I'm sure most readers would agree that building a nest egg large enough to produce a generous passive income in retirement would be a great thing.
And while the interest rates on saving accounts have improved greatly over the last 12 months, they still pale in comparison to the returns that have been generated by ASX shares over the last 30 years.
According to Fidelity, during the last 30 decades, ASX shares have delivered a total return of 9.55% per annum.
In light of this, if you want to build a sizeable nest egg capable of providing a nice source of passive income, then shares may be the way to do it ahead of a cash savings account.
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Avoiding savings accounts
Having some cash on hand is always a good idea. This is because life has a tendency to throw a curveball at you from time to time. However, relying on savings to produce a retirement nest egg and passive income could lead to significant disappointment.
Commonwealth Bank of Australia (ASX: CBA) currently offers standard interest rates of 2.2% on its NetBank saver accounts. This might be as good as gets for savers for the foreseeable future given that the market believes the Reserve Bank's cash rate hikes are now over.
If you were to put $1,000 into your savings account each month and earned this level of return, after 30 years your nest egg would have grown to be worth $500,000.
While that's not to be sniffed at, it is worth highlighting that $360,000 of this figure is from your monthly contributions. That means you've only actually added $140,000 to your wealth.
Another issue with this interest rate is that it could end up being lower than the average inflation rate for the period. If that's the case, then the real value of your money will have fallen even though it has increased on paper.
And if you wanted to live off the passive income in retirement, your $500,000 would only yield $11,000 a year. That may not be enough to live the lifestyle you deserve in retirement.
Making a passive income from shares
Instead of savings accounts, building a diverse portfolio of ASX shares could lead to a far more generous passive income in retirement.
As I mentioned at the top, the Australian share market has generated an average return of 9.55% per annum over the past 30 years.
There's no guarantee it will do the same in the future, but if it were to do so, then putting $1,000 a month into ASX shares would result in a portfolio valued at just over $1.9 million in three decades.
At that point, investors have a number of options. They could keep things the same and sell off a little bit each year to support their lifestyle or they could switch their focus to passive income.
By building a portfolio filled with ASX dividend shares that offer an average yield of 5%, you would generate a massive $95,000 of passive income each year.
That should be enough to live a very comfortable retirement and maybe even fund some family holidays!
I know which option I would choose.
