For many Australians, reaching retirement age comes with the sobering realisation that their superannuation balance might not stretch as far as they'd like.
The age pension offers some support, but for those wanting a more comfortable lifestyle, finding a way to generate an additional income stream can make all the difference.
The good news? With a bit of planning, you could target a second income of around $26,000 a year by investing in ASX dividend shares.
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The $26,000 a year target
Why $26,000? For a retiree, that figure represents an income boost of about $500 a week — enough to comfortably cover extras like dining out, travel, or simply enjoying life without worrying about every dollar.
To generate that level of income sustainably, you'd ideally be looking for a diversified portfolio of shares and ETFs worth $520,000.
With an average yield of around 5%, this portfolio would deliver $26,000 in annual income.
That might sound daunting, but remember this figure is built on the idea of a long-term, income-focused portfolio.
Many high-quality ASX dividend shares — such as Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), and APA Group (ASX: APA) — provide reliable dividends, often fully franked, which can enhance after-tax returns for retirees.
For those who prefer diversification, income-focused ETFs like the Vanguard Australian Shares High Yield ETF (ASX: VHY) or the newer Betashares S&P Australian Shares High Yield ETF (ASX: HYLD) offer exposure to dozens of dividend-paying companies in a single trade.
Building to $520,000
Of course, not everyone enters retirement with half a million dollars sitting idle.
The key is to start where you are and build gradually. By contributing regularly in the years leading up to retirement, compounding can help you close the gap faster than you think.
For example, investing $1,000 a month into a portfolio that generates 10% returns (capital growth plus income) would grow to our target size in just over 17 years.
Foolish takeaway
Falling short of your retirement target doesn't have to mean a frugal lifestyle in the future. By focusing on dividend-paying ASX shares and ETFs, you could create a second income stream of around $26,000 a year.
It won't happen overnight, and it requires discipline, diversification, and patience. But with the right strategy, you can give yourself the financial breathing room to enjoy retirement the way you want.
