Superannuation is a very effective tool for investors to generate returns with a lower tax rate. It could be a very useful way to invest for Aussies wanting passive income.
The main reason it's so appealing is that superannuation has a lower tax rate compared to many individuals, trusts and companies. I believe the nature of the superannuation structure, and how Aussies access that money in retirement, enable investors to invest for the long-term.
Receiving passive income is one of the rewarding elements of owning ASX shares with how little effort we need to put in for the ongoing dividend payments.
In my opinion, the passive income we receive after tax is a more important figure than the before-tax figure, because that's what investors get to keep.
Superannuation can have a tax rate as low as 0% in retirement. That's great. In the accumulation phase, the superannuation 15% tax rate on income is lower than what many individuals or companies may experience.
Every household may have a different tax situation, so I'll just focus on a specific dividend income target and won't refer to tax rates from now on.
Image source: Getty Images
How much is needed in superannuation for $100,000 of annual passive income?
Receiving $100,000 in dividends each year would be wonderful, in my opinion. I'd love to receive that much, though I've got a long way to go to get there.
There are a variety of asset classes that investors can consider for income such as term deposits, bonds, property and shares.
I think that ASX shares are the best choice for passive income, partially thanks to the excellent bonus of franking credits.
The portfolio size required to earn $100,000 depends on the size of the dividend yield.
As an example, a portfolio with a 5% dividend yield would require a $2 million portfolio. If a portfolio had a dividend yield of 6%, it would need a $1.67 million portfolio.
Different dividend yields require different-sized portfolios to reach that $100,000 of passive income from superannuation.
The sorts of ASX dividend shares I'd buy
Within the ASX share space, there are a few different types of dividend options that offer good dividend yields, such as real estate investment trusts (REITs), S&P/ASX 300 Index (ASX: XKO) shares and compelling listed investment companies (LICs).
Some of the businesses I'd consider with a lower-to-medium dividend yield include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Australian Foundation Investment Co Ltd (ASX: AFI) and Telstra Group Ltd (ASX: TLS).
Some of the higher-yielding names I'd consider include WCM Global Growth Ltd (ASX: WQG), Future Generation Global Ltd (ASX: FGG), Future Generation Australia Ltd (ASX: FGX), Centuria Industrial REIT (ASX: CIP) and Dexus Industria REIT (ASX: DXI).
There are even more ASX dividend shares that superannuation investors could consider for passive income, but I think the above names are a useful starting list.
