To earn $10,000 a year in passive income from a $10,000 investment in ASX shares, you’d need to be getting a 100% dividend yield.

And if you know any ASX companies offering a reliable 100% yield, well, drop us a line.

But that doesn’t mean you can’t get to that $10,000 annual passive income stream from your ASX share investment.

It will just take some patience and time.

Tapping into the magic of compounding for long-term passive income

When you’re buying ASX shares, it’s worth taking some advice from legendary investor Warren Buffett.

And when it comes to long-term investing, Buffett famously said, “I don’t invest to make a quick profit. I buy stocks with the mindset that the market might shut down tomorrow and stay closed for five years.”

Or, more succinctly, Warren Buffett once quipped, “Our favourite holding period is forever.”

Now, rest assured, you won’t have to wait forever to see your $10,000 investment in ASX shares deliver $10,000 a year in passive income.

I believe you can reasonably expect to earn a long-term yield of at least 5.2% from quality ASX dividend stocks.

S&P/ASX 200 Index (ASX: XJO) energy giant Woodside Energy Group Ltd (ASX: WDS) shares, for example, trade on a 5.1% fully-franked dividend yield.

Shares in Aussie freight operator Aurizon Holdings Ltd (ASX: AZJ) trade on a 6.2% dividend yield, 90% franked.

And ASX 200 bank stock Westpac Banking Corp (ASX: WBC) trades on a 4.4% fully-franked dividend yield.

Using these three as our sample, if you bought an equal amount in each stock, you could expect to earn a 5.2% dividend yield.

To the maths!

So, in the first year after your initial $10,000 investment, you could expect to earn $520 in passive income.

To achieve your $10,000 in annual passive income at a 5.2% yield, you’ll need to own $192,308 in ASX dividend shares.

Bearing Warren Buffett’s advice in mind, we’ll be patient and tap into the magic of compounding.

Let’s take the S&P/ASX 200 Gross Total Return Index (ASX: XJT) – which includes all cash dividends reinvested on the ex-dividend date – as our benchmark for the types of returns you might expect from that initial investment.

Over the last five years, the ASX 200 total return index has gained 46%. That equates to an annualised return of approximately 7.9%.

Now we won’t try to beat those returns. But we certainly hope to match them.

So, if you sit tight and leave that $10,000 invested for 38 years, you should have $199,287.

At a 5.2% yield, that will give you an annual passive income of $10,363.

The post $10,000 a year in passive income buying just $10k worth of ASX shares? Here’s how I’d go about it appeared first on The Motley Fool Australia.

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• How many Westpac shares do I need to buy for $8,000 of passive income?
• 5 things to watch on the ASX 200 on Monday
• How much do I need in my superannuation to earn $200 a day in passive income?

Motley Fool contributor Bernd Struben 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.

In Australia, superannuation is a popular tool to build wealth for retirement.

It’s tax effective too, and you can also use your superannuation to build a passive income to live off in your retirement years.

But by investing your superannuation wisely, you will benefit from lower tax rates, compound growth, and then eventually a retirement lifestyle boosted by a tax-free passive income.

The question is, how much do you actually need in your superannuation to receive the passive income you want?

Let’s break it down, using $10,000 per month as an example.

How much superannuation do I need to earn $10,000 of monthly passive income?

First, you need to work out what $10,000 in passive income every month totals over the year. 

So, $10,000 x 12 = $120,000.

Then you need to divide your annual passive income by the dividend yield of your overall portfolio. 

For example, $120,000 ÷ 2% = $6 million (that’s the portfolio size you’d need).

The only catch is that the answer varies depending on your dividend yield.

That means a super portfolio with a dividend yield of around 4% only needs to be half the size of one with a dividend yield of around 2% to generate the same level of passive income.

Which is good news because a $6 million superannuation balance is out of reach for the majority of Australians.

Ok, so how much do I need to earn $10,000 off a 4%, 5% or 6% yielding portfolio?

We already know what portfolio size you’d need to earn $12,000 per year (the equivalent of $10,000 per month) off a 2% yielding account.

But if your overall portfolio has a slightly higher dividend yield of around 4%, you’ll need a balance of around $3 million to earn the same $120,000 per year in passive income.

If the yield of your portfolio is higher still, at around 5% for example, your balance would need to be closer to $2.4 million to earn the same dividend income.

For a 6% yielding portfolio, you’d need a superannuation balance closer to $2 million to earn the same amount again.

And so on…

You’d still earn $120,000 per year in passive income from each of these superannuation balance sizes.

I’m aiming for a 5% yielding superannuation portfolio, which ASX shares can I invest in?

To earn a $120,000 passive income off a 5% yielding portfolio, you’d need around $2.4 million saved. 

