Many Australians may love the idea of receiving $80,000 a year of passive income and choosing to retire at the age of 50. Investing in ASX shares could be the best way to achieve that.
For some Aussies, retiring early could be appealing because it could mean enjoying more of life, calling it quits before the body can’t do the physical work any more, or just getting away from the desk and out into ‘life’.
Whatever the motivation for wanting to unlock $80,000 of annual passive income, reaching that goal could be very compelling.
Use compounding to build wealth
I think that every investor should keep the power of compounding in mind for long-term wealth creation.
One of the smartest people ever to live, Albert Einstein, once reportedly said:
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.
By using compounding, we can invest in ASX shares that grow in value on their own. We don’t need to contribute any further money ourselves to see that growth in value.
Let’s look at two scenarios of how that could play out for someone.
Imagine someone is 20 right now and they manage to save $750 per month to invest in ASX shares. That translates into an annual investment total of $9,000. If we assume the portfolio returns an average of 10%, the portfolio would be worth $1.48 million after 30 years.
In another example, let’s consider someone who starts five years later at 25, so they can earn more and they can save $1,500 per month. If the portfolio returned the same 10% per year, it would grow to be worth an incredible $1.77 million.
Which ASX shares investors could buy for passive income to retire
If we go with the two example portfolios above, a $1.48 million portfolio would require a dividend yield of 5.4% to make $80,000 of annual passive income. Meanwhile, the $1.77 million portfolio would require a dividend yield of 4.5%.
There are a wide variety of investments that we can make to generate high passive income.
I’ll run through some businesses and other types of businesses that could be great options for a portfolio dividend yield of around 5%.
Firstly, I’ll highlight investment businesses such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Australian Foundation Investment Co Ltd (ASX: AFI), Australian United Investment Company Ltd (ASX: AUI), Future Generation Australia Ltd (ASX: FGX), PM Capital Global Opportunities Fund Ltd (ASX: PGF) and L1 Long Short Fund Ltd (ASX: LSF).
There are operating businesses like Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV), Medibank Private Ltd (ASX: MPL) and JB Hi-Fi Ltd (ASX: JBH) that could all be compelling options.
Other top options for passive income include Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial REIT (ASX: CIP), Dexus Industria REIT (ASX: DXI), Rural Funds Group (ASX: RFF) and WCM Quality Global Growth Fund (ASX: WCMQ).
I think investors wanting to retire with $80,000 of annual passive income would be well-served by the above names, as well as other ASX shares that could deliver strong growth.
The post How much do I need to retire on $80,000 a year at 50? appeared first on The Motley Fool Australia.
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More reading
- Is the Telstra share price a buy for its 6.25% dividend yield?
- What happens if the ASX share market crashes just after I retire?
- How much passive income could a $500,000 superannuation balance generate?
- Top 3 ASX shares to buy with $3,000 in September
- Which ASX shares win when the Aussie dollar is strong?
Motley Fool contributor Tristan Harrison has positions in Future Generation Australia, L1 Long Short Fund, Rural Funds Group, Washington H. Soul Pattinson and Company Limited, and Wcm Quality Global Growth Fund. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Rural Funds Group, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Lovisa and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.