The Association of Superannuation Funds of Australia (ASFA) calculates that a comfortable retirement will cost single Australians approximately $56,166 per year.
To fund that, the association assumes that a single retiree will need a superannuation balance of at least $630,000.
That's the minimum amount you'll need to have stashed away to be able to afford the retirement lifestyle you want.
But what if you didn't live off your superannuation balance at all?
Instead of steadily drawing down on your superannuation capital to cover retirement lifestyle expenses, what if you could earn enough passive income to cover your living expenses?
This would let your superannuation balance keep compounding. Instead, you'd live solely off the income it generated.
It's very possible.
Here's how it could work.
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How much superannuation do I need to generate $56,000 per year in passive income?
The calculation is relatively straightforward. You'll need to divide your annual passive income by the overall dividend yield of your investment portfolio.
The tricky part is that the answer varies depending on what that dividend yield is.
Generally, as the dividend yield of your portfolio increases, the superannuation balance you need to earn the same passive income goes down.
It means, for example, that a portfolio yielding 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.
How much do I need if my portfolio yields, 4% to 6%?
If your overall portfolio has a dividend yield of 4%, you'll need a superannuation balance of around $1.4 million. That's because $56,000 ÷ 4% = $1.4 million.
If your portfolio yield is a little higher, at around 5%, your balance will need to be closer to $1.12 million to earn the same amount.
Raise that to 6% and you'll need around $934,000 to earn $56,000 per year in passive income.
Remember that not every ASX share in your portfolio needs to yield the same amount. What matters is the overall dividend yield of your portfolio.
Ideally, you want to buy shares with various yields to hedge against volatility and protect your portfolio from fluctuating prices.
You don't need to invest the whole sum in one go. Start with regular monthly investments and let compounding do some of the hard work for you.
What ASX shares pay a dividend yield between 4% and 6%?
Several options are available at this level, but here are my top picks.
Large blue-chip companies like BHP Group Ltd (ASX: BHP), National Australia Bank Ltd (ASX: NAB) and Woodside Energy Group Ltd (ASX: WDS) pay around the 4-6% level.
Elsewhere, defensive shares like Telstra Group Ltd (ASX: TLS), Origin Energy Ltd (ASX: ORG), AGL Energy Ltd (ASX: AGL), or Amcor PLC (ASX: AMC) are another solid choice for income-seeking investors. These picks could be particularly advantageous in the current environment, marked by rising inflation and heightened volatility.
