How much money do you need to invest to quit work and live only off ASX dividend income?

How realistic is it to live off dividends?

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Being able to quit work and live off only ASX dividend income could be a dream to many. In this article, I'm going to look at how much we may need to invest to make that a reality.

There are a number of different ways to try to generate passive income – bank interest, bonds, residential property, commercial property and ASX share dividend income.

If someone has just won the lottery or received an inheritance, then it could be a great move to invest that money and create a stream of regular cash flow with little ongoing work needed. I wouldn't invest a lump sum all at once. Instead, I'd steadily invest it consistently over a period of time such as 12 months.

Going back to the title – how much is needed to quit work and live only off ASX dividend income? If we have the money right now, the question is what dividend return we're expecting from the portfolio and how much we want to spend.

What dividend yield is needed?

Everyone's finances and spending intentions are different. Someone could live on a simple budget in a regional Australian town and not require too much of an annual budget. At the other end, we could be talking about someone who lives in an expensive Sydney suburb, going on regular luxury holidays and so on.

It can be riskier to go for assets that have increasingly high dividend yields. I'd only suggest a few ASX dividend shares with high dividend yields like Metcash Ltd (ASX: MTS) or GQG Partners Inc (ASX: GQG). For sustainable long-term ASX dividend income, I'd suggest it'd be better to look at names with a dividend yield of between 5% to 6% (or lower), including the yield-boosting franking credits.

If someone had $500,000 invested and received a 5% dividend yield, they'd get $25,000 of dividends.

If someone had $1 million invested and received a 5% dividend yield, they'd get $50,000 of dividends. If we stretch the (average) dividend yield of the portfolio to 6%, a $1 million portfolio could make $60,000 of dividends.

I'm not accounting for paying tax in these calculations, as someone's tax rate could be between 0% to more than 40%.

The ASFA Retirement Standard could be a good starting guide of how much we may need in annual income. According to its latest numbers, a couple wanting a comfortable lifestyle may need to budget to spend around $71,000 per year. This figure assumes the retiree(s) owns their own home and relates to expenditure by the household.

With a 5% dividend yield, to hit $71,000 per year we're talking about a portfolio worth $1.42 billion. I can't imagine many working-age people have $1.4 million of cash sitting in a bank account waiting to be invested.

Long-term compounding

The more likely way of quitting work and living off dividend income is by building up wealth through compounding.

We can steadily invest money over the years where it can generate investment returns and the portfolio can build itself, rather than us needing over $1 million of cash to invest ourselves.

How quickly can we get to $1.4 million? That's impacted by two things – the return of the portfolio and how much we invest.

Let's say we re-invest the ASX dividend income received into more shares, the portfolio makes returns of 10% per annum and they invest perhaps $2,000 per month. According to this compound interest calculator –  In less than 17 years, the portfolio value would grow to $1 million. It would take less than 23 years if someone were investing $1,000, and less than 14 if someone invested $3,000 per month.

So, it'd take some time and saving, but it could be quite possible to live off the ASX dividend income. The dividends received would hopefully grow over time as the underlying businesses grow.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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