on the profits they're sharing out in the form of dividends.
With that in mind, here's how I'd go about investing $100 per month in ASX shares to earn at least $1,000 a month in passive income.
$1,000 per month or more in passive income from ASX shares
Now, obviously I'm not going to turn a $1,200 annual investment in ASX dividend stocks into a $12,000 plus passive income overnight.
And I won't get there by simply sticking the cash under my mattress either.
Saving $100 a month without making that money work for me would see me with a cash pile of $36,000 after 30 years. Not nearly enough to withdraw $1,000 a month for my passive income stream without rapidly depleting my capital.
Instead, I'd target a 12% annual return from a combination of capital gains and fully franked dividend payments from a diversified portfolio of ASX shares.
That's a fairly juicy return, granted. And it will require a good bit of research to get into the best ASX dividend stocks to make that happen. Even then, investing in stocks comes with the risk they could lose value over time as well as gain.
But if I get into the right companies delivering an average annual 12% total return, I can reach my passive income goal in 30 years.
With the magic of compounding, investing just $100 a month at that yield will see my holdings turn into:
- $1,265 in one year
- $8,034 in five years
- $91,121 in 20 years
- $305,201 in 30 years
Now, 4% is broadly considered a safe withdrawal rate that won't erode the fund you're tapping into.
And a 4% withdrawal rate from my $305,201 ASX share portfolio will deliver me a passive income of $12,208 a year. A very welcome boost to my superannuation and any other income I may be receiving.
