How I'd aim to retire rich enough to live on passive income from my ASX dividend shares

This is how I would aim to retire rich with a growing passive income stream to live from.

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A couple sit on the deck of a yacht with a beautiful mountain and lake backdrop enjoying the fruits of their long-term ASX shares and dividend income.

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Key points

  • The share market is a great place to grow your wealth over the long term
  • Investors can also change their focus at any given time to suit their goals
  • I would grow my wealth and then switch to an income focus to live on a growing passive income stream

If you want to retire rich, you have a few options at your disposal. You can save, you can invest, or you can try and win the lottery.

While the latter would be nice, the odds are stacked firmly against you. So, it would probably be advisable to not bet your whole retirement on winning the Powerball at some point between now and then.

Of the two remaining options, investing has historically provided investors with much stronger returns.

For example, ASX shares have provided investors with an average total return of 9.6% per annum over the last 30 years. This is vastly superior to the average interest rate you would have received from a savings account over the same period.

Retire rich with ASX dividend shares

If I wanted to retire rich, I would focus on making long-term investments in ASX shares that pay dividends.

And while you could cash out your dividends when they are paid, I think it would be better to reinvest them each year in order to take full advantage of compounding.

Moving on. There's no guarantee that ASX shares will continue to generate 9.6% annual returns over the next 30 years, but we're going to assume this will be the case and base our calculations on this historical return.

If you were able to invest $20,000 each year into a high-quality group of ASX shares, such as CSL Limited (ASX: CSL) or TechnologyOne Ltd (ASX: TNE), and earned the market return, your portfolio would grow to be worth $1 million at the end of the third decade.

Alternatively, if you don't have as much capital to invest but have time on your side, you could invest $10,000 per year for 43 years to arrive at the same figure.

Turn your portfolio into a passive income machine

Now we have a million-dollar portfolio, it's time to start thinking about generating an income.

At present, there are plenty of ASX dividend shares that offer potential yields of 6% or above. This includes Rio Tinto Ltd (ASX: RIO) and Westpac Banking Corp (ASX: WBC) in FY 2024, according to Goldman Sachs.

If this continues to be the case in 30 years (or 43 years) then you could aim to build a balanced income portfolio filled with ASX dividend shares offering 6% yields.

Doing so would result in an annual paycheck of $60,000, with the potential to grow each year thereafter. That's a good retirement if you ask me!

Motley Fool contributor James Mickleboro has positions in CSL and Westpac Banking. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia has recommended Technology One and Westpac Banking. 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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