How much is needed in superannuation to target a $100,000 annual passive income?

I love the idea of investing for the long term and building significant cash flow for retirement. Superannuation could be the best place to invest for those goals.

If I’m working full-time and want to invest, putting money into shares in my own name could mean paying at least 30% tax on investment returns. Investing through superannuation could mean paying a tax rate of half that.

One of the main perceived negatives of superannuation is that the money is locked away for so long. It’s true that the money contributed to superannuation may not be accessible for decades. But that’s the point – we’re saving for retirement.

With mandatory contributions (and possibly topped up by additional amounts), investors can build towards a very pleasing net worth.

When it comes to building annual passive income, tax can play an important part because the income we can spend/invest is what we earn after tax. So, the tax rate affecting our investments is important.

Reaching $100,000 in annual passive income can be assisted by using superannuation, due to lower taxes during the accumulation phase and in retirement. Investing in our own name as an individual can come with higher taxes throughout life compared to the superannuation tax rate.

Let’s look at what is needed to make $100,000 of dividends within superannuation, while ignoring tax from now on because everyone has a different tax position.

Dividend yields are important

Any share investment that pays a dividend has a dividend yield.

That dividend yield is decided by how much of its annual earnings it pays out – the dividend payout ratio – and the valuation of the business.

A business can be valued in many ways, such as its price-earnings (P/E) ratio, the price-to-book ratio, and so on. The more expensive an asset is, the lower the dividend yield becomes.

Investors seeking dividend income will probably hunt for a solid dividend yield, but I think yields can be excessive if the dividend payout ratio gets too high, so I wouldn’t fill my portfolio with the highest yields I can find.

How large an investment balance needs to be to generate $100,000 of annual passive income depends on the dividend yield.

For example, if a portfolio had a dividend yield of 4%, it would need to be $2.5 million in size.

If the portfolio had a 5% dividend yield, it would need to be a $2 million portfolio.

A portfolio with a 6% dividend yield would require a $1.67 million portfolio.

Each portfolio yield comes with a different target, so it depends on what sorts of ASX shares investors buy.

So, let’s run through some businesses with their dividend yields.

Examples of top ASX shares with their dividend yields

I think investors should focus on the forecast upcoming payments where possible, rather than the past dividends. Forecasts are either from CMC Invest or the business itself. So, I’ll largely be looking at forecast grossed-up dividend yields, including franking credits if that’s relevant.

First, I’ll mention a couple of blue chips for superannuation dividend investing. In FY27, Coles Group Ltd (ASX: COL) is forecast to pay a grossed-up dividend yield of 5.2%, and Telstra Group Ltd (ASX: TLS) is projected to pay a grossed-up dividend yield of 6.5%.

Real estate investment trust (REIT) yields are looking particularly appealing following elevated interest rates. For example, Centuria Industrial REIT (ASX: CIP) is projected to pay a distribution yield of 6.2%, and Charter Hall Long WALE REIT (ASX: CLW) is forecast to pay a distribution yield of 7.8%.

Finally, I’m a big fan of compelling investment businesses with good investment strategies. Three of my favourites include Washington H. Soul Pattinson and Co Ltd (ASX: SOL), with a current grossed-up dividend yield of 3.4%, L1 Long Short Fund Ltd (ASX: LSF), with a current grossed-up dividend yield of 4.5%, and MFF Capital Investments Ltd (ASX: MFF), with a current grossed-up dividend yield of 6.7%.

The above ASX shares, and others, could be great contenders to produce an annual passive income of $100,000.

The post How much is needed in superannuation to target a $100,000 annual passive income? appeared first on The Motley Fool Australia.

More reading

• 17 ASX shares going ex-dividend next week
• Wesfarmers vs Coles: Which dividend share is better for retirees?
• How much superannuation do I need to generate $100,000 per year in passive income?
• Woolworths Group vs Telstra Group: Which ASX blue chip pays better passive income?
• 2 ASX passive income share ideas I’d use to generate $600 a month in 2027

Motley Fool contributor Tristan Harrison has positions in L1 Long Short Fund, Mff Capital Investments, and 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 Mff Capital Investments, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.