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?
I say yes 🙂
Most Canadians wanting an above-average retirement lifestyle need $1 M in the bank of investments, and a paid off home. That should be the goal.
If you have pensions, you are set but without knowing what the future holds, most Canadians are best served saving as much as they can, as often as they can, for as long as they can.
You cannot control your investment returns, so $1 M in the bank spinning off 3% yield, 4% yield or even 5% yield is likely sufficient outside of government programs.
Thoughts?
Mark
One thing people forget about is that they will probably be receiving CPP/OAS when they retire. Combined they will be something like 1200 a month or 14400 a year. Assuming a 4% withdrawal rate that’s already a 360k equivalent, making the target for a 1m total worth much easier to hit since you’d only have to make up 640k.
I realize you are the dividend guy, but what are your thoughts on avoiding Canadian eligible dividends in taxed accounts to avoid the gross up ensuring the reported income doesn’t eat in to income tested benefits in retirement?
I would agree that the answer depends. If you can live on $1,000 per month, even a $300K – $400K portfolio of dividend growth stocks will be enough. Or if you can wait for a decade, and only have $300 – $400K, and you reinvest dividends, you can earn more than $2K/month easily.
Of course, don’t forget about taxes either. $40K in annual dividend income is equivalent to something like a $70K salary for a single person in the US..
I think the answer depends on your personal situation. For the average Canadian I’d say you might need something close to $1M. If you can reduce your expenses you should need a lot less than $1M.
I thought this post was a little confusing, and may puzzle some. First, with a portfolio of $800,000. you would need a five percent dividend payout to achieve the forty grand payout. ($32,000 at 4%). You don’t address the fact that as stock values grow, the dividend yield would decline – barring any declared increases. My round about way of saying if you have a five hundred grand portfolio that grows to eight hundred through capital appreciation you may well fall short on the income side especially if the yield remains fairly constant. The yield on your original investment is higher however you still may not be able to live off the dividends.
While in non registered accounts dividends have a significant tax advantage over interest income, there is a distortion in the gross up, which has the potential to impact,(unfairly?), OAS. (in Canada).
Perhaps not significant but I thought some might get confused.
$1000000 is certainly too much.
Considering a need to get 40K a year for a 40 year period with a 2% inflation rate. Also consider an average dividend yield of 5%.
If you get your dividend out + anything you need to complete to 40k$ (this amount increase by 2% a year, so it will be 86590$ in year 40, you only need 900000$.
Another scenario is to have share that give an average yield of 3.5% but increase more than inflation (+1.5% in this case). In this case you need only $690000.
So the corner stone of good retirement portfolio is you need quality stock: good dividend coverage, steady dividend increase, continuous profit.
Dividend growth is more important than dividend yield.
How much investments you were planning to leave to your family? I would definitely sell something “in the end” to cover some of the expenses. At least the funeral costs…there will be some fine wines and _very_ expensive liqueurs 🙂
Sorry guys for the late answers, I’ve been working to be up to date at work before I leave on vacation (which is today! woohoo!).
My own advisor,
I think 1M$ plus a home free of debt is definitely enough to live a very comfortable retirement with your spouse (I think the 1M$ target should be for a couple, someone alone doesn’t need that much).
Traciatim,
nice to see you around!
I agree that considering your will receive between $10K-$14K per year from Gov’t pension, you don’t need 1M$ to generate a yearly income of 50K. Good point.
If you avoid dividend payouts, you will get into either interest (which is worst than dividend) and 100% capital gains may seems riskier to me than buying blue chip with dividend. Thoughts?
Dividend Growth Investor,
you are right, it all depends on how much you need to live. I had one of my client (in my previous life) that retired at the age of 53 with about $400K but he only needed $20K/year to live.
Steve,
thx for the additional comment on the 800K. The advantage with the dividend portfolio is to see your dividend payout increasing over time (as opposed to a fixed income portfolio paying the same interest over time).
If you build a 800K div portfolio today, it will probably pay around 3%-3.5%. However, if you keep the same portfolio for 5 years, you will earn 5% on the same 800K. You can’t expect that with fixed income (interest on bonds can’t increased year after year for the next 50 years, dividend payouts can).
Hello Hemgi,
I’m not sure you can generate 5% the first year with your portfolio though. I like your second scenario better 🙂
Hey Mr. Bean,
This is a very personal choice (to leave money or not). I will be giving everything to my three kids while I live but I also believe in working hard to earn your money. Anyway, considering the fact I might die at 90, my oldest son will be… 67! I don’t think he will need my millions if he hadn’t made it yet!
I think for us, it’ll be about £500,000 and a paid off home. I think we’ll be able to manage on that!
I was thinking about it many times , but I don’t know 🙂 Agree that idea of comfortable retirement is very different from family to family… We’d like in retirement to take long-term vacations (2-3 months ) every year…. We own house, no debt….but have no idea how much we will need… it would be interesting what already retired people can say with similar lifestyle like ours.
btw, no one mentioned TFSA and this is great retirement product as you don’t pay taxes neither on dividends nor on income, in 2014 from 2 TFSAs we expecting to get about $3,700 in dividend+income, every year considering 11K we can invest, this amount will be higher by $350-500 (depends on where do you invest).
Also I don’t think it’s correct to speak about total value of portfolio, it can be 500K today and 300K (or 650K) in just couple of months…better to talk about annual dividend stream and it’s Y/Y growth…
imho , 40K per won’t be enough for us, as only for property tax, car/home insurance, electricity, gas and water we pay more than 10K per year and imagine somebody need a new teeth implant….I’d think we;ll need 60K+
Not this 4% withdrawal rate yet AGAIN.
What you will get (in Canada)
1) CPP/QPP + OAS You will have to figure out how much you will get from CPP/QPP but the years and amounts paid in to it.
2) Any company pension you are entitled to. Again, figure out how much that will be.
3) RRSP – The only year you will get to take just 4% out of it is when you are 65 (if converted to a RRIF) After that it increases every year. There goes the 4% crap
4) TFSA – If you were smart enough to put money in to this then you can withdraw whatever amount you want – non taxable.
5) Non Registered monies invested in what ever pleased you in the past. Whether you are pulling dividends or interest (bonds/ GIC’s, etc) or selling stock for capital gains you will be taxed at your income rate for that year. Dividends and Cap gains are treated more favorably than straight interest. So you can decide how much you need to top up from this sector. If you need to sell stock then you will get capital gains (hopefully not losses) assessment and pay tax on it. This, and the TFSA are the only places you can play the 4% game.
Anyone who thinks they can jsut withdraw 4% from their RRSP’s will have a big let down once they convert to a RRIF (mandatory when you turn 71) or annuity.
Quit talking about withdrawing only 4%. If we were allowed to do that one hell of a lot of us would probably never run out of money in retirement. The government(s) want their taxes back and we can not stop that.
“3) RRSP – The only year you will get to take just 4% out of it is when you are 65 (if converted to a RRIF) After that it increases every year. There goes the 4% crap” – not quite 🙂 You can convert RRSP to RRIF at any age and yes, you need to withdraw required minimum. But you can have more than 1 RRSP or Spousal RRSP. You can convert 1 RRSP into RRIF , but leave other(s) as RRSP, thus you will be able more or less get income you want. Only at age 71 you cannot do it…