Lots of us read the stories about early retirees and turn green with envy. Many people don’t understand how to get to that point or how much money it really takes. The fact of the matter is that it’s different for everyone and it’s actually pretty easy to calculate how much you would need to live off dividends alone. We all have different goals, hobbies and things we would like to accomplish with our time. Most of these things require money and if they don’t require money, they require time which money buys you. Understanding your month to month expenses, the lifestyle you want to live and how to calculate how much you’ll need to achieve these things are crucial to achieving the goal of living off dividends.
Expenses
Before anything else you’re going to need to know exactly how much money you need to spend every month. This number is the absolute minimum you’ll need to retire early. Granted, you wouldn’t have any extra money after paying your bills, you still technically wouldn’t have to work. If your bills add up to $,1500 every month you’re going to need at least $1,500 per month in dividend income. Most dividends are paid quarterly so you’ll need to find your average monthly dividends and budget accordingly. If your expenses vary quite a bit every month then you can budget for yearly expenses.
Being diligent about tracking your expenses on a monthly basis is a must if you want to know how much you need to retire off your dividends. Tracking expenses creates a picture of your financial health that you don’t often see otherwise. Having this information available to you allows you to make changes and see exactly where you can cut back or where you’re overspending. Tracking your net worth is also extremely beneficial to understanding your current situation and for tracking progress. I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up
This is the tricky aspect where personal preference comes into play. If you want to stay in a hotel every night and have luxurious things you’ll need much more money than someone who is content with taking one vacation per year and living a basic life. There’s no right or wrong answer here but the more money you want to spend while retired the more money you’ll need to have invested to generate that income. The trick is to find balance. At what point are you still happy? Do you need to spend $60,000 on a brand new car or will a $10,000 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 do want a more expensive car or to go out to eat more often. Just plan on having that extra money budgeted for every month. 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. That means I’ll need to work longer so save more money to afford these expenses. This is pretty straightforward. If you bought 100 shares of AT&T, for example, the quarterly dividend at the time this was published was $0.48 per share. 100 shares x $0.48 dividend = $48. That’s how much you can expect quarterly (hopefully with increases over time). Or, $48 x 4 quarters = $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 left over every month. Or you’ll know how far away you are from being able to afford your monthly expenses. If you want a simple answer to the question “how much do I need to live off dividends?” This is a method that could work for you. For example, say that you need $20,000 per year for your basic expenses and you’d like another $20,000 per year to spend. Take that $40,000 and divide it by .04. The result is $1,000,000. You would need to have $1,000,000 invested to receive $40,000 per year in dividend income if you can achieve a 4% yield. If you wanted 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. Everyone has different goals when it comes to retirement. You may just want to make the absolute bare minimum that you can so you can 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 and decide for yourself. The math is simple, it’s everything else that isn’t. 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 definitely fall somewhere in the middle as I believe most people do. Find what works for you and start working towards it! Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.Lifestyle
Calculating Dividends
A Rough Estimate
Overview
How much money would it take for you to begin your early retirement?
