Buying the right ASX shares offers one of the best means I know of for Australians to secure a welcome extra passive income during their retirement years.
One of the advantages we have Down Under, which investors in US and many international stocks don't, is that a lot of ASX dividend shares come with full franking credits.
That means the companies you've invested in have already stumped up the 30% corporate taxes on the dividends they're paying. Meaning you get credit for that when it comes time to pay your own taxes.
Nice, right?
Now, there's no getting around this first part.
If you don't have any savings at 30, and you're aiming to retire with an extra $24,600 of passive income a year by 65, you'll need to start putting away a little extra cash each month to buy ASX shares.
Let's say $100 per month. That's less than $25 each week.
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Buy $100 a month of quality ASX shares
To begin with, you don't need to stick strictly to ASX dividend stocks. Instead, do your own research – or reach out for expert advice – and invest in a diversified basket of quality shares. Ones that are likely to outperform or at least match the benchmark returns to reach your passive income retirement goal.
Let's use the S&P/ASX 200 Gross Total Return Index (ASX: XJT) – which includes all cash dividends reinvested on the ex-dividend date – as our benchmark.
Over the last five years, the ASX 200 Total Return Index has gained 64.6%. That works out to around a 10.5% annual gain, compounded.
Now, here's the real power of compounding at work.
By investing $100 a month in ASX shares and returning an average of 10.5% per year, you'll have secured $21,801 in 10 years, $81,050 in 20 years, $251,640 in 30 years, and … drum roll please … $432,264 at the end of 35 years.
All from that $100 per month, or a total of $42,000 invested in ASX shares over the years.
Reposition into top ASX passive income stocks
Now you've reached 65, with one eye firmly on that retirement boosting passive income stream.
Here is where you can reposition your investment portfolio wholly into dividend-paying ASX 200 shares. Ideally, ones offering full franking credits.
If you were eyeing a similar situation today, three top ASX dividend shares you might want to consider adding to your passive income portfolio are Woodside Energy Group Ltd (ASX: WDS), Fortescue Ltd (ASX: FMG), and Bank of Queensland Ltd (ASX: BOQ).
Over the past 12 months, Bank of Queensland shares have delivered 38 cents per share in fully-franked dividends. That sees the ASX 200 bank stock trading on a trailing dividend yield of 5.5%.
Fortescue shares have paid (or shortly will pay) $1.22 in fully-franked dividends over 12 months. Fortescue shares trade on a trailing dividend yield of 6%.
And Woodside shares have paid out (or shortly will) $1.652 apiece in fully-franked dividends over a year. Woodside shares trade on a 5.5% trailing dividend yield.
So, how about that passive income?
Well, if you were to invest an equal amount into all three ASX 200 shares, you'd earn an average yield (based on the past 12 months) of 5.7%.
Meaning you can now take out $24,639 a year in passive income from your $432,264 investment portfolio without drawing down on that capital.
