A plan to retire at age 55 and live off the income from stock dividends will let an early retiree refrain from tapping the principal in his or her investment portfolio while also avoiding the need to earn income by earning an income. Due to currently low yields on dividend-paying shares, though, it’s particularly challenging to accumulate enough capital to generate income strictly from dividends. Therefore, a successful strategy leading to retirement at 55 will likely call for radical cuts in living expenses.For help planning a strategy to retire at 55 and live off of dividends, consider working with a financial advisor.
Funding Retirement With Dividends
Traditionally, people planning for retirement lean heavily on Social Security and interest from fixed-income securities such as bonds. However, 55 is seven years before the earliest age most people can draw Social Security. And with interest rates little risen above recent historical lows, fixed-income securities right now are not offering much help. Thirty-year Treasury bonds, for instance, are paying just over 2%, while inflation has been running at three times that level.
Equities offer a chance to earn higher total returns. But with the steep market decline of the last major recession still relatively fresh in memory, many retirement savers also feel unsure about paying for retirement by withdrawing investment principal. Especially in the early years of retirement, being forced to sell stocks during a downturn can wreak havoc on the long-term viability of a retirement plan.
Dividend-paying stocks can represent a potentially better third option. Investors who don’t sell their shares, but simply collect the dividends, can better weather price downturns. Compared to fixed-income investments, dividend yields generally are higher. And the idea of living off dividends while leaving the nest egg untouched exhibits an undeniable appeal. Here’s how to use dividends to fund an early retirement at 55.
Investing for Dividends
One approach to investing for dividends involves buying shares of a group of companies called Dividend Aristocrats. These are large companies with a long history of paying steadily increasing dividends. While past performance does not necessarily indicate future performance, the idea is that these companies will continue to pay dividends that grow as fast or faster than inflation.
Dividend Aristocrats have typically yielded more than 3%, making them significantly more attractive than many fixed-income instruments. Right now, however, thanks to strong price appreciation in the stock market, an exchange-traded fund that tracks the S&P 500 Dividend Aristocrats Index, for example, is yielding less than 2% from dividends.
Some dividend plays sport much higher yields. However, companies with high dividend yields are not always good investments. Sometimes yields are high because the company is in financial trouble and may need to cut the dividend.
At a 2% yield, a $1 million investment produces $20,000 per year. This is not much more than the federal poverty level for a couple. To earn dividends equal to something like four times the $17,420 poverty level for two people, a retiring couple would need approximately $3.5 million in stocks paying 2%.
For most people, that will require a lot of discipline and self-sacrifice in order to save and invest starting from a young age. The SmartAsset retirement calculator can help you determine how much you’ll need to save, depending on factors like your age and location, in order to have that much at 55.
Estimating Income Needs
With these dividend yields in mind, a workable plan to retire at age 55 probably will probably emphasize reducing the need for income in retirement. Most estimates peg post-retirement income needs at about 70% of pre-retirement income. This can vary widely depending on income level, health, life expectancy and other factors.
Importantly, these post-retirement income requirement estimates aim to give retirees the same lifestyle they had while working. A retirement planner who expects to live off of dividends can, by being willing to accept a significantly less costly lifestyle, have a better chance of the plan working.
You can determine the cap on your post-retirement expenses for a dividend-based retirement plan to work. To do that, multiply the amount you expect to have in your retirement plan times 2%, which is the current Dividend Aristocrats yield.
Ways to Cut Retirement Costs
Real estate is the biggest single cost for most households, and that is where many retirees look for savings. Retirees can significantly reduce housing cost by downsizing and moving to a less expensive locale. Another way to reduce cost in retirement is to pay off debts such as mortgages and car loans while still working.
Healthcare is another place to look. As people age, they typically spend more on healthcare. One widely cited Fidelity study said a 65-year-old couple can expect to spend $300,000 after taxes on healthcare costs in retirement. And that’s while covered by Medicare. A 55-year-old retiree has to find a way to pay for a decade of healthcare before the government health plan begins coverage. So staying healthy, as much as possible, is potentially another way to reduce retirement expenses.
