Investing in superannuation is a great way to generate a passive income for your retirement years.
Not only does your super help to build wealth for later on in life, but it also comes with the added bonus of low tax rates and the benefit of long-term compounding.
But how much do you actually need to be able to get the passive income you want when you transition to your pension phase?
Let's investigate using a $6,000-per-month passive income as a guide.
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How much do I need in superannuation to get $6,000 of monthly passive income?
If you want to earn $6,000 in passive income every month from your superannuation, that equates to $72,000 per year in dividend payments.
In order to work out what superannuation balance you'd need to get that level of income, simply divide your annual passive income by the dividend yield.
The tricky part of the calculation is that the answer varies widely depending on the dividend yield of your portfolio.
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.
How much do I need if my portfolio yields 3% to 7%?
If your overall portfolio has a dividend yield of around 3%, you'll need a balance of around $2.4 million to earn $72,000 per year in passive income.
A $2.4 million 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 goes down.
Say the yield of your portfolio is around 4% or 5%, for example, your balance would need to be closer to $1.8 million or $1.44 million to earn the same dividend income. Again, these are huge numbers for a superannuation portfolio, but if you raise the yield a little higher, it's even more achievable.
A superannuation investment portfolio yielding around 6% would need to be around $1.2 million in order to earn $72,000 per year in dividend payments.
Meanwhile, a 7% dividend yield would need closer to $1 million to earn the same amount in passive income.
Note, though, that while it's tempting to build a portfolio with a lower amount and a high yield, it can be risky from an investment perspective. Generally, the higher the yield, the higher the risk associated with that ASX stock. Instead, you should concentrate on good-quality stocks that are proven to stand the test of time.
Ok, so what ASX shares can I buy around these dividend yields?
There is a huge range of shares available, but here are some of my favourites.
Lower-yielding ASX dividend-paying shares such as Wesfarmers Ltd (ASX: WES), Evolution Mining Ltd (ASX: EVN), and Washington H. Soul Pattinson and Co Ltd (ASX: SOL) are solid and reliable shares that offer a yield of around 2% to 3%.
For a mid-range yielding ASX dividend option, I'd look at defensive assets like Telstra Group Ltd (ASX: TLS). Qantas Ltd (ASX: QAN) is a good option if you want travel exposure. Meanwhile, Yancoal Australia Ltd (ASX: YAL) and blue-chip majors like BHP Group Ltd (ASX: BHP) pay a decent dividend of around 3% to 4%.
For a higher 5% to 6% dividend yield, I'd look at reliable payers like APA Group (ASX: APA) or Origin Energy Ltd (ASX: ORG).
If you want to take on more risk and go for a much higher-yielding ASX stock, my picks would be something like IPH Ltd (ASX: IPH) or the BetaShares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX). These typically yield around 9% or more.
