How Much Do I Need To Retire On Dividends Alone?

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Some prospective retirees are quite divided between using dividends to fund retirement and simply drawing down from the portfolio. Indeed, there are tax advantages to realizing capital gains when one’s no longer in the workforce, but, of course, it would be nice to be able to be sustained by the dividends and distributions from companies owned within a portfolio so that one doesn’t need to think about what to pare (that’s a lot of portfolio management in any given month, not to mention mounting commission fees).

Additionally, by not having to sell any stocks in one’s retirement fund, the portfolio can have what it takes to keep growing. In an era where inflation is heated (and could get even hotter), it’s important to maintain a growth mindset, even after one officially enters retirement.

Yield is the star of the show, but don’t forget about growth potential.

Keeping that stock portfolio growthy, I think, is especially important for younger prospective retirees seeking to join the FIRE (Financial Independence, Retire Early) movement. Indeed, if you’re leaving work for good at the age of 35, you’re going to need to have a more padded retirement fund for the next 50 years or so.

That’s a long time to invest, and there are sure to be economic recessions, black swans, many corrections, and even a generational crash here and there. The important thing is that one’s portfolio won’t be exhausted once such a market downfall does finally happen.

In any case, one shouldn’t fear such chaotic events. Rather, one should already ensure they’re skewing a bit more on the conservative side when drawing down to fund a retirement (perhaps that entails going with the 3% rule instead of the 4.7% rule or whatever that “magic” number is at nowadays).

If one’s simply collecting (and spending rather than reinvesting) dividends, distributions, royalties, and interest, though, one won’t have to worry about drawing down after an already horrid market sell-off has already hit. Indeed, drawdowns after plunges tend to hurt one’s time to recover. Arguably, one should be buying, not selling, after markets shed 30%, 50%, or even 60% of their value from peak levels. In any case, retirees just don’t have such liquidity.

But for prospective retirees hoping to retire with less financial anxiety about running the risk of running dry in the midst of one’s golden years (can you believe some fear dying more than this?), going down the dividend route can be more comforting, though it may be tougher to attain and less-than-ideal, given a portfolio’s greater emphasis on the lower-growth, higher-yielding securities (think dividend stocks, junk bonds, and covered call ETFs).

What yield is right to live off dividends alone?

For those keen on living off dividends, one must first ask oneself how much they expect to spend in retirement. If you’ve got a taste for fine wines, luxury watches, extravagant vacations, mansions with a view, and enviable sports cars, you’re going to need a heck of a lot more dividends than if you live a simple life in a one-bedroom apartment with no dependents.

Either way, I’d try not to skew far beyond averaging a 4% yield on one’s portfolio. Arguably, younger prospective retirees may wish to keep that yield as low as 3% or even 2% if they’ve got enough capital.

Why? It’s not leaving money on the table. It’s keeping money invested to boost future growth. A percent less dividend could mean many more percent worth of capital appreciation over time. Personally, I think the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is the gold standard for one-stop-shop investors. With a 3.87% yield, you’re getting a fine balance between growth and yield.

And if 3.87% isn’t enough to fuel your retirement lifestyle, you probably need a larger nest egg, rather than a more aggressive plan that aims to pursue much higher yields. Of course, if you’re keen on retiring early and aren’t big on growth, I’m not against going for 5%-yielders and perhaps allocating a very small portion to those premium income ETFs that sport yields well above 8%. Do remember, though, higher yields typically mean higher risk, lower growth, or a combination of the two.

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