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.
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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.
