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…

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Almost all of us would love the ability to quit work and rely on the passive income from ASX dividend shares to live. We might not want to stop working altogether. But merely having the option to work or not to work, safe in the knowledge that our dividends can cover all of our living expenses, is one that most Australians would relish.

But dreaming is the easy part. Plotting a viable pathway to financial independence is a little harder.

Hopefully, we can clear some of the fog from this path today with a look at how much cash you might need to quit work and live off of your dividend income for the rest of your days.

Well, there are quite a few variables we have to go through.

For one, we have to ask ourselves how much income we need to live off in order to give up our day jobs.

Some people might want to live lavish lifestyles after they stop working. These folks might want to travel the world and see the sights or host regular parties and gatherings for their friends and family.

Others might want to move to the country, buy a couple of chickens, plant a vegetable garden, and enjoy a simpler existence.

You'll also need to consider other factors like whether you rent or, if you don't, whether your mortgage is paid off.

Step one is working out how much money you will (not might) spend.

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

Step two involves assessing how much cash you have available to invest in a portfolio of income-producing ASX dividend shares.

Chances are you won't want to (indeed, you shouldn't) keep all of your net wealth tied up in shares, even if they are producing income for you. Keeping some of your wealth in cash for an emergency or rainy-day fund is important.

If you crash your car or have an expected medical bill in the depths of a stock market crash, you might be forced to sell your shares at the worst time possible. So make sure you take this into account as well.

But let's get down to some numbers.

Here in Australia, our shares are well-known for their high dividend output. However, the level of cash you'll need to invest will still vary from stock to stock. For instance, if you wish to bag $50,000 in annual dividend income from ANZ Group Ltd (ASX: ANZ) shares, you'll need to invest approximately $825,000.

But to see that level of income from WiseTech Global Ltd (ASX: WTC) stock, you'll have to invest more than $31 million.

Crunching the numbers on an early retirement

For simplicity's sake, we'll assume our would-be retiree buys a portfolio of generous ASX dividend payers that yields a collective 4%.

Some famous ASX dividend payers, like ANZ, Transurban Group (ASX: TCL) and Telstra Group Ltd (ASX: TLS), currently pay more than 4%. And some, like Woolworths Group Ltd (ASX: WOW) and Commonwealth Bank of Australia (ASX: CBA), pay less right now. But for an average, 4% arguably makes sense.

Harking back to our two lifestyles above, we'll assume the person wanting to retire and maintain a lavish lifestyle would want $150,000 in annual income from their ASX dividend shares.

We'll also assume that our more modestly inclined would-be retiree would be content with an annual salary of $75,000.

If one wishes to bag $150,000 in annual dividend income at a yield of 4%, they would need to aim for an ASX share portfolio worth $3.75 million.

For that $75,000 annual income, the figure one should aim for is $1.875 million.

Fortunately, dividends tend to rise over time, so we hopefully won't have to worry about this annual income keeping up with inflation.

But this exercise just goes to show that building enough wealth to fund an early retirement is no easy feat, even if you are aiming for a modest early retirement. But with enough time and discipline, it is more than possible for most of us.

Motley Fool contributor Sebastian Bowen has positions in Telstra Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Transurban Group and WiseTech Global. The Motley Fool Australia has positions in and has recommended Telstra Group and WiseTech Global. 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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