Passive income that replaces salary

At some point the spreadsheet has to feed your kids.

The accumulation phase is mostly maths and patience. Save more, invest it, wait. The decumulation phase, the part where you turn assets into a salary-replacement, is the part nobody talks about until they're staring down it.

I'm not retired. I'm in the late accumulation / early bridge phase. But I've spent two years running the post-50 cash-flow model and stress-testing the income stack, because I'd rather find the holes now than at 51 with a tenant moving out and the market down 28%.

Here's what an actual passive-income stack looks like for an Australian retiring early.

What "passive" really means

There's no such thing as truly passive income.

• ETF dividends require you to hold (and not panic-sell during a 35% drawdown)
• Rental income requires you to hold property (with all the calls)
• Trust distributions require admin, accounting, and decisions
• Even bond coupons require you to roll the ladder

So when I say passive, I mean: doesn't require you to show up to a job at 8am. The ongoing work is measured in hours per year, not hours per week.

Define your salary-replacement number first. From module 1: annual spend in retirement, in today's dollars. Let's say $100,000 for the rest of this discussion.

The four-source stack

A robust passive-income setup for an early retiree blends:

1. Equity dividends and distributions (ETFs, direct shares)
2. Rental income (residential or commercial)
3. Fixed income (bonds, term deposits, the cash buffer)
4. Super drawdowns (post-preservation age)

Source diversification is the point. A portfolio that's 100% rental gets killed by a vacancy + repair year. 100% equity dividend yields panic-sell during a crash. 100% bonds gets eaten by inflation. The mix protects you from any single failure mode.

Source 1: Equity dividends and distributions

Australian shares, especially the ASX 20 (banks, miners, supermarkets, healthcare), pay relatively high dividends with full franking credits. VAS yields roughly 3-4% in distributions, plus franking which adds another ~1-1.5% effective for someone on lower retirement-bracket marginal tax.

International equity (VGS, IVV) pays lower yields (1.5-2%) but delivers more capital growth, which you can tap via selective selling.

A $1.5m equity portfolio split 35/65 AU/world might generate:

• $525k in VAS at 4% gross + franking: ~$26k/yr distributable
• $975k in VGS at 1.8%: ~$17.5k/yr distributable
• Total: ~$43k/yr passive distributable income, before any capital sales

For drawdown: turn off DRP. Distributions hit the cash account quarterly (VAS) or semi-annually (VGS). Top up by selling units when needed (the "total return" approach), which is more tax-efficient than chasing high-dividend stocks at the cost of capital growth.

Source 2: Rental income

A modest investment property generating $30k/yr gross rent, with $8k of expenses (rates, insurance, repairs, agent), nets ~$22k.

If the property is held in personal name with low or no debt by retirement, that's $22k of taxable income at lower retirement marginal rates. If still leveraged, the interest deduction reduces taxable income but also reduces cash flow.

The real question for property in retirement: do you keep it, or sell and convert to ETFs?

Arguments for keeping:

• Inflation hedge (rents rise with CPI)
• Diversification from financial markets
• The CGT bill on selling can be ugly

Arguments for selling:

• Property is illiquid; you can't sell half a house when you need $20k
• Tenants and managers and calls and decisions
• Concentration risk (one property = one address)
• The CGT bill is once; the management is forever

I'll likely sell at least one of mine before 50, take the CGT hit, and convert into an ETF stack inside super (or in lower-bracket personal name). Less stress per dollar.

Source 3: Fixed income and the cash buffer

Cash and bonds are the yield drag in your portfolio for 30 years, then they become the most important position you own.

In retirement, the orthodox model is the "bucket strategy":

• Bucket 1 (Cash, 1-2 years of expenses): high-interest savings, sitting in offset or HISA, earning 4-5% in the current rate environment
• Bucket 2 (Bonds/term deposits, 3-7 years): bond ETFs (VGB, VAF), term deposit ladder, hybrids if you understand them
• Bucket 3 (Growth equity, 8+ years): VAS/VGS, the long compounding engine

You spend from Bucket 1. You refill Bucket 1 from Bucket 2. You refill Bucket 2 from Bucket 3 in good market years, and skip the refill in bad ones. This protects you from sequence risk (covered in module 1) by giving you 3-7 years to ride out an equity bear market without being forced to sell at the bottom.

For a $100k spend retiree: $200k in cash, $400-700k in bonds/cash equivalents, $1.5-2m in equity. Heavy cash by FIRE standards, deliberate by retirement-planning standards.

Source 4: Super (the post-60 cavalry)

If you retire at 50, super is locked until 60. You bridge those 10 years from non-super assets. Then super unlocks and the strategy shifts.

In pension phase (account-based pension), earnings inside super are tax-free up to the transfer balance cap ($1.9m, indexed). Withdrawals are tax-free for over-60s. This is the most tax-favoured income source available to an Australian.

Strategy: in the bridge years (50-60), draw heavily from non-super to preserve super for the tax-free pension phase. Once 60, shift drawdowns into super. The post-60 income can be 30-40% higher in real terms because you're paying near-zero tax on it.

The actual stack, retirement-ready, for a $100k spender

Here's a workable target portfolio at age 50 for someone wanting $100k/yr indexed:

• $200k cash (2 years buffer)
• $500k bonds / term deposit ladder (5 years)
• $1.2m ETF stack (VAS + VGS, generating ~$35k distributions)
• One IP netting ~$22k after costs (or sold and converted)
• $1.2m super balance (locked until 60, then becomes the heavy lifter)
• PPOR (paid off, removes the rent line entirely)

Total non-super investable assets: ~$1.9-2.0m + super $1.2m. Income stack from non-super sources: ~$57k passive + ~$15-20k from selling units annually, totalling ~$75-80k tax-effective. Plus rental top-up or super phase-in.

Not flashy. Reliable. Maintainable for decades.

What kills the income stack

Failure modes I've watched or modelled:

• Concentrated dividend chasing. Buying high-dividend AU stocks (banks, Telstra) for the yield, missing the capital decay. Total return is what feeds you, not headline yield.
• Bond-light portfolios. Going into retirement with 95% equity because "bonds suck" works until the first 35% drawdown. Then it doesn't.
• Rental-heavy stacks. One vacancy + one big repair + one bad tenant year is 18 months of rent gone. Diversify.
• Super timing errors. Drawing super before 60 (when allowed) instead of preserving the tax-free pension phase. Lifetime cost: significant.
• Lifestyle creep on the way in. Retirement spending often rises in years 1-3 (suddenly free time = travel, hobbies). Plan for it.

What to do this week

• Calculate your annual retirement spend (today's dollars).
• Map your current assets into the four-source model. Where are the gaps?
• If you're 5+ years from retirement: you're in accumulation, ignore the bucket strategy specifics, just keep accumulating.
• If you're 5 years out: start modelling the bucket allocation. Begin building the cash and bond buckets in the last 3-5 years before you stop work.
• If you're 1-2 years out: you should have a written drawdown plan, reviewed annually with an adviser.

Build the stack. Test the stack. Trust the stack.

Not financial advice. Talk to an adviser before acting.

Further watching

• "Sequence of Returns Risk" — Ben Felix
• 5 Best Dividend ETFs in Australia 2026 (High Yield)