Live Off Dividends

Passive Income and Personal Finance

How Much Do I Need to Live Off Dividends?

How Much Do I Need

A lot of people have this same question. The fact is, it’s different for everybody. What kind of lifestyle do you want to live? How much are you willing to give up to not go to work everyday? What does “retirement” mean to you? Not many people have a lump sum of money to drop in a brokerage account and live off their dividends that way. For most people it’s a long term goal and a process. What’s more important than the “how much” is learning what retirement means to you and what you’re able to live on.

 

Expenses

Before anything else you’re going to need to know exactly how much money you spend every month. If you spend $,1500 every month you’re going to need at least $1,500 per month in dividend income. Most dividends are paid quarterly so obviously average your monthly dividend and budget accordingly. If you’re expenses vary quite a bit every month then you can use your yearly expenses or budget for the high end. Being able to track your expenses on a monthly basis is a must if you want to know how much you need to retire off your dividends. This is part of the learning process. Learn what you NEED to spend every month and where you can cut back. Track your monthly expenses every month for as long as you can leading up to your early retirement. The better understanding you have of your personal expenses the better off you will be.

 

Lifestyle

This is the big one for most people. They want to continue spending money on luxury and convenience items. That’s fine, for some people. Others would rather spend very minimal and retire even earlier. The trick is to find your personal balance. At what point are you still happy? Do you need to spend $60,000 on a brand new car or will a $5,000 used car work for you? Do you need to go out to eat 4 times a week or will 1 or 2 times a month work for you? Maybe you personally do WANT a more expensive car or do WANT to go out to eat more often. Just plan on having that extra money budgeted for every month. That could postpone your retirement by a couple years. It’s all about sacrifice and deciding what’s important to you. Personally, I want to be able to travel when I retire. For me this means I need to be able to have extra money every month to afford travel expenses. I would like to travel at least 4 times a year so for me this will definitely postpone my retirement. That or I will work a part time job (something that I enjoy doing, minimal hours a week) to afford my traveling expenses. It’s all about balance and finding what will work for you.

 

Calculating Dividends

This is pretty straight forward. If you own 100 shares of AT&T, for example, the quarterly dividend currently is $0.48 per share. 100 x $0.48 = $48. That’s how much you can expect quarterly (hopefully growing). Or, $48 x 4 = $192 yearly. Or $192 / 12 = $16 monthly. Simply do this math for all your stocks and that is your pre-tax dividend income. You will have to account for taxes as well depending on the bracket you will be in when you retire. Subtract your monthly expenses from your monthly dividend income and that’s how much you’ll have leftover every month. Or you’ll know how far off you are from being able to afford your monthly expenses simply from dividend income.

 

A Rough Estimate

If you want a simple right now answer to the question “How much do I need to retire off dividends” here’s a method that could work for you. If you decide you need $20,000 a year in dividend income and can tolerate the risk involved with an average 4% yield, then simply divide 20,000 by .04. The answer is $500,000. To make $20,000 a year in dividend income at an average yield of 4% you need to have $500,000 invested. If you want to make $100,000 a year with an average yield of 3.5% then you’re going to need to have $2.85 million invested.

 

Overview

Every single person has different goals when it comes to retirement. Maybe you want to make the absolute bare minimum that you can so you can just quit your job and never go to work again. Maybe you don’t want to retire until you can live the exact same lifestyle that you’re living now. Maybe you’re happy somewhere in the middle. These are the things that you need to consider individually and decide for yourself. The math is simple, it’s everything else that’s not. Track your expenses, decide what makes you happy and what you really want to do with your life. I don’t want to slave away until I’m 63 but I want to be able to do things with my life as well. I’m definitely somewhere in the middle as I believe most people are. Find what works for you and start working towards it!

Are you happy with a more frugal retirement or are you not willing to give up your current lifestyle?

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2 Comments

  1. I hadn’t seen what you need invested reduced to a simple calculation before. That’s really helpful.

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