The Smart Way Investors can retire at 55

how to retire at 55 and live off your dividends

how to retire at 55 and live off your dividends

A plan to retire at age 55 and live off income from stock dividends will allow an early retiree to avoid tapping the principal in their investment portfolio while avoiding the need to earn income by earning income. However, due to today’s low yields in dividend-paying stocks, it is particularly difficult to accumulate enough capital to generate income strictly from dividends. Therefore, a successful strategy leading to retirement at 55 will likely require radical cuts in living expenses.

For help planning a strategy to retire at 55 and live off the dividends, consider working with a financial advisor.

Funding retirement with dividends

Traditionally, people planning for retirement have relied heavily on Social Security and interest from fixed-income securities such as bonds. However, 55 is seven years before the youngest age most people can draw Social Security. And with interest rates barely up from recent record lows, fixed income isn’t much help right now. 30-year Treasuries, for example, are paying just over 2%, while inflation is running at three times that level.

Stocks offer the opportunity to earn higher total returns. But with the sharp market decline of the last great recession still relatively fresh in the memory, many retirement savers also feel uncertain about paying for retirement by withdrawing investment capital. 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 declines. Compared to fixed income investments, dividend yields are generally higher. And the idea of ​​living off the dividends while leaving the nest egg untouched presents an undeniable appeal. Here’s how you can use dividends to fund an early retirement at 55.

Investing for Dividends

how to retire at 55 and live off your dividends

how to retire at 55 and live off your dividends

One approach to investing for dividends involves buying shares of a group of companies called the Dividend Aristocrats. These are large companies with a long history of paying consistently 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 typically have yields in excess of 3%, making them significantly more attractive than many fixed income instruments. Right now, though, thanks to strong stock market appreciation, an exchange-traded fund that tracks the S&P 500 Dividend Aristocrats Index, for example, yields less than 2% in dividends.

Some dividend plays much higher returns. However, companies with high dividend yields are not always good investments. Sometimes yields are high because the company is in financial trouble and may have to cut the dividend.

At a 2% return, a $1 million investment produces $20,000 per year. That’s not much more than the federal poverty level for a couple. To earn dividends equal to about four times the poverty level of $17,420 for two people, a retired couple would need about $3.5 million in stocks paying 2 percent.

For most people, this will require a lot of discipline and sacrifice in order to save and invest starting at a young age. The SmartAsset retirement calculator can help you work out how much you’ll need to save, based on factors like your age and location, to have that much at 55.

Assessment of income needs

With these dividend yields in mind, a workable retirement plan at age 55 will probably emphasize reducing the need for income in retirement. Most people estimate that post-retirement income needs are 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 dividends may, by being willing to accept a significantly less expensive lifestyle, have a better chance of making the plan work.

You can set the spending limit after you retire to make a dividend-based retirement plan work. To do this, multiply the amount you expect to have in your retirement plan by 2%, which is Dividend Aristocrats’ current yield.

Ways to reduce retirement costs

how to retire at 55 and live off your dividends

how to retire at 55 and live off your dividends

Real estate is the single biggest expense for most households and that’s where many retirees look for savings. Retirees can significantly reduce housing costs by downsizing and moving to a less expensive location. Another way to keep costs down in retirement is to pay off debt like mortgages and car loans while you’re still working.

Healthcare is another place to look. As people get older, they typically spend more on health care. A widely cited Fidelity study reported that a 65-year-old couple can expect to spend $300,000 after taxes on health care costs in retirement. And that’s covered by Medicare. A 55-year-old retiree must find a way to pay for a decade of health care before government health plan coverage kicks in. So staying healthy as much as possible is potentially another way to reduce retirement expenses.

Conclusion

Funding retirement as early as age 55 with dividends allows retirees to avoid tapping the principal in their investment portfolios to pay expenses. Dividends are typically higher than fixed income returns, and owning dividend-paying stocks can help investors weather a downturn when stock 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 living standards.

Tips for retirement

  • To make sure you have enough income when you retire, consider consulting a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor matches at no cost to decide who 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 invest in dividend stocks, make sure you use a workplace retirement plan, such as a 401(k), if you have access to one.

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The post How to Retire at 55 and Live on Your Dividends appeared first on SmartAsset Blog.

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