How much do you need in ASX shares to give up work and live only off dividend income?

Retired couple reclining on couch with eyes closed

Retired couple reclining on couch with eyes closed

ASX dividend shares can quickly unlock cash flow. But, how much is needed for an individual to decide they can live off dividends for the rest of their lives and retire?

It could be a tricky question to answer – every household’s finances are different. Some people may have a big mortgage, others may own their own home debt-free. One household may have a fancy sports car, with an equally eye-catching car loan.

Each household may also have different lifestyle goals in retirement. How much we need to pay for the essentials is one thing, but funding an annual cruise would add a lot more to the cost.

Estimates for comfortable retirement

Research by the Association of Superannuation Funds of Australia shows that if a couple who own their own home wants to have a comfortable retirement, they will need an annual income of $67,000. A single person would need an annual income of over $47,000.

That spending includes a reasonable allowance for leisure, holidays, health services, and so on.

But for an individual, or household, who doesn’t own their own home, the rent or mortgage could mean an extra $10,000, $20,000, $30,000 — or even more — is needed in additional investment income from ASX dividend shares.

How much do we need invested in ASX dividend shares

Once the investor has roughly figured out how much they’re going to spend per year in retirement, then we can figure out the investment income needs. Certainly, a financial planner would be very helpful here for working out what the specific goals and objectives are.

But, in simple terms, it’s a combination of the dividend yield and the size of the portfolio.

A $1 million portfolio could have a 2% dividend yield and pay $20,000 per year in dividends.

A $300,000 portfolio might have a dividend yield of 10% and pay $30,000 per year in dividends.

Of course, in general terms, the higher the dividend yield, the riskier it might be and the higher chance there could be a dividend cut in the short-to-medium term.

For quality ASX dividend shares, I prefer to look at names that have dividend yields of between 3% to 9% and have a record of growing dividends over time.

If we use the mid-point of the range I just said – 6% – and target $67,000 of annual dividend income, then it suggests the portfolio would need to be over $1.1 million in size.

The 6% figure is just an average though. As an example, there are some names that could pay a dividend yield of around 6% in 2023 such as Telstra Group Ltd (ASX: TLS) and Charter Hall Long WALE REIT (ASX: CLW).

There are others with lower current yields, such as Wesfarmers Ltd (ASX: WES) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), but they have an objective of growing shareholder payouts.

Then there are ASX dividend shares that have very high dividend yields, like Shaver Shop Group Ltd (ASX: SSG) and Metcash Limited (ASX: MTS).

If an investor wants to choose businesses that are seen as defensive ASX shares but still reach that passive income goal, then they’d need to keep saving and growing their wealth until they get to the target dividend amount.

Foolish takeaway

ASX dividend shares could be the key to unlocking a life of pleasing dividends and easy cash flow. But, it could take a portfolio of around $1 million to achieve the targeted amount. Yet, of course, there are still investment risks, as well as volatility, to keep in mind.

The post How much do you need in ASX shares to give up work and live only off dividend income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Telstra Group, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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