How much is needed in superannuation to target $80,000 a year in passive income?

Superannuation is a great way to build long-term wealth in a tax-effective manner.

Figures from industry analyst Chant West show that since the introduction of mandatory superannuation in the early 1990s, the median growth fund has returned 8% per year, well above the inflation rate over that period.

The big question is, how much superannuation do you need?

Of course, that depends on what sort of income stream you’d like in retirement, and whether you can afford to save enough during your working life to set yourself up.

Having a goal in mind is the first step, so let’s see what it would take to generate $80,000 per year in income from your superannuation.

How much in superannuation savings do you need for $80,000 per year in income?

For simplicity’s sake, I will calculate this based on dividends alone. However, once people start to draw down on their superannuation, it is, in practice, usually a combination of dividends and share sales (capital gains) that creates the income stream.

To calculate how much you will need to generate $80,000 per year, you need to make an assumption about how much you can expect to earn from dividends, or the average dividend yield.

I would argue that with the benefit of franking credits a return of about 7.5% is realistic.

Franking credits pay back a shareholder for the company tax already paid, which is 30% for a fully franked dividend.

In practice this means that a 5% fully franked dividend is worth 7.14% once credits are taken into account for retirees who pay a zero per cent tax rate.

Not all shares you own need to pay this rate. Some can be lower-dividend, higher-growth shares, while some can be high-dividend payers.

Which shares could I buy to generate an $80,000 income stream?

An example of the latter is some infrastructure stocks such as Atlas Arteria Ltd (ASX: ALX), which is currently paying a trailing dividend of 7.6%, albeit without franking.

In the financial services sector, Morgan Stanley predicts Bank of Queensland Ltd (ASX: BOQ) will pay at least a 6% dividend in FY28, while Regal Partners Ltd (ASX: RPL) is paying a trailing dividend of almost 13%.

Among the major retailers, the dividend yields are a bit lower, with Woolworths Group Ltd (ASX: WOW) paying 2.35% and Coles Group Ltd (ASX: COL) 3.27%, although they do come with the security of large, stable markets.

Real estate investment trusts can also be good dividend payers, with Arena REIT (ASX: ARF) paying 7.6%, Charter Hall Long Wale REIT (ASX: CLW) paying 7.84%, while Waypoint REIT (ASX: WPR) pays 8.18%.

The post How much is needed in superannuation to target $80,000 a year in passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.