How much would I need to invest in ASX shares for a retirement income of $80,000 per year?

How big does the nest egg need to be?

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Retirement income is very important for people wanting to live off their nest egg. ASX shares can be the answer, generating excellent levels of passive income.

Australian companies can pay a very appealing level of dividends because of their ordinary payments and franking credits. Grossed-up dividend yields can be particularly attractive because of how the Australian taxation system works.

Franking credits can turn a normal yield of 3.5% into a grossed-up dividend yield of 5%, though we don't get the full benefit until completing a tax return. With that in mind, let's consider how much investors might need.

Retirement income dividend yields

According to the AFSA Retirement Standard, a retired couple aged between 65 to 84 that own their home outright would need $71,724 annually for a comfortable lifestyle. Getting $80,000 per year would be an appealing amount of money coming in.

But how much of a nest egg needs to be invested?

It all comes down to the dividend yield.

If $1 million were invested in high-yield ASX shares that paid an average of 8%, then it would make $80,000 of retirement income. I don't think people should be aiming for an 8% (grossed-up) yield, which would likely be an unsustainable yield, particularly after the recent share market rally (which pushes down on yields).

Let's look at a more sustainable (grossed-up) dividend yield of 5%. To get $80,000 of annual retirement income, we're talking about an ASX share portfolio worth $1.6 million with an average yield of 5%.

There's a suggested rule for retirement that implies a safe withdrawal rate is 4% of the nest egg balance which means someone won't run out of cash in retirement. If an ASX share portfolio had a 4% dividend yield, it would require a balance of $2 million to make $80,000 of annual retirement income.

Of course, these numbers don't account for things like tax, and other forms of potential income (such as bank interest, part-time work, the pension and so on).

ASX share examples

The Vanguard Australian Shares Index ETF (ASX: VAS) is a low-cost fund that owns 300 of the largest businesses in Australia and has a dividend yield of 3.9% at 31 January 2024. That yield is before franking credits.

Telstra Group Ltd (ASX: TLS) has an annualised grossed-up dividend yield of 6.7%.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has a trailing grossed-up dividend yield of 3.6%.

The above three ASX shares are known for their dividend payments, but there are plenty of other investments out there as well.

Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Telstra Group and Washington H. Soul Pattinson and Company Limited. 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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