3 steps to take for a rich retirement with ASX shares

Following these steps could help you have a golden retirement.

| More on:
A couple sit on the deck of a yacht with a beautiful mountain and lake backdrop enjoying the fruits of their long-term ASX shares and dividend income.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Nobody wants to get to retirement age only to realise they don't have enough funds to live as comfortably as they had dreamed.

The good news is that this living nightmare doesn't have to happen to you. By planning ahead and investing wisely in ASX shares, you could put yourself in a position to have a rich retirement.

Let's take a look at three steps you could take to try and make this dream a reality.

Step one: Start as early as you can

Time is an investor's best friend. The longer you have to allow compounding to do its thing, the less capital you need to deploy into ASX shares.

For example, if you have an investment time horizon of 30 years, then by investing $500 a month, you would grow your investment portfolio to a sizeable $1 million if you can generate an average total return of 10% per annum.

And while future returns are not guaranteed, this return is in line with historical averages. As a result, I feel it is reasonable to aim for this in the future.

Now imagine you only have 10 years to invest until retirement. Instead of making $500 monthly investments into ASX shares, you would need to put in $5,000 a month to get to $1 million if you achieve an average 10% per annum return.

Step two: Buy quality ASX shares for your retirement portfolio

If you're wanting a rich retirement, then you ought to consider buying only the highest quality ASX shares for a balanced portfolio.

Traits to look for are strong business models, experienced and talented management teams, sustainable competitive advantage, and positive long-term growth outlooks.

These are the qualities that Warren Buffett looks for when he makes his investments. And given that he has doubled the market return since the 1960s, it's fair to say that his investment strategy is tried and tested.

Companies like CSL Ltd (ASX: CSL) and Goodman Group (ASX: GMG) could tick these boxes and be worth further investigation.

Step three: Reinvest dividends

While getting a pay check every six months from your ASX shares is undoubtedly very nice, unless you absolutely need these dividends, you should consider reinvesting them into the market.

That's because if you take them out, you're stopping them from compounding each year along with the rest of your funds. This will slow down your wealth creation and could leave you with less in your retirement portfolio than you were hoping to have come retirement time.

Let's imagine that you have a 2% dividend yield across your investment portfolio. If you take those dividends out, your investment portfolio would only grow by 8% per annum (if you achieve a 10% total return).

Going back to our $500 a month investment example, this new growth rate would mean you end up with a portfolio valued at $710,000 after 30 years. That's almost $300,000 that you have sacrificed by pulling out the dividends.

Overall, by following these three steps, investors have a good chance of retiring rich.

Motley Fool contributor James Mickleboro has positions in CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Goodman Group. The Motley Fool Australia has recommended CSL and Goodman Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Retirement

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Retirement

2 ASX 200 retirement shares to buy now

Analysts have buy ratings on these high-quality stocks.

Read more »

An older man wearing a helmet is set to ride his motorbike into the sunset, making the most of his retirement.
Retirement

If I were 60 I'd buy these ASX shares for dividends

These stocks could be appealing options for passive income.

Read more »

man and woman discussing superannuation
Superannuation

What's the average age Australians access their superannuation?

Here's what the data says.

Read more »

Woman smiling with her hands behind her back on her couch, symbolising passive income.
Dividend Investing

How much cash do you need to quit work and live off ASX dividend income?

Dividends are the best path to an early retirement for most Australians...

Read more »

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Retirement

2 ASX investments I think all retirees should have

Investors shouldn’t underestimate how important these two things are.

Read more »

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Retirement

2 ASX shares to buy for a retirement portfolio in FY25

Analysts have put buy ratings on these stocks. Here's why they could be worth considering for retirees.

Read more »

worried couple looking at their retirement savings
Retirement

Will you still be paying a mortgage in retirement?

One in three Australians expect to still be paying off their home loans in retirement, a survey shows.

Read more »

Older couple enjoying the backyard
Retirement

3 top ASX retirement shares to buy for FY25

Analysts think these stocks could be good additions to a retirement portfolio.

Read more »