This article idea came to mind after discussing with one of my readers. His questions looked like this:
“I’ve heard I need about a million dollars to generate a $40,000 income at retirement”
There are lots of rules of thumb surrounding retirement. You need to generate 70% of your job income at retirement. You should consider a 4% withdraw rate. You should invest differently (safer investments) now that you are retired. You should always save at least 10% of your income to retire happy. The average rate of return of a stock portfolio should be 8-10%. Which ones of these rules are right or wrong?
In my opinion; they are all wrong. Why? Because none of them applies to everybody. Back to my readers question; do you need a million bucks to retire?
Yes & No
Yes; if you have a million bucks saved and you withdraw 4% each year ($40,000), chances are you will be able to withdraw forever. However, the real question is: is $40,000 is enough to support your lifestyle and how are you going to deal with inflation? $40,000 today may be enough to support your lifestyle, but 20 years from now, you may need $60,000-$70,000 to support the same lifestyle. How does this translate in your retirement plan? Will the million dollars support it?
No; You don’t need a million dollar to generate $40,000 in retirement income. If you have $800,000 generating a 4% dividend yield, you get your $40,000. Over time, building an 800K portfolio paying a 4% dividend yield is fairly reasonable. Many stocks pay around 3 to 3.50% right now and will increase their payout fast enough to reach 4% in a few years.
One more point to consider is you might want to benefit from all those years of saving money and spend more along the way. After all, it’s your money. Therefore, you can take money from your capital and decrease your 800K or $1M nest egg. I don’t advise you take all your money out of your account and start living like a villain. I think the right move to make when you do know how much you can withdraw would be to get a financial plan from… a financial planner!
Here’s How Dividend Investing Can Help You
As opposed to many other way of investing, dividend investing seems to be the one that is the most aligned with a retiree’s way of living. Once you retire, you can’t count on that comfortable bi-weekly paycheck to pay the bills. You can’t really count on the amount of Gov’t pension you will receive to sustain your lifestyle (unless you like ramen noodles for lunch and spam for dinner!).
If you are super lucky, you will have a fully funded pension plan from a big company (or by the government!). But it isn’t likely to be the case as most companies are cutting down on their generous pension plans and leaning toward a contribution defined pension plan. Meaning that you have to save money in a retirement account and your employer helps you with an additional contribution. However, once you leave, you get “your doggy bag” and you are in control. You can spend as much as you want but once the bag is empty, you can’t go back to your employer to ask for more.
The most reliable source of income for an investor is the dividends paid. It’s better than the interest on bonds for two reasons; most bonds pay every 6 months and the interest paid is fully taxed in a non-registered account. On the other hand, you can find dividend stocks paying out quarterly or even monthly. You can create a dividend calendar and manage your portfolio to hold enough stocks to receive dividend payments each month from one company or another.
If you are able to live on the dividend distribution only, dividend investing will also protect your lifestyle from inflation. Most dividend stocks I pick increase their dividend by 5% or more each year. Inflation should be around 2 – 2.25% for the upcoming years. The dividend increase will not only cover inflation but will actually increase your buying power.
What is your next step?
If you are about to leave for retirement and you have never invested in dividend stocks before, you need help to get started. You can deal with a financial planner that will help you with a detailed plan for retirement. You will either have to pay slightly over $1,000 for this plan with a fee only planner (this means he won’t sell you anything) or you can go with a regular financial planner for a free plan but he will want you to buy funds with him (everybody has to make a living, right?).
The other option you have is to start on your own. This is one of the reasons I’ve created Dividend Stocks Rocks; to help retirees managing their portfolio. We now have 12 real life portfolios to help you build yours along with stock lists and an exclusive ranking system. The bi-weekly newsletter is exactly what you need to keep on top of everything and without having to worry about potential crashes.
Back to Our Question – How Much Do You Need to Retire?
As you can see, the answer is not universal; I know people that have retired and project total revenue in the range of $24K-$30K per year. They live simply, have no debts and don’t need more to be happy. Others will need over $50K annually before considering retirement. It’s all about knowing how much you need.
One thing is for sure, you have to consider living up to 90-95. In my opinion, out surviving your savings is probably the worst case scenario you can have as a retiree. In order to reach 95 with enough money in your bank account, you will probably need to retire around 67-70 and have around $1M in savings. But it doesn’t have to be $1M in cash in an investment account; it could be a combination of many things; a pension plan, a rental property or even your own property (if free of debts) so you can sell your assets and continue to live your retirement dream.
My personal plan is to retire around the age of 55, maybe 60. I’ll have a pension plan that will jump in at the age of 65 and in between, I count on my retirement account (dividend investing!) to sustain my lifestyle. I expect to have around 450K at the age of 60 in my RRSP account along with a fully paid house and pension plan. Therefore, at the age of 60, I will have over $1M in value (my pension plan alone will be close to $800K at that time), so I can retire comfortably.
Have you ever thought on how much do you need to retire? What’s your magic number?