Your superannuation isn't just a nest egg for retirement.
Once you retire and move into the pension phase, it can also provide you with a regular stream of passive income.
And in the meantime, you can benefit from concessional tax treatment and the power of compounding.
But exactly how much superannuation do you need to be able to earn the passive income you want when the time comes?
Here's a breakdown, using a monthly $6,200 passive income target as an example.
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How much do I need in my superannuation to receive $6,200 per month in passive income?
The calculation is pretty straightforward.
First, you need to calculate what $6,200 per month totals over a whole year. In this case, $6,200 x 12 = $74,400.
Then you'll need to divide your annual passive income ($74,000) by the dividend yield of your overall portfolio.
The only issue is that the answer varies significantly depending on the dividend yield of your portfolio.
For example, for a 3% yielding portfolio, $74,000 ÷ 3% = $2.46 million (that's the superannuation portfolio size you'd need).
Then for a 4% yielding portfolio, you'd need around $1.85 million to earn the same passive income.
Increase that to 5%, and you'd need more like $1.48 million.
If you go higher again to 6%, then you'd be able to earn the $74,000 annual passive income off of $1.23 million.
The required balance would be lower again on a high-yield portfolio of around 7-8%. You'd need a superannuation balance of around $1.06 million or $925,000, respectively.
Ok, so if I invest in the highest-yielding ASX shares available, that means my balance can be lower and still earn the same?
Technically yes. But it's a risky move 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 quick, it's a better idea to concentrate on a diverse range of good-quality businesses with strong balance sheets and stable earnings. Ideally you want to focus on stocks that are most likely to stand the test of time.
What could a diversified portfolio look like?
Say you plan to earn $6,200 per month off of a 5% yielding portfolio, you'd need around $1.5 million.
That doesn't mean that every investment in that superannuation portfolio has to be 5%. It can be a variation which equates to a combined overall 5% 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.
I'd look at splitting my superannuation portfolio into different yielding stocks, across different sectors.
You could look to have around 10% of your portfolio invested in 3% yielding ASX shares, 20% into 4% yielding, 35% into 5% yielding, 25% into 6% yielding, and 10% into 7% yielding. Overall this would give a total overall portfolio yield of just over 5%.
Alternatively, you could split it down far more simply. If you had 65% invested into mid-range yielding ASX shares around 4-5%, another 20% invested into slightly higher yielding stocks maybe around 6%, the remaining 15% could be invested into riskier but much higher yielding shares. Again this would total around 5% overall.
It's important to note that the majority of ASX shares pay their dividends every six or 12 months. Only a small handful pay every month.
Also note that while a 5% yield from a diversified portfolio is a reasonable long-term target, it's not guaranteed and could fluctuate depending on sharemarkets and company profits.
