How much money do I need to live solely on dividends? Here’s how to determine the smallest amount you need to work

How much money do I need to live solely on dividends?  Here's how to determine the smallest amount you need to work

How much money do I need to live solely on dividends? Here’s how to determine the smallest amount you need to work

A comfortable retirement means different things to different people, but it also presents almost unlimited financial scenarios: getting a reverse mortgage, selling off property, moving to a place where the cost of living is cheap. (If you’re counting on Powerball, well, good luck with that.) Add to that list an option that’s sometimes overlooked: living off investment dividends.

The question is, is it really possible to do this if you do not belong to the upper layer of the rich people?

Of course, the debate about “how much money is enough” is endless and wide.

And a lot depends on what kind of life you plan to lead in retirement. However, there are a few guidelines to help you determine the ideal savings balance for you. Consider taking these three steps as you take an active hit to passive income.

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Step 1. Define what wealth means to you

There is no perfect number, right? A person who pays off their modest mortgage and grows vegetables in a small town may feel much more comfortable than a city dweller who still has a bunch of high monthly expenses and forgot to read the retirement note.

With a desirable lifestyle, thinking about whether passive dividends will get things done really comes down to numbers. Major banks and institutions such as Knight Frank use seven numbers to identify their ideal clients.

According to his 2022 wealth report, a person with investable assets is $1 million, and a person with $30 million or more is considered ultra-high net worth.

What’s more, if you make more than $570,000 a year or have more than $11.1 million in assets, you’re “richer” than 99% of Americans. But this is where “place, place, place” comes into play. A million dollars in Midtown Manhattan is not the same as a million in Mumbai.

Why is it important? If you consider wealth relative, you will want to earn more money in the form of passive income, or just enough, compared to others in your age group. It depends on your geographic region or other variables, the main one being whether your home is paying for itself.

If you think of wealth as absolute, then use an Excel spreadsheet or QuickBooks to determine how much you will spend—both fixed and flexible spending—compared to your pre-retirement earnings.

Whatever the difference, once you start living on savings, Social Security will be your magic number for solving the dividend equation.

Step 2. Calculate your rate of return

Let’s say you hit your $100,000 annual income goal. When predicting how much dividend income you can safely expect, historical numbers provide a reliable barometer.

The S&P 500 offers a current dividend yield of 1.69% and an average of 2.34%. This means that if you want to earn $100,000 in annual passive income from a vanilla index fund, you would need $4,273,504 in assets ($100,000 divided by 2.34%).

Close the gap with whatever retirement income you already have, and if that number is less than that $100,000—let’s say just $10,000—you’ll be in better shape to experience dividend-based freedom. To reach the $10,000 mark, you would need approximately $427,000 at a yield of 2.34%.

You can get higher returns from a dividend-focused fund like the Vanguard High Dividend Yield (NYSEARCA:VYM) ETF. Since 2018, the fund’s average dividend yield is 2.97%. This means you only need $3,367,003 to generate $100,000 in passive income annually.

Read more: Here are 4 easy ways to multiply your hard-earned money without a shaky stock market.

Step 3. Name your margin of safety

Remember those surprise bills that came to you during your working years? Well, they’re not going to stop now. But if you use a strategy based on the so-called safe retirement rate, you can predict how much money you will receive in 30 years. That’s 3.8% of your retirement portfolio per year, according to Morningstar.

This assumes a 50-50 percent split between stocks and bonds, and how many of those stocks pay dividends. As you can see, this is often complicated because how much your stock will rise in price and how much you will receive in the form of dividends are not the same thing.

Moreover, dividend stocks could perform worse in the coming years, with inflation making pension payments more expensive in 2033 than in 2023; Morningstar forecasts a long-term annual inflation rate of 2.8%.

That’s why it’s wise to consult a financial advisor with all your financial questions, including the Great Dividend Question.

Putting It All Together: Simplicity Is a Smart Starting Point

Otherwise smart people find the task of putting their numbers together so overwhelming that they make the confusing choice of leaving retirement to chance.

But what might have worked in adventurous youth is not in keeping with the wisdom and prudence that come in old age.

Starting simple, you will focus on your retirement lens as you discover your unique vision of wealth and financial freedom, two pillars of a solid investment strategy.

Whatever your worries or concerns, start with where you are. Don’t leave things up in the air – and if you want to ignore the numbers, Powerball can miss a lot.

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This article provides information only and should not be construed as advice. It is provided without any warranty.

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