Superannuation is a popular and tax-effective way of building wealth for retirement.
Many Australians realise the importance of accumulating a big enough nest egg that compounds over time.
But did you know you can also use your superannuation to invest in ASX shares and generate a consistent passive income once you transition to the pension phase?
But exactly how much super do you need to earn your ideal passive income?
Let's take a look, using $1,000 per week as an example.
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How much do I need in my superannuation to earn $1,000 per week in passive income?
First, you need to calculate what $1,000 in passive income every week totals over the entire year.
So, $1,000 x 52 = $52,000.
Then you need to divide your annual passive income ($52,000) by the dividend yield of your overall investment portfolio.
For example, $52,000 ÷ 2% = $2.6 million (that's the portfolio size you'd need).
Of course, the answer varies significantly depending on the dividend yield you'll be using. As your yield increases, the superannuation balance you'd need to earn your $1,000 weekly passive income, goes down.
Remember, most ASX dividend shares pay dividends on a semi-annual or annual basis. This means that while you could target the equivalent of $1,000 per week 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.
What superannuation balance would I need for a 3-5% yielding portfolio?
Say your overall portfolio has a yield of around 3%, you'll need a balance of around $1.73 million to earn your $1,000 per week ($52,000 per year) of passive income.
Then, if your portfolio yields closer to 4%, you'd need around $1.3 million.
And if your portfolio yields a little higher, around 5%, you'd need more like $1.04 million to earn the same amount.
What if I wanted to go for a higher yielding portfolio, around 6% or 7%?
At 6%, you'd need a superannuation balance of around $867,000 to earn the same $1,000 weekly passive income amount.
Increase that to a 7% yield, and you're looking at closer to $743,000.
And is it possible to go for an even higher yield, around 10%?
Yes, it's still possible to earn from a 10% yielding portfolio, but there are significantly fewer options available.
The higher yield also comes with a higher element of risk, which translates to a lower balance for the same income.
If your portfolio yielded 10% and you wanted to earn $1,000 per week, you'd need a superannuation balance of around $520,000.
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.
Ok, how could I create a diversified portfolio?
If you plan to earn $1,000 per week off a 5% yielding portfolio, you'd need a balance of around $1.04 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 5% yield overall.
You don't need to invest the whole sum in one go either. Start with a monthly investment and let compounding do some of the hard work for you.
For a diversified portfolio, my tip would be to consider splitting your portfolio between different sectors and yielding shares.
You could look to divide your portfolio equally between 3%, 4%, 5% and 6% yielding shares. Overall, this would give a total overall portfolio yield of around 5%.
Alternatively, you could invest around half of your portfolio into 6% yielding shares, another 40% into 4% yielding ASX shares, and invest the remaining 15% in 5% yielding shares. Again, this would total around a 5% portfolio overall.
