Superannuation is more than just a savings pot for retirement, it can also be a powerful tool to help generate long-term wealth and a passive income stream.
By investing today, you can benefit from low tax rates, compounding, and eventually a tax-free passive income once you transition to the pension phase.
But how much do you actually need in your super to generate the passive income you want when you retire?
Let's break it down, using $5,500 per month as an example.
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How much superannuation do I need to earn $5,500 of monthly passive income?
The math is simple.
First, calculate what $5,500 in passive income per month totals over the year.
So, $5,500 x 12 = $66,000.
Then divide your annual passive income by your overall portfolio's dividend yield.
But the tricky part is that the answer varies widely depending on your portfolio's dividend yield.
For example, 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.
Let's break it down further
If your overall portfolio has a dividend yield of around 3%, you'll need a balance of around $2.2 million to earn $66,000 in passive income each year.
A $2 million-plus portfolio isn't achievable for many Australian investors, but the good news is that, as the dividend yield of your portfolio increases, the superannuation balance you need to earn the same passive income goes down.
For example, if your portfolio yields closer to 4%, you would need around $1.65 million in your superannuation to earn $5,500 in passive income each month.
Then, if your portfolio yields around 5%, your balance would need to be closer to $1.3 million to generate the same dividend income.
Increase that to a 6% or 7% dividend yield, and you're looking at closer to $1.1 million or $943,000. You'd still earn $66,000 per year in passive income with these portfolio sizes.
Note that the higher the yield, generally the higher the risk associated with that ASX stock.
Ok, so what ASX shares can I buy with dividend yields between 3% and 7%?
A wide range of shares yield 3% to 7%, but here are a few of my top picks.
ASX dividend-paying shares, such as large-cap companies like Commonwealth Bank of Australia (ASX: CBA) or mining giant BHP Group Ltd (ASX: BHP), pay their shareholders a 3-4% dividend yield.
Defensive shares like Telstra Group Ltd (ASX: TLS), Origin Energy Ltd (ASX: ORG) or Amcor PLC (ASX: AMC) are a solid choice for income-seeking investors. These all yield around the 5% to 6% level (at the time of writing).
For a higher 7% dividend yield, or even above, I'd look at dividend-payers like Shaver Shop Group Ltd (ASX: SSG), IPH Ltd (ASX: IPH), or even a real estate investment trust like Charter Hall Long Wale REIT (ASX: CLW).
