Money

Hitting Your Goals in Retirement

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I was recently forwarded an email by Julia Guth, CEO of The Oxford Club and Chair of the Board of The Roberto Clemente Health Clinic. The email came from one of Julia’s friends who stated their goal was to “completely live off of dividends and continue to support the Clinic,” which provides healthcare and helps the community with clean water, nutrition and other services in Nicaragua.

It’s a fantastic goal – to be able to live off the income produced by your investments and help those who need it.

My goal – whether I’m writing about dividends here in Wealthy Retirement, coaching you on them in my book Get Rich with Dividends or making specific stock recommendations in my newsletter, The Oxford Income Letter – is to help investors do exactly what Julia’s friend hopes to achieve.

I want to help you generate enough passive income from dividends that you never have to worry about money again and can do the things you yearn to do, like travel, buy some new toys or support worthy organizations.

Since it’s tax time, I’ll put this out there too – if your income is derived mostly from dividends and held in a taxable account, you’ll be taxed at the lower dividend tax rate than the likely higher ordinary income tax rate.

If the dividend payers are in a Roth IRA, you won’t pay any tax on the money.

If the stocks are held in a regular IRA or 401(k), you will be taxed at the ordinary income rate.

So how do you get to the point where you can live off dividend income?

Obviously, a lot will have to do with your lifestyle. But the longer you invest, the more your money will grow.

The key is to own Perpetual Dividend Raisers. These are stocks that raise their dividends every year. And you want to own the ones that raise their dividends by a meaningful amount so the increases are at least keeping up with inflation.

If you invest $100,000 in a portfolio with a starting yield of 4%, dividends growing at an 8% annual clip and stocks performing in line with the S&P 500 historical average, after 10 years, your investment would be worth $229,032 and you’d be earning $7,996 annually in dividends.

After 20 years, your nest egg would be $524,559 and your annual dividends would be $17,262.

With a 30-year time horizon, you’re looking at $1,201,414, which will generate $37,269 in annual dividends.

Now watch what happens if you reinvest your dividends. If you don’t need the cash spun off by these stocks yet, you can automatically reinvest the dividends. You just tell your broker that’s what you want to do. It’s very simple.

When you reinvest the dividends, you automatically buy more stock with the dividends (nothing out of pocket). You buy more shares and generate more dividends to buy more shares and generate even more dividends…

Look how big the numbers get when you reinvest.

After 10 years of reinvesting, instead of the solid $229,032 producing $7,996 in annual dividends, you would have $334,911 that’s spinning off $11,588. At the 20-year mark, you would have $1,097,596 in your account, nearly double the $524,559 if you didn’t reinvest. And the income generated totals $35,824, which is more than double the $17,262 in the earlier example.

At 30 years of reinvesting, you’d be sitting on $3,524,108, nearly triple the $1,201,414 you would have if you didn’t reinvest. And you’d be collecting $107,572 per year in dividends – on an original investment of $100,000.

Chart: Annual Dividend Income of Our Reinvested $100,000
Keep in mind, you can stop reinvesting dividends anytime you need and start taking them as income. So if you’re reinvesting dividends, your circumstances change and you need the cash flow from your dividends, simply quit reinvesting and start collecting the dividends.

If you don’t have the time horizon to reinvest dividends, Perpetual Dividend Raisers will still help you a great deal.

Imagine getting a big 8% or 10% bump in your income every year. Maybe that will happen with Social Security if inflation is sky-high. With Perpetual Dividend Raisers, it happens year after year, boosting your buying power.

The best part about living off your dividends is never having to touch the principal since your nest egg spins off enough income every year to live on.

Whether you’re years away from retirement or you’re already retired, Perpetual Dividend Raisers should be an important part of your retirement plan. Maybe they’ll help you end up like Julia’s friend, carefree about your investments and supporting organizations you care about.

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