Looking to quit work and live off ASX passive income? Here's how I'd aim to make it happen

If you want to tell your boss where to go, you will have to read this.

Man jumping in water with a floatable flamingo, symbolising passive income.

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Let's face it. 

You wouldn't be reading a website like The Motley Fool and investing in ASX shares if you weren't wanting to tell your boss to stick it one day.

To get to that point one day, you need passive income.

So allow me to take you through an example of how you could make this a reality with the power of stocks and compounding.

What's my passive income goal?

Like many endeavours in life, it's important to set goals for your finances.

For the purposes of quitting your day job, you need to work out how much passive income you might need.

The government's Moneysmart resource suggests that roughly two-thirds of your pre-retirement wages are adequate as retirement income.

The latest available Australian Bureau of Statistics data shows the median employee earnings in Australia is $1,250 per week. That's an annual income of $65,000.

Two-thirds of $65,000 is $43,333. 

Of course, different people have varying lifestyle expectations, but for the purposes of this hypothetical let's set an aim of $43,333 annual passive income.

The Lucky Country

My thinking is that constructing a portfolio that can produce a 10% dividend yield on the ASX is not out of the question.

That's because Australia has tax laws that are friendly to investors who receive dividend income.

The biggest benefit is that double taxation is avoided using franking credits.

If a business has already paid corporate tax on its profits, then shareholder distributions coming out of that are accompanied by franking to indicate the investor need not pay income tax.

So when ASX companies want to return capital to shareholders, there is a massive carrot to do it via dividends over other channels, like buybacks.

All this means that many quality Australian dividend stocks pay out yields at extraordinarily high levels that would make overseas investors' heads explode.

And that's why squeezing 10% yield out of an ASX portfolio is realistic, in my opinion.

How long do I have to wait?

Unfortunately, comparison site Finder found this year that the average Australian only has $40,000 saved up.

Creating a 10% yield dividend stock portfolio from this would only produce $4,000 of passive income each year.

That's not really enough to tell your boss that you're not coming back, is it?

So let's reinvest the returns to grow the pot.

If you can keep saving $800 a month to add to the portfolio, the magic of compounding will see you reach $472,105 after 15 years.

Then if you stop reinvesting and pocketed the 10% return each year, you have yourself a passive income of $47,210.

Mission accomplished.

If you start this plan as a 30 year old, you're on your way to retiring at 45.

Motley Fool contributor Tony Yoo 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 no position in any of the stocks mentioned. 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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