Reaching $1 million in superannuation would be a major milestone.
Once retirement arrives, though, the size of the balance is only part of the picture. The next question becomes what sort of lifestyle that money could support and how long it might need to last.
For someone hoping to draw $50,000 a year, there are a few things I would think about before assuming the numbers will work.
Image source: Getty Images
Start with the withdrawal rate
Taking $50,000 from a $1 million super balance represents a 5% annual withdrawal.
On the surface, that does not look unreasonable. If the portfolio earned an average return of 5% after fees, a $50,000 withdrawal would roughly match those returns in the first year. Stronger investment returns could allow the balance to grow, while weaker years could see it fall.
Of course, markets do not deliver the same return every year.
A portfolio might rise strongly one year and fall the next. That means the sustainability of a $50,000 annual income would depend on what the investments earn over many years, rather than whether they happen to generate 5% in any individual year.
Which ASX shares would I buy?
One way to generate $50,000 of income a year would be to build a portfolio averaging a dividend yield of 5%.
There are certainly ASX shares capable of contributing meaningful dividend income, but I would not force the entire portfolio into high-yield investments just to hit that figure.
I would rather own a mixture of income and growth investments.
APA Group (ASX: APA), for example, could provide exposure to infrastructure and regular dividends. Macquarie Group Ltd (ASX: MQG) offers another source of income while retaining opportunities to grow across its global businesses.
I would also want investments with stronger capital growth potential, potentially including international shares through an exchange-traded fund (ETF) such as the Vanguard MSCI Index International Shares ETF (ASX: VGS).
Some years, dividends might cover much of the $50,000. In others, I would be comfortable selling a small portion of the portfolio to cover the balance.
Retirement income does not have to come entirely from dividends.
Inflation changes the calculation
Inflation is another challenge if retirement lasts 20 or 30 years.
A $50,000 annual income today will not buy the same amount decades from now.
If living costs rise by 2.5% each year, for example, an investor would eventually need considerably more than $50,000 just to maintain the same spending power.
That is one reason I would keep a meaningful allocation to growth assets after retiring.
If the portfolio can continue increasing in value over time, withdrawals may also be able to rise without putting as much pressure on the remaining balance.
Foolish takeaway
So, could $1 million in superannuation provide $50,000 a year in retirement?
I think it could.
A 5% starting withdrawal is not an extreme figure, but I would want the portfolio to keep working well beyond the first few years of retirement.
For me, the stronger approach would combine income, long-term growth, diversification, and some flexibility around withdrawals. That gives the $1 million balance a good chance of supporting a comfortable income while still having plenty left to fund the years ahead.
