How much do I need to retire on $95,000 a year at 60?

Many Australians may love to retire on $95,000 a year at 60 or even earlier. That may sound like a difficult objective to reach, but I want to show how it's possible with enough time for compounding.

Inflation has made the essentials and discretionary spending more expensive, so I think it's a good idea to aim for a sizeable amount of income.

To reach $95,000 of annual income, it'll take a good nest egg.

Luckily, superannuation can do a lot of heavy lifting for most Australians with how employees receive mandatory contributions each month. Long-term investing in growth assets (namely shares) can help deliver the strongest wealth-building thanks to the power of compounding.

Compounding is the concept of growth on growth after a number of years. For example, $1,000 turns into approximately $2,000 in eight years if the return is 10% per year, which has been the long-term return of the share market.

As Albert Einstein once supposedly said:

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.

Speaking of interest, it's a good idea to avoid consumer debt as much as possible because borrowing for items that go down in value isn't a good idea.

What would it take to make $95,000 of annual income?

Receiving almost $100,000 each year would be great. Plus, that income level could grow over time because businesses can grow their earnings and dividends over time.

The required balance for $95,000 of passive income depends on the dividend yield (or withdrawal rate) that the retiree wants to aim for.

For example, if the retiree goes for a 4% dividend yield (or withdrawal rate), then it would require a $2.375 million balance to retire.

A 5% dividend yield would require a smaller balance of $1.9 million.

With a 6% dividend yield, we're talking about a balance of $1.58 million to retire.

Invest for success

With enough time, investors can build towards those sorts of nest-egg figures through superannuation and perhaps additional non-superannuation investments.

Each of the below scenarios assumes people are starting with $0 in investments across superannuation and outside of superannuation, but I think it's likely that everyone does have some investments (even just super) at 30 or older, so it could be easier to reach $1.5 million or $2 million than I'm about to outline.

If someone is 30 years old and invests $1,000 per month for 30 years at 10% per year, it'd grow to $1.97 million.

Now imagine someone is 40 years old and could invest $2,400 per month; they'd reach $1.65 million if it returned 10% per year.

Someone who starts at 20 has the advantage of time. They have 40 years to compound wealth until they're 60. Investing $500 per month for 40 years would become $2.65 million if it returns 10% per year.

For long-term compounding returns, I'd consider investing in diversified international share options, including ideas like Vanguard MSCI Index International Shares ETF (ASX: VGS), VanEck MSCI International Quality ETF (ASX: QUAL), BetaShares Diversified All Growth ETF (ASX: DHHF), or Global X S&P World Ex Australia GARP ETF (ASX: GARP). Washington H. Soul Pattinson and Co Ltd (ASX: SOL) is also a good option.

Once at retirement age, I'd consider high-quality options that provide solid dividend income such as MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), L1 Long Short Fund Ltd (ASX: LSF), and Future Generation Global Ltd (ASX: FGG).

There are plenty of other ASX shares that could deliver stronger returns than 10% and help us retire faster or retire at the same age with more money.

The post How much do I need to retire on $95,000 a year at 60? appeared first on The Motley Fool Australia.

Motley Fool contributor Tristan Harrison has positions in Future Generation Global, L1 Long Short Fund, Mff Capital Investments, VanEck Msci International Quality ETF, Washington H. Soul Pattinson and Company Limited, and Wcm Global Growth. 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 and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Vanguard Msci Index International Shares ETF. 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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