Superannuation is a great way for Australians to build wealth for their retirement.
But it's not just a savings pot.
Did you know that you can also earn a passive income off your balance once you transition to the pension phase?
But how much do you need in your super to be able to get the passive income you want when your retirement years arrive?
And how achievable is a $10,000 per month passive income?
Let's investigate.
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How much do I need in my superannuation to get a passive income of $10,000 every single month?
First, you need to work out what $10,000 in passive income every month equals over the entire year.
So, $10,000 x 12 = $120,000.
Then you need to divide your annual passive income by the dividend yield of your overall portfolio.
For example, $120,000 ÷ 5% = $2.4 million (that's the portfolio size you'd need).
The catch is that the answer varies depending on your dividend yield.
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.
Break it down for me
Say your overall portfolio has a yield of around 2% or 3%. You'll need a balance of around $6 million or $4 million to earn your $10,000 per month ($120,000 per year) passive income.
Of course, these are huge figures and this level of superannuation balance is out of reach for the majority of Australians.
But the good news is, as your yield goes up, the amount you need to earn the same $10,000 per month passive income, goes down.
So, if your portfolio yields closer to 4%, you'd need around $3 million.
Then if your portfolio yields a little higher, around 5%, you'd need more like $2.4 million to earn the same amount.
At 6%, you'd need a superannuation balance of around $2 million to earn the same amount.
Increase that to a 7% or 8% yield, and you're looking at closer to $1.7 million or $1.5 million, respectively.
Then if you have the appetite for higher yielding and riskier shares, around the 9% or 10% mark, you'd need around $1.33 million or $1.2 million in your super to earn the same level of passive income.
Remember, most ASX dividend shares pay dividends on a semi-annually or yearly basis. Which means that while you could target the equivalent of $10,000 per month in passive income, you won't actually receive the money on a month-by-month basis, but instead in a lump sum every six or 12 months.
Why can't I invest in the highest yielding ASX shares available so I can earn the same passive income off a lower balance?
Technically this is possible, but it comes with a significant amount of risk.
When it comes to ASX dividend shares, high-yielding shares could be cyclical businesses that fluctuate significantly with market cycles, niche companies with strong cash conversion, or they have discounted share prices.
It doesn't mean high-yield shares should be avoided, but rather, they should be part of a diversified portfolio rather than account for the entire portfolio.
Rather than trying to get rich quick, it's best 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.
Ok, so what does a diversified portfolio look like?
If you plan to earn $10,000 per month off a 5% yielding portfolio, you'd need a balance of around $2.4 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 compounding 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 and allocate 20% equally to 2%, 3%, 4%, 5%, and 11% yielding shares. Again, overall, this would total a 5% yield and you'd benefit from a range of exposures.
