Investing your superannuation to generate passive income in the future is a sensible strategy, especially if your goal is to build wealth for retirement.
By investing today, you can benefit from low tax rates, compounding, and eventually a tax-free passive income once you transition to the pension phase.
But how much do you actually need in your super to be able to get the passive income you want when the retirement years hit?
Let's break it down, using $5,500 per month as an example.
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How much do I need in superannuation to get $5,500 of monthly passive income?
If you want to earn $5,500 in passive income every month from your superannuation, that equates to $66,000 per year in dividend payments.
There is an easy way to work out the superannuation balance you'd need to get that level of income. Simply divide your annual passive income by the dividend yield.
But the tricky part is that the answer varies widely depending on your portfolio's dividend yield.
For example, a portfolio with a dividend yield of around 6% only needs to be half the size of one with a dividend yield of around 3% to generate the same level of passive income.
Let's break it down further.
If your overall portfolio has a dividend yield of around 3%, you'll need a balance of around $2.2 million to earn $66,000 per year in passive income.
A $2 million-plus portfolio isn't achievable for many Australian investors, but the good news is that, as the dividend yield of your portfolio increases, the superannuation balance needed to earn the same passive income decreases.
For example, if the yield of your portfolio is around 5%, your balance would need to be closer to $1.3 million, to earn the same dividend income.
Increase that to a 6% or 7% dividend yield and you're looking at closer to $1.1 million or $943,000. You'd still earn $66,000 per year in passive income of these portfolio sizes.
Can't I just invest in shares with the highest yield to get the biggest returns?
It's a tempting idea, but it doesn't make good investment sense.
Generally, the higher the yield, the higher the risk associated with that ASX stock.
Rather than trying to get rich quickly, investors should concentrate on good-quality businesses with strong balance sheets and stable earnings. These stocks are most likely to stand the test of time and while also building wealth.
The key is diversity, consistency and lots of patience.
And remember, you don't need to invest the whole sum in one go. Start with a monthly investment and let compound growth do some of the hard work for you.
Ok, so what ASX shares can I buy with dividend yields around 3-7%?
There is a huge range of options, but here are a few of my favourite ASX dividend shares to get you started.
ASX dividend-paying shares such as large cap companies like Commonwealth Bank of Australia (ASX: CBA) or mining giant BHP Group Ltd (ASX: BHP) pay their shareholders a 3-4% dividend yield. As does CSL Ltd (ASX: CLS) and Telstra Group Ltd (ASX: TLS) .
For a mid-range yielding ASX dividend option, I'd look at defensive stocks like Transurban Group (ASX: TCL), APA Group Ltd (ASX: APA), or ASX miner Fortescue Ltd (ASX: FMG), which pay a dividend of 4-6%.
For a higher 7% dividend yield, or even above, I'd look at dividend-payers like Shaver Shop Group Ltd (ASX: SSG), Charter Hall Long Wale REIT (ASX: CLW) or even IPH Ltd (ASX: IPH).
