Many Australians love the idea of retiring at 55 with $120,000 of annual passive income. Investing in ASX shares could be the best option to achieve that.
For some people, retiring early sounds good because it could mean enjoying more of life, stopping before the body can't do the physical work anymore, or simply getting away from the desk.
Whatever the reason for wanting $120,000 per year of passive income, unlocking that level of dividends is enticing.
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Use compounding to build wealth
One of the best things that investors can utilise to get to retirement is the power of compounding.
Albert Einstein once supposedly said about compounding:
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
Compounding allows our ASX share investments to grow in value over time without us needing any more money ourselves to increase that value.
By regularly putting additional money into the stock market, investors can see the value of their portfolio increase.
I'll run through two examples of how it could work.
If someone is 25 and can invest $1,000 per month, they'd be able to invest $12,000 per year. Assuming the portfolio returns an average of 10% per year, that portfolio would grow to be worth $1.97 million after 30 years.
With the second example, let's imagine someone is 30 and has more earning power, allowing them to invest $2,000 per month. If the portfolio were to return 10% per year, it would grow to $2.36 million after 25 years.
Which ASX shares I'd buy for passive income to retire
If we go with those two examples above, a $1.97 million portfolio would require a portfolio dividend yield of approximately 6.1% to make $120,000 of annual passive income. Meanwhile, a $2.36 million portfolio would require a dividend yield of 5.1%.
I'm going to highlight some ASX shares with a lower-to-medium dividend yield and some with a higher dividend yield.
Some of the stocks with a dividend yield of around 5% (or a little less) that I like include Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), L1 Long Short Fund Ltd (ASX: LSF), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), APA Group (ASX: APA), Coles Group Ltd (ASX: COL), Telstra Group Ltd (ASX: TLS) and WCM Quality Global Growth Fund (ASX: WCMQ).
The ASX shares that have a higher dividend yield that I'm a big fan of with a higher dividend yield include WCM Global Growth Ltd (ASX: WQG), MFF Capital Investments Ltd (ASX: MFF), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG) and Hearts and Minds Investments Ltd (ASX: HM1).
