Retirement: How To Save A Million And Live Off Dividends

Retirement plan with calculator pen and glasses


The market has been tough in the year 2022. There is 40-year high inflation that is not only causing a lot of uncertainty in the marketplace but also impacting the working folks in their daily lives. Interest rates are rising, and the market is giving warning signs of a looming recession. But in spite of all the negative headlines, there’s no reason that you should not think of planning a successful and rich retirement with stock investments. In fact, the opposite.

We want to show our readers, especially the new and relatively younger investors – what’s possible with starting and investing early for the future. The earlier you start, the easier the path will be. Even if you’re late to investing and saving for the future, there’s no reason to be disheartened. After all, it’s better late than never, and there are ways to make up for the lost time. If you’re already into your late 40s or even 50s, you can still achieve financial freedom – it will just require a little more sacrifice and determination. Always start with reasonable and achievable goals first, and once you have achieved the first set of goals, build on them by setting new and higher targets. In this article, we will provide a retirement planning roadmap for a couple who has just turned 45 and they wish to retire by the age of 62.

So, why do we often talk of a million dollars? We talk about a million dollars simply as a milestone. Sure, a million dollars is not the same as it used to be just two decades ago. Most financial planners would now advise shooting for $2 million to have a comfortable retirement. Due to inflation, since early 2000, the buying power of one dollar has reduced to less than 60 cents today, and that’s not counting the current bout of high inflation. So, even with that basis, now you would need over $1.6 million to maintain the same standard of living as you could afford with one million in the early 2000s. But it is important to remember that everyone’s needs are different. For some, a million dollars could be a very tall target, while for others, it may be an insufficient amount to retire. So, it all depends on your own individual perspective and your current way of life. But for most everyday working folks, the first time they hit a million-dollar mark in retirement savings, it’s an important achievement. At the same time, folks who have retirement 20 years away (or more) should definitely target $2.0 million to retire comfortably.

So, how much do you need to retire? This can vary greatly from person to person, depending upon current income, basic living expenses, health status, personal spending habits, hobbies, availability of other sources of fixed income like pension and social security, and most importantly, the place where you may decide to live in retirement.

To plan for retirement, always start with some basic questions:

  1. What would be your basic expenses in retirement?
  2. How much savings would be enough to retire?
  3. When and at what age should you retire?

The above questions are critical to the planning process. As such, these questions are interrelated and interdependent. As such, there are no pre-set or generic answers. But first things first; how much money would you need in retirement for your basic expenses on a monthly basis? It’s mostly determined by your personal situation. We will try to answer this and other questions on a methodical basis in the next section.

For the vast majority of people, Social Security and Medicare play an important financial role in their retirement planning. For Social Security purposes, the full retirement-benefits age is considered 66 years, which gradually rises to 67 years for folks born in 1955 or later. The early Social Security benefits become available at age 62, albeit at 25%-30% lower rates. Medicare plans become available starting at age 65, which is essential for many folks to be able to retire. So, because of medical insurance necessity and Medicare eligibility at 65, most working folks plan to retire at 65. That said, we think one also should have a contingency plan to be able to retire a few years early (say at age 62), just in case it’s forced upon by any circumstances.

Let’s say you and your spouse just turned 45 and have not given serious thought to retirement. Well then, it may be just the right time to get into the planning process. You are not late, but there’s not much more time left to wait. It’s probably high time that you make a plan and put it into practice. For the purpose of this article, we will consider a couple who have just turned 45 and want to be prepared for retirement in 17 years.

Note: This article is part of our Retirement Series, where we write periodically on retirement themes. Each time, our focus is on a specific set of circumstances and age groups. At times, you may notice some repetition of some core principles and strategies, but they are necessary for the benefit of new readers.

All of the tables and charts in this article have been prepared by the author unless explicitly specified otherwise.

Part I: Retirement Planning for our Hypothetical Couple – John and Lisa

As usual, to make it easy to understand the concept, we would use our hypothetical couple – John and Lisa – to demonstrate the planning process.

Let’s assume John and Lisa are 45 years of age and wish to retire in 17 years at 62. It’s possible that they would change their mind in the future and may decide to work longer, but the idea is to be prepared to retire by the age of 62 or even sooner if they want to or have to. We will assume that they both work full time, and their current household gross income is $130,000 a year, which falls solidly in the middle-class income group.

Their current retirement savings are at $150,000, not a meager amount but nowhere close to where it needs to be. They’re mostly invested in tax-deferred plans like 401K and/or IRAs. We also have to account for the fact that the market has done exceedingly well in the last decade, except in the last few months, but the next decade may not be as good as the last one.

In any case, they have done a good job of accumulating the current savings of $150,000, and they have been saving roughly 6% of their paycheck. However, they will have to ramp up their savings rate to reach their goal of a million dollars in today’s dollars. According to financial planners, their savings should be roughly 5-7 times their current gross income by the time they are 55 years of age. In other words, in just ten years, they should accumulate roughly $700,000. So, clearly, they will need to make some tough choices if they hope to have a comfortable retirement starting at 62. They would have to make some sacrifices now and cut down some of their discretionary spending in order to save and invest more.

While trying to plan for their retirement:

  • The first question they need to answer is how much savings would be enough for them to retire. Retirees of today have to plan for 30-40 years of retirement because people are living much longer than just a few decades ago. Also, it’s better to plan for longer and have some surplus left for your heirs or any other causes than running out of money in your 90s.
  • The answer to the above question lies in the realistic estimate of expenses in retirement. If they underestimate, it can prove to be a big problem because that means that they would not have saved enough. If they overestimate it, they will end up with a much higher savings goal that may be unachievable or unrealistic. Sometimes it becomes disheartening and self-defeating when the goals appear to be totally out of reach. So, goals need to be realistic and achievable. Many financial experts suggest planning for about 75% of your pre-retirement expenses. We think it’s too high a target for most folks, and actual expenses in retirement may actually be much lower. Nonetheless, they should make an honest assessment of their estimated expenses in retirement.

Let’s make some more assumptions about John and Lisa’s situation.

  • They currently carry a mortgage on their house and have 20 more years to repay in full. By maintaining the status quo, they will be taking the mortgage payments a few years beyond their retirement at 62. They definitely do not want to see themselves taking any debt into retirement. They decide that they will make slightly higher payments each month on the mortgage so that they’re able to pay off the house in 15 years instead of 20 years. They will pay $150 extra every month to pay off the loan by the time they are 60. This decision is very personal, as some would consider it wise to invest any extra dollars rather than pay off the mortgage early. But this is not a huge amount, and either way, it is not going to impact their goals much. But we are of the opinion that for most people, it’s better to take that extra burden off of your mind in retirement. It just helps you sleep better.
  • John and Lisa decide that they will not carry any type of debt into retirement, be it car loans or credit cards.
  • They will also need to save for college tuition fees for their kids. They will put $1,200 each month for the next ten years into their college savings fund. Anything above and beyond, their kids will need to work part-time or raise student loans.
  • They currently have one new car on the five-year term loan. They will continue to make existing payments on this car. However, once this car loan is fully paid, they would start putting away $400 a month for a future car so that they would not need to finance another car whenever they need to replace it.
  • Most importantly, they decide that they both will increase their current 401K contributions to 16% of their earnings. Now, 16% contribution sounds like a lot (up from 6%), but after some tax savings, it may be closer to 13%. Also, once the college expenses of their kids are squared off, they will bump the savings rate to 20%. This will definitely require some hard choices and…

Read More: Retirement: How To Save A Million And Live Off Dividends

2022-08-13 06:30:00

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