If you’re like most investors, your ultimate goal is to build a good retirement nest egg, or at least improve the financial situation of the retirement you’ve already started. We all want just enough money to cover all of our bills and all of our fun dreams during our golden years.
The point is, pensions and Social Security probably won’t reduce it for most people. The average retiree’s monthly Social Security check in 2020 was $ 1,544. And while some pensions are still paid to other plan members, most companies have imposed retirement savings obligations on workers themselves.
If you are looking for a comfortable retirement, this is especially important for you. This means living on dividend income in retirement, which in turn means building up enough nest egg to buy enough dividend-paying stocks later in life. An extra $ 1,000 per month would make a big difference for many retirees.
That being said, here’s a rough three-step plan on how to achieve that goal. Logistically, each step is fairly straightforward. The challenge is to maintain our focus persistently for many years.
1. Invest in reliable growth stocks for around 30 years
There are many growth stocks to choose from. But not all of them are reliable growth stocks. Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is a reliable growth name, for example, dominating the search engine market, and is likely to continue to do so for the indefinite future. Intelligence (NASDAQ: INTC) is another growth name, but not reliable enough to hang on to it in the long run. Years of R&D missteps now haunt the company and, by extension, shareholders. As a result, the stock is trading where it was at the start of 2018, upsetting anyone with a significant stake in Intel who planned three years ago to retire in 2021.
There is also a precise target to aim for. It takes approximately $ 600,000 in retirement to generate $ 12,000 in dividend income per year at current market dividend rates. Assuming you start investing seriously in your mid-30s and get an average annual market return of around 10%, compounding the returns on a contribution of $ 300 per month would allow you to break above the 600,000 mark. $ after three decades. Start saving later in life and your monthly contribution amount will be significantly different.
You can also build up a good nest egg by using low-yielding stocks, or dividend-paying stocks, or a mix of all three. Recent history suggests that this low-return path would require much larger monthly contributions to hit the $ 600,000 mark, while smaller monthly contributions might help you if you are able to find and stick with it. to the best growth choices.
2. Start switching from growth stocks to dividend-paying stocks well before your retirement date.
Growth names like Alphabet (or even Intel) can be suitable choices when you’re younger and working, and have time to wait for any temporary setbacks. However, retirees who need the income right now don’t always have the luxury of waiting for better days.
In fact, savvy investors are beginning to shift from riskier, growth-oriented choices to safer dividend payers long before they quit working. This gives them the opportunity to exit overvalued growth stocks on their own terms rather than market conditions. Likewise, this early migration gives investors the opportunity to pick up dividend paying stocks when they are cheap, even if those investors do not yet need the income.
Just keep in mind that this change doesn’t have to happen at the same time, or even in the same year. It should be a process rather than an event.
3. Unless things change, commit at least $ 600,000 in dividend-paying stocks when you retire.
Finally, the figure of $ 600,000 mentioned above is not a number drawn at random from a hat. This is the amount you will need to generate monthly dividend income worth $ 1,000 using current dividend yields; an average return of 2% on $ 600,000 of dividend-paying stocks equals $ 12,000 in dividends per year.
Informed investors could immediately recognize the S&P 500The current yield of is a much lower 1.3%. Just keep in mind that a bunch of companies that don’t pay dividends (or don’t care much about paying one) weighs in on the average. For example, the S&P 500 High Dividend Index only includes the 80 top-performing stocks in the S&P 500, and is currently returning 4%. Anyone looking for good dividend growth and the healthy chance of a little capital appreciation may find that they like stocks somewhere in the middle of that continuum, where reliable returns of around 2% are easily achievable.
The good news is that interest rates (and therefore dividend yields) could be about to rise for a prolonged period. If they increase for a while, you may only need $ 500,000 to generate monthly dividend checks worth $ 1,000. An average dividend yield of just 2.4% would do the trick.
The bad news is that it could be years before well-balanced company returns return to that level, last seen in the 1990s, if they ever do.
Continuous updating of any plan is key
This is only a draft. Investors with less time to save will want to save more, while anyone who owes a pension as well as a Social Security check may not need the extra $ 1,000 per month. Yields change too. Your retirement savings plan should be reviewed annually and updated as needed.
If you are just starting to put together a comprehensive investment plan, this outline gives you a lot to consider and invites you to ask lots of questions. Even responding to a few of them now is better than doing nothing and hoping for the best.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.