Bottom Line
Funding retirement as early as age 55 with dividends allows retirees to avoid tapping the principal in their investment portfolios to pay expenses. Dividends typically are higher than fixed-income yields, and owning dividend-paying stocks can help investors weather downturns when equity prices decline. However, dividend yields are currently low, so planning to pay for retirement strictly with dividends is likely to require significant compromises in post-retirement standard of living.
Tips on Retirement
To make sure you have enough income when you retire, consider consulting with afinancial advisor.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Even if you’re investing in dividend stocks, make sure you use a workplace retirement plan like a 401(k) if you have access to one.
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The post How to Retire at 55 and Live Off Your Dividends appeared first on SmartAsset Blog.
As a seasoned financial expert, I can attest to the complexities and challenges involved in planning for an early retirement, particularly with a focus on living off stock dividends. The article outlines a strategy to retire at the age of 55 while relying on income generated from stock dividends. I will break down and elaborate on the key concepts discussed in the article, providing insights into each aspect.
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Retiring at 55 and Living off Dividends:
- The central idea is to retire at 55 without tapping into the principal investment, relying instead on income generated from stock dividends.
- The approach aims to avoid the need for additional income sources and withstand market downturns without selling stocks.
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Challenges of Low Yields on Dividend-Paying Shares:
- Due to currently low yields on dividend-paying shares, accumulating enough capital to generate sufficient income from dividends becomes challenging.
- This necessitates considering radical cuts in living expenses as part of a successful early retirement strategy.
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Role of Financial Advisor:
- The article suggests working with a financial advisor to help plan a strategy for retiring at 55 and living off dividends.
- Financial advisors can provide personalized guidance and help individuals navigate the complexities of retirement planning.
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Traditional Retirement Funding vs. Dividend Approach:
- Traditionally, retirees rely on Social Security and fixed-income securities like bonds for retirement funding.
- However, the article highlights challenges such as delayed Social Security benefits and low yields on fixed-income securities.
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Equities and Dividend-Paying Stocks:
- Equities, particularly dividend-paying stocks, offer the potential for higher total returns compared to fixed-income securities.
- Dividend stocks can provide a more stable income source, especially during market downturns, as investors collect dividends without selling shares.
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Investing for Dividends:
- The article suggests investing in Dividend Aristocrats, large companies with a history of steadily increasing dividends.
- Dividend Aristocrats historically yield over 3%, making them attractive for income-focused investors.
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Income Needs and Retirement Planning:
- Estimating income needs is crucial for planning to retire at 55, and this plan likely involves reducing post-retirement income requirements.
- Post-retirement income estimates often target around 70% of pre-retirement income, with adjustments based on factors like health and life expectancy.
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Ways to Cut Retirement Costs:
- To make the dividend-based retirement plan work, individuals may need to accept a less costly lifestyle.
- Strategies to cut retirement costs include downsizing in real estate, paying off debts, and managing healthcare expenses.
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Healthcare Considerations:
- Healthcare costs, particularly for a 55-year-old retiree, become a significant factor, considering the gap before Medicare coverage begins.
- Staying healthy is highlighted as a potential strategy to minimize healthcare expenses in retirement.
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Final Considerations:
- The article emphasizes that while dividends are higher than fixed-income yields, the current low dividend yields may require compromises in post-retirement standard of living.
- Planning for retirement at 55 with dividends necessitates careful consideration, discipline, and potentially starting to save and invest from a young age.
In conclusion, the article provides a comprehensive overview of the challenges and strategies involved in planning for an early retirement at 55, focusing on living off stock dividends. The insights shared highlight the importance of financial planning, disciplined investing, and adapting lifestyle choices to achieve a successful retirement.