But note, if you want a portfolio yielding around 5%, it doesn’t mean that every investment in your portfolio has to yield that level. It can be a combination that yields 5% overall.

These are my top picks.

Defensive shares like Telstra Group Ltd (ASX: TLS), Sonic Healthcare Ltd (ASX: SHL), Origin Energy Ltd (ASX: ORG) or Amcor PLC (ASX: AMC) are a solid choice for income-seeking investors. These all yield around the 5% to 6% level, at the time of writing.

Non-discretionary ASX consumer staples stocks are also naturally defensive, but many of them yield slightly less. Supermarket giants like Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) can generate stable cash flow across all phases of the economic cycle. This translates to consistent dividends for shareholders. These shares pay around 3%, at the time of writing. 

Then there are your popular ASX mining shares. These are more cyclical, but such stocks usually rebound strongly during recovery. BHP Group Ltd (ASX: BHP), Fortescue Ltd (ASX: FMG) and Rio Tinto Ltd (ASX: RIO) are popular options. These yield anywhere between 3.5% and 6.5% at the time of writing. 

The post How much do I need in my superannuation to earn $10,000 passive income every month? appeared first on The Motley Fool Australia.

More reading

• Here are the top 10 ASX 200 shares today
• Post-earnings: I’d buy these ASX dividend stocks for income today
• How I’d target $5,000 a year in passive income from ASX shares
• Why is everyone talking about China and BHP shares today?
• These ASX shares benefit from a high Aussie dollar

Motley Fool contributor Samantha Menzies has positions in BHP Group. 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 positions in and has recommended Amcor Plc and Telstra Group. The Motley Fool Australia has recommended BHP Group and Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

For many Australians, $1 million in superannuation sounds like the magic retirement number. But can that balance realistically deliver $60,000 a year without running out too soon?

The answer depends on more than the size of your nest egg. Your age, investment returns, spending habits, inflation, housing situation and access to the Age Pension can all materially change the equation.

The simple maths

At first glance, the calculation looks encouraging. Taking $60,000 from a $1 million superannuation balance represents a 6% annual withdrawal rate. If the investments inside the super fund generate more than 6% over time, the capital could potentially last for many years.

But investment returns aren’t guaranteed, and retirees need to account for periods when markets fall. Taking withdrawals during a market downturn can accelerate the depletion of a portfolio.

That’s why a $1 million balance doesn’t automatically translate into $60,000 of sustainable annual income.

A million is a substantial balance

It is worth putting that figure into perspective. The Association of Superannuation Funds of Australia (ASFA) currently estimates that a single homeowner aged 67 needs around $630,000 in superannuation to fund a comfortable retirement, while a couple needs $730,000. Those estimates assume retirees draw down their capital and receive some Age Pension.

ASFA’s latest retirement budget puts the annual cost of a comfortable lifestyle at $55,923 for a single person and $78,566 for a couple aged 65 to 84.

That suggests $1 million is not an insignificant amount. In fact, for a homeowner, it could provide a considerable buffer above the current ASFA benchmark.

However, the circumstances are very different for someone renting. Housing costs can dramatically increase the amount of retirement income required.

Age Pension changes the equation

Another important consideration is that superannuation doesn’t necessarily have to fund the entire $60,000. A retiree may qualify for a full or part Age Pension, depending on their circumstances and the relevant income and assets tests. That means a $1 million super balance could potentially be combined with government support.

But there is a catch: relying on a fixed withdrawal rate ignores how long the money needs to last. Someone retiring at 67 could potentially need to fund several decades of retirement. Market volatility, inflation and rising healthcare costs can all put pressure on the portfolio.

Foolish takeaway

A $1 million super balance gives a retiree a strong starting point for targeting $60,000 of annual income, particularly if they own their home and qualify for some Age Pension.

But investors shouldn’t view 6% as a guaranteed income rate. A more conservative strategy could mean withdrawing less during weak markets and more when investment returns are strong.

The key lesson is that retirement planning isn’t simply about hitting a magic super balance.

For someone targeting $60,000 a year, $1 million in superannuation could be enough, but the sustainability of that income will ultimately depend on how the money is invested, withdrawn and supplemented throughout retirement.

The post Is $1 million in superannuation enough for a $60,000 retirement income? appeared first on The Motley Fool Australia.

More reading

• WiseTech shares are down 62%. Why are brokers still bullish?
• 4 high conviction ASX stock picks from Canaccord Genuity
• $10,000 a year in passive income buying just $10k worth of ASX shares? Here’s how I’d go about it
• How much do I need in my superannuation to earn $10,000 passive income every month?
• Here are the top 10 ASX 200 shares today

Motley Fool contributor Marc Van Dinther 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.