How much money do I need to live entirely off dividends? Here’s the lowest amount you can probably get away with

How much money do I need to live completely without dividends?  Here is the minimum amount you can probably get away with

How much money do I need to live completely without dividends? Here is the minimum amount you can probably get away with

Whether you’re just starting your career or approaching retirement, the idea of ​​building up an investment portfolio to generate passive income can be tricky.

But how much money do you really need to leave the workforce and get by on dividends alone?

So you have to start by honestly evaluating who you can live with and without. But there is a simpler formula and some less simple risks you need to consider when making the biggest dividend addiction decision.

do not lose

Dividends are great tools for investors

Dividends are payments made by listed companies to their shareholders. They are generally used to communicate the strength of the company’s financial situation. Regular dividends, even small ones, often indicate a positive projection of a company’s long-term prospects.

Many dividends are paid in cash. for investors, 401 (k) s or IRAdividends are often automatically reinvested and, through the power of compounding, provide a powerful tool to grow a nest egg.

For simple stock investors, these cash payments promote dividend income, where passively generated payments cover living expenses.

how much you will need

The amount you will need depends on your income, spending habits and living expenses. Which means the answer is very personal.

But once you know how long you need to live, here’s a simple formula for calculating how much you need in total.

Desired Dividend Income / Dividend Yield (%) = Estimated Portfolio $ Required

Consider the desired dividend income of $ 37,522, which was the actual average income of a single person in the United States in 2021 according to data from the St. Louis Federal Reserve.

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So, consider what you can expect from the dividend yield. It is advisable to provide for rates of return between 1% and 6%.

Using our formula described above, here’s how the return translates into the required portfolio size:

  • $ 1,876,100 for a 2% return. a wallet is required

  • $ 1,250,733 for a 3% return. a wallet is required

  • $ 938,050 for a 4% return. a wallet is required

  • $ 750,440 for a 5% return. a wallet is required

  • A yield of 6% requires a portfolio of $ 625,367.

Yet, as we shall see, these numbers have yet to be refined thanks to taxes (or even no, thanks).

assess the risks of this approach

There are three possible outcomes to consider before fully committing to this earning strategy.

Do. Dividend payments from taxable brokerage accounts, or traditional 401 (k) and IRA accounts, are considered taxable income.

downside risk. Dividends are not a dunk. High-yield dividends may not be sustainable, and a company focused on returning profits to investors may have slowed down afterwards. And sometimes without warning, today’s high dividend tank.

If you are going to pay your bills with dividends, you need to realize that the risk is justified and worth it.

Very tight budget. If you think you can manage your expenses with average dividend income, planning is key. High inflation, rising interest rates AND global turmoil can affect your portfolio – you’ll need a strong stomach and a solid strategy.

Since housing is a basic cost, start there. do you have to move? According to Redfin, for the first time ever, the average asking price crossed the $ 2,000 mark in May. That number now ranges from $ 1,453 in San Antonio, Texas, to over $ 4,000 in the New York metropolitan area nationwide.

Higher return = higher risk?

Carefully managed, the pursuit of stable and sustainable dividend income can be a win-win game.

For older Americans, it makes sense to stay away from dividend income, especially if it delays taking Social Security benefits. The longer you wait, the more money you will get when depositing.

However, as with all things that invest, the risk is never far away. History is littered with companies whose high yields indicated weakness.

And when they are in trouble, companies often forgo the first dividend. So, when designing a strategy, it helps to remember this truth: powerful dividends and portfolio diversification are a great combination.

what to read next

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This article provides information only and should not be taken as advice. It is provided without warranties of any kind.

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