How Much Do You Need Invested To Retire Off The Dividends?

What is your goal with investing your money?

• Is it to have a little extra income coming in on the side?
• Is it to have a safety net in case you lose your job?
• Or is it perhaps to have your dividend income entirely replace your day job?

If you are like me, it can be for all of the above.

However, in this article, we will focus on the last point which is to have dividend income replace your job entirely, which I am sure is a goal for many people as they think about their future. 

How Much Do You Need Invested To Retire Off The Dividends?

• This amount depends on your current lifestyle.

For people like Graham Stephen, Nate O'Brien or myself we enjoy the simple things in life, and that usually don't cost thousands of dollars. We're not obsessed with having the most expensive cars or most expensive homes or even buying branded items. 

For me as long as I have money to spend on what I enjoy, debt-free and I am able to live comfortably, I'm happy. Some people really enjoy shopping on Amazon all the time, going to Starbucks every day, and living lavish lifestyles. That is absolutely fine as well, but these people need a higher amount invested to live off their dividend income. 

The median income of a worker

To recalculate the annual income of a person we will base it on the median amount needed for a person.

In the US, the median income is roughly $53,924 ($1,037 x52 weeks), which is roughly $50,000 a year.

We will be prudent in our calculations. Out of the $50k gross salary, some of it will go to taxes, pensions, 401k, Roth IRA and etc through auto deductions, so the actual take-home could be around $40,000 depending on where you live and the tax rates in that location. Similarly, if you're based outside the US, you can take your annual net income (which is the after-tax amount) as a benchmark of how much you need to survive annually or you can use your desired annual income upon retiring.

How much do we need to invest to get $40,000 a year?

• Do you want to go for the high yield dividend companies?
• Or do you want to go for the low yield dividend companies?

There is no right or wrong answer, everyone has a different approach to managing their personal finance. Personally, for me, I like to have a balanced approach and go somewhere in the middle for the yield of dividend companies. Generally, these mid yield dividends are companies that pay a good dividend from their earnings and also use some of their earnings to reinvest their earnings.

If a company pays out all its earnings on dividends it is risky because it makes you wonder how will the company keep growing. 

Personally, I want to make sure companies keep reinvesting back into the business so that they keep growing and progressing.

There are exceptions, however, for eg REITs that are required to pay 90% of their earnings back to their shareholders which are built into the entity's structure.

What stocks did Warren Buffet invest in?

Warren first bought shares in 1988, and this company has a strong business model behind it.

By 1989, Buffet has 23.35 million shares worth $1.8 billion.

Warren buffet profited through:

• Share price increases worth $19.4 billion
• Additionally, he has received $7 billion worth of dividends

The Magic Formula

Annual Income You Want / Dividend Yield = Amount You Need Invested

Dividend yield

What would be considered a good dividend yield?

To answer this we need to look at the big dividend ETFs in the USA.

S&P Dividend ETF

SPDR S&P Dividend ETF

This follows the S&P Composite 1500 index that has increased dividends for at least 20 consecutive years. Currently at 2.74%.

Vanguard Dividend Appreciation Index Fund Admiral Shares

• The biggest dividend ETF is the Vanguard Dividend Appreciation Index Fund Admiral Shares.
• It tracks the Nasdaq US Dividend Achievers Select Index.

Currently, this yields 1.82%

Schwab US Dividend Equity ETF

• This focuses on the higher dividend ETF.
• Has a dividend yield of 3%.

If you average it out (SPDR, VDADX, SCHD) you will get around 2.5%.

Let's crunch the number

Annual Income You Want / Dividend Yield = Amount You Need Invested

40,000/0.025=$1,600,000 

You need $1,600,000 invested to be able to draw down $40,000 per year without ever touching the principal amount if the invested sum is growing at a 2.5% rate year on year.

2 concerns people have

• A group of people may find achieving upwards of $1 million impossible.
• Another group of people may have concerns about wanting to have a higher annual income rather than just $40,000 a year.

Concern 1

• This amount is absolutely possible.

The secret: Compound interest.

$1.6 million can be achieved by anyone in a first-world nation if you give it time and be consistent in your investing.

Here are the numbers to achieve :

Assuming a 7% rate of return based on the S&P 500, here is how much you need saved per month;

40 years: $610 per month

30 years: $1,311 per month

20 years: 3,071 per month

10 years: 9,244 per month

What if you managed to find higher individual dividend yield stocks at 4% instead in your portfolio and you reduced your end goal amount to $1,000,000

40 years: $381 per month

30 years: $820 per month

20 years: $1,920 per month

10 years: $5,778 per month

If you give yourself enough time you can definitely reach the $1,000,000 mark, the key is to give yourself time and to consistently invest money.

And let's say life gets in the way, and you don't achieve the $1,000,000 mark and you only achieve half of it, $500,000, would you really be complaining? Half of your expenses can now be replaced with dividends and you are much further along compared to someone else that has no dividend income coming in.

Again this is dividend income that you receive for doing:

• absolutely no work.
• income that passively comes in on time.

Concern 2

For those that want more than $40,000 per annum, that's great too.

You just need to tweak the figures for you to invest more. 

• Let's say you want $80,000 a year you need about $3.2 million invested ($80,000/0.025).
• Let's say you want $90,000 a year you need about $3.6 million invested ($90,000/0.025).

Depending on your total expense needs, you now know the total amount of money you need to achieve these goals.

Conclusion

It isn't the worst idea to have a goal of living off dividends because even if you don't get there, you'll still be in a great financial position later on in life.

You can start off by buying broad range ETFs if you want to be diversified. Alternatively, you may prefer to buy individual dividend stocks and build up your own portfolio which is absolutely fine as well. 

The most important thing is to get started and build from there. And who knows years down the road you will look back and have a bunch of really good stock portfolios in your quiver for a comfortable retirement.

"If it is to be, it is up to me."- William H. Johnsen

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