Investing in superannuation is a great way to generate a passive income for your retirement years.
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 in your super to be able to get the passive income you want when you transition to your pension phase?
Let's break it down, using an annual $60,000 passive income as an example.
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How much do I need in my superannuation to get a passive income of $60,000 every year?
Working out the superannuation you'll need to earn that level of passive income is more straightforward than you'd think.
Simply divide your annual passive income by the dividend yield of your overall portfolio.
The tricky part is that the answer varies significantly depending on the dividend yield of your portfolio.
That means 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.
Say your overall portfolio has a dividend yield of around 3%, you'll need a balance of around $2 million to earn $60,000 per year in passive income.
Then, as your portfolio's dividend yield increases, the superannuation balance required to earn the same passive income decreases. So if the yield of your portfolio is around 4%, for example, your balance would need to be closer to $1.5 million to earn the same dividend income.
For a 5% yielding portfolio, you'd need a balance of closer to $1.2 million to earn the same amount.
Increase that to a 6%, 7%, or 8% dividend yield, and you're looking at closer to $1 million, $858,000, or $750,000, respectively.
You'd still earn $60,000 per year in passive income from these portfolio sizes.
Can't I just invest in the highest-yielding shares so I can earn the highest passive income off the lowest balance?
You could, but it's not a good idea from an investment perspective.
When it comes to ASX dividend shares, generally, the higher the yield, the higher the risk associated with that stock.
Rather than trying to get rich quickly, it's a better idea to concentrate on diversification. That is, a range of good-quality shares across a range of industries on major indexes like the S&P/ASX 200 Index (ASX: XJO). You'll also need to invest in shares at a range of yields.
How could I diversify my portfolio?
Say you eventually plan to have around $1.5 million in your superannuation to invest for passive income. You could earn around $60,000 per year off a portfolio yielding around 4% overall.
That doesn't mean that every investment in that portfolio has to be 4%. It can be a variation that equates to a combined overall 4% yield.
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.
For example, I'd look at splitting my portfolio into different yielding stocks.
I'd look to have around 70% invested in mid-range yielding ASX shares of around 4% to 5%, another 20% invested in slightly higher yielding stocks of maybe around 6%, and the remaining 10% invested in riskier but much higher yielding shares.
I'd also look to buy ASX shares across multiple sectors to further diversify my portfolio.
It's important to note that most ASX shares pay dividends every 6 or 12 months.
Also be aware that while a 4% yield from a diversified portfolio is a solid long-term target, it's not guaranteed and could fluctuate depending on the company's profits.
