Superannuation is a great tool for Australians to save toward retirement and also enjoy the financial fruits in the golden years. It could be the tool to use to generate $110,000 of annual passive income.
Australia's retirement system allows us to save throughout our lifetime and benefit from the power of compounding over many years.
Employees receive mandatory superannuation contributions every month, with those contributions taxed at a lower rate (15%) than the marginal income tax rate of full-time workers.
Additionally, investment earnings inside superannuation are taxed at a lower rate during the accumulation phase, helping build towards a very healthy nest egg. In retirement, investment earnings may be taxed at 0%, depending on the investment balance.
With withdrawal rules that essentially stop people from accessing their superannuation money until they're in their 60s, it encourages long-term investing in what could deliver the most growth, which is why I choose to invest in shares in superannuation.
Receiving passive income inside superannuation can be very attractive with the lower tax rate. It's the income after tax that we can use, so losing less to tax in superannuation makes a lot of sense to me.
Everyone has a different tax position, so I won't mention tax for the rest of the article.
With that in mind, let's see what's needed for $110,000 of annual passive income.
The required dividend yield
Receiving dividends is very pleasing to me, as investments pay us money just for owning them.
It'd take a sizeable portfolio to receive $110,000 per year, but the exact amount depends on the dividend yield of the portfolio.
A dividend yield tells an investor how much of a cash return from their dollars they get in a similar way to a bank interest rate, though dividends are not guaranteed.
If the portfolio had a dividend yield of 4%, the portfolio would need to be $2.75 million in size to unlock $110,000 per year.
With a dividend yield of 5%, the portfolio would need to be $2.2 million in size.
A dividend yield of 6% would need the portfolio to be $1.84 million in size.
Finally, if the portfolio had an average dividend yield of 7%, the portfolio would need to be $1.57 million in size to create $110,000 of annual passive income per year.
Regularly putting money into superannuation, investing in growth assets with track records, and potentially adding extra amounts as Aussies get closer to retirement could help build towards those sorts of numbers.
What sorts of investments have that type of dividend yield?
There are a variety of ASX dividend shares that Aussie investors can buy with different yields.
At the time of writing, the lower-to-mid dividend yields (of around 5% or under), I'm attracted to are names like Washington H. Soul Pattinson and Co Ltd (ASX: SOL), L1 Long Short Fund Ltd (ASX: LSF), Wesfarmers Ltd (ASX: WES), and WCM Quality Global Growth Fund (ASX: WCMQ).
Some of the higher dividend yields that I like right now that are close to 6% or more include MFF Capital Investments Ltd (ASX: MFF), Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG), and Dexus Industria REIT (ASX: DXI).
There are plenty of attractive ASX shares that can provide good investments to generate returns for superannuation.
The post How much is needed in superannuation to target a $110,000 annual passive income? appeared first on The Motley Fool Australia.
Motley Fool contributor Tristan Harrison has positions in Future Generation Australia, Future Generation Global, L1 Long Short Fund, Mff Capital Investments, 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 Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia has positions in and has recommended Mff Capital Investments, Rural Funds Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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