How I'd invest $200 a month to aim for a passive income of $84,567 a year for life

Changing our investing strategy can make a big difference to the passive income potential.

| More on:
A happy older couple relax in a hammock together as they think about enjoying life with a passive income stream.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Gaining a stream of passive income of $84,567 every year would be a dream come true for most Australians.

After all, that stream of income is above the median salary in Australia and orders of magnitude higher than the Age Pension. It would effectively make working optional and give most of us the opportunity to retire whenever we want.

But dreaming of passive income is the easy part. Actually obtaining that level of secondary income is where things get a little tricky.

Here at the Fool, we regularly preach that dividend income from ASX shares is one of the best ways to enjoy passive income. For one, dividend income is truly passive, requiring almost no effort to obtain, aside from the capital investment of course. But dividend income is also tax-effective income, thanks in no small part to the benefits of franking that most dividend payments come with.

But is it even possible to secure passive income worth $84,567 a year from ASX dividend shares if we have $200 a month to invest?

Well, yes. But it will take a lot of time, discipline and patience.

Investing in ASX shares for passive income

Perhaps the most straightforward path to gaining a passive income stream of the magnitude we are discussing is to invest $200 per month into an ASX index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ). An index fund like IOZ invests in 200 of the largest shares on the Australian share market, giving an investor an 'average' return of the ASX.

This exchange-traded fund (ETF) has returned an average of 8.28% since its ASX inception in 2010. Not a bad return, objectively speaking.

Let's assume this rate of return will continue (which is not guaranteed, of course). If it did, investing $200 a month would result in a lump sum of around $1.17 million after 45 years. That means that someone who started when they were 20 would end up with a pretty tidy nest egg by the time they are approaching retirement. However, under the 4% rule, this would still only get them a passive income stream worth $46,687 per annum.

Of course, that's nothing to turn one's nose up against, but it's still not even close to that $84,567.

So what is one to do? Well, the only way to increase returns is either to increase our investing amount, or achieve a higher rate of return. Since the former is obvious, let's focus on the latter.

Boosting your returns

Investing in index funds is a great strategy for most investors. But, it is possible to gain better returns by investing in individual shares yourself.

The ASX is full of shares that have outperformed the broader stock market over the past ten years. Some examples include WiseTech Global Ltd (ASX: WTC), Xero Ltd (ASX: XRO), Commonwealth Bank of Australia (ASX: CBA), and Washington H. Soul Pattinson and Co Ltd (ASX: SOL). Again, just because a stock has outperformed the broader market in the past doesn't mean it will continue to do so.

However, the fact remains that if you do manage to find stocks that can deliver market-beating performance, you can turbocharge your path to high levels of passive income.

Let's assume that you invest in a portfolio comprising both index funds and a few top ASX stocks. If you pull this off and achieve an average annual return of 11% per annum instead of 8.28%, that same $200-a-month investment will result in a final portfolio value of $2.11 million after 45 years.

And 4% of that $2.11 million would equate to an annual passive income of $84,567.

Should you invest $1,000 in Commonwealth Bank Of Australia right now?

Before you buy Commonwealth Bank Of Australia shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Commonwealth Bank Of Australia wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 9 January 2025

Motley Fool contributor Sebastian Bowen has positions in 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, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited, WiseTech Global, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

a man dressed in a green superhero lycra outfit stands in a crouched pose with arms outstretched as if ready to spring into action with a blue sky and oil barrels lying in the background.
Dividend Investing

Which ASX 200 energy share will pay the best dividend yield in 2025?

Will fallen share prices mean higher dividend yields for beaten-up ASX energy stocks this year?

Read more »

Smiling woman upside down on a swing with yellow glasses, symbolising passive income.
Dividend Investing

Invest $15,000, create $867 in passive income from this ASX dividend stock

I think this ETF is a great fit for any income investor.

Read more »

Excited woman holding out $100 notes, symbolising dividends.
Dividend Investing

Which will deliver better dividends in 2025: ASX mining shares or bank stocks?

Banks and miners have long been among the most favoured ASX stocks for income investors.

Read more »

Magnifying glass in front of an open newspaper with paper houses.
Dividend Investing

Which ASX REIT will pay the best dividend yield in 2025?

Will the ASX REITs pay higher distributions this year amid falling interest rates worldwide?

Read more »

A woman standing in a blue shirt smiles as she uses her mobile phone to text message someone
Dividend Investing

Buy Telstra and this ASX dividend stock in February

Brokers think these shares could be buys for income investors. Let's see what they are saying.

Read more »

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
Dividend Investing

5 ASX dividend shares to double up on right now

Analysts think income investors should be snapping these shares up while they can.

Read more »

Four girls in festive pink hats are sitting on a hammock and laughing merrily.
Dividend Investing

I invested in 4 high-yield ASX dividend shares. Here's why I own each one

I chose these stocks for their big dividends.

Read more »

A happy construction worker or miner holds a fistfull of Australian money, indicating a dividends windfall
Resources Shares

How does the Fortescue dividend yield compare to other ASX mining shares?

Fortescue typically pays excellent dividend yields, but can it do so again in 2025?

Read more »