Could a $1 million superannuation balance provide $50,000 a year in retirement?

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.

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.

The post Could a $1 million superannuation balance provide $50,000 a year in retirement? appeared first on The Motley Fool Australia.

More reading

• How much passive income can I earn off a $550,000 superannuation balance?
• Top 3 ASX dividend shares to buy if interest rates go up
• Top 3 ASX shares to buy with $3,000 in September
• How much is needed in superannuation for $3,000 in weekly passive income?
• Are these top Vanguard ETFs still a buy in September?

Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Apa Group. The Motley Fool Australia has recommended Macquarie Group and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.