Invest 1k a Month to Retire on Dividends

Did you know that 2 out of 3 Baby Boomers feel like they haven’t saved enough for their retirement yet? More than 8,000 Baby Boomers are retiring every day and two-thirds of them are planning on living off of their Social Security benefits and maybe some light savings through 401k programs or a tax-deferred IRA. Despite these facts, the average investment advice for people at or near retirement is based on the idea that they’ve been able to save millions of dollars throughout their career.

Most people don’t have millions. At best, the average retiree is planning to live on about $1,000 per month. If all this sounds similar to you because that’s how you’re planning on retiring, then here’s some good news for you: it is possible to build up a retirement dividend that will keep a retirement supported for $1k per month or less.

The Key To Success Is To Reinvest Dividends

The whole point of retiring is that you’ve worked hard and developed a financial portfolio that can support itself. There is only one effective way to be able to do this: through the use of re-investments into the portfolio. When you’re investing into stocks, many businesses will offer stock holders a dividend every quarter, semi-annually, or annually that will provide a certain return for holding equity in the business. You’ve got two options: take those dividends and live off of them or put them back in to compound the income.

You can do this even if you’re just 5 years away from retirement. By re-investing your dividends back into your financial portfolio, you’ll be able to build it up with some amazing speed. All it takes is 2-3 good years to potentially develop enough cash to live off of after retiring and then you can continue to re-invest dividends throughout your retirement to keep building up cash.

It is a mistake to take a complete cash-out after you retire. At the 20 year mark of investments, you can begin to see some huge gains in profitability when compared to taking out dividends as profits every time they come in. In 30 years, on average, the investor who is re-investing their dividends is going to have a portfolio worth over $1 million and it all started with a dividend portfolio that had contributions of $1k per month or less.

Let’s say that you’re 55 right now. The average life span of someone today who reaches the age of 65 is 80-85. In practical terms, by the time you reach 65 and are ready to retire, you’ll have enough investments to be able to supplement your Social Security. Take only what you need and continue investing the rest. By the time you reach 75, you’ll be set for a fairly comfortable remainder of your retirement. If you live beyond 90, you could potentially be a multi-millionaire. If not, then you’ll have left a nice investment for your heirs to continue building and achieve true wealth.

It Always Pays To Start Investing Early

Almost half of all Americans right now don’t have a savings account whatsoever. They are living paycheck to paycheck and not even thinking about retirement right now. That is a mistake. Those days of working hard and getting the bills paid will only come to an end when a conscious decision is made to start working out of that debt for good. It doesn’t take a lot to start a small IRA to begin investing. If you’ve got $200 and you meet income thresholds, then you can create a Roth IRA that will help you begin to invest.

Roth IRAs can be setup to take paycheck contributions automatically. Many brokerage accounts will let you deposit as little as $25 per paycheck into your IRA. That might not seem like a lot, but at $50 per month, you’ll be setting aside $600 for your retirement each year. At the end of the first year, you’ll have enough money to begin investing into some high dividend stocks. Keep contributing to the IRA, keep getting dividends, and you’ll be surprised how large your portfolio will wind up being at the 5 year and 10 year mark.

What Is the Key to Successful Dividend Investing?

You’re going to need to do some research. Dividend stocks are publicly traded, which means they will go up and down in value over time. Your goal will be to purchase stocks that offer the higher dividend yields when they are trading at a value price. One of the easiest ways to do this is to look at what the dividend yield happens to be and then look at what the stock price happens to be at that given moment. If you’re near the 52 week low and the business has a history of providing annual dividends that are higher every year, then you’ve got a potential investment opportunity.

It is also smart to diversify your portfolio so that you’re not placing all of your funds at the mercy of just one stock. During a financial crisis, it isn’t uncommon for a business to cut or eliminate the dividend as a way to save some cash. You can protect your portfolio against this by looking at a wide range of high dividend stocks in different industries.

Having diversification doesn’t eliminate all risk. Nothing, in fact, can eliminate all risk. The goal for a retirement isn’t to make short-term trades. You’re looking at long-term profitability through the use of dividend re-investing and drips. Most stocks are going to balance themselves out over the course of 5-10 years, even if they have short-term losses. Diversification simply limits the risk of a cross-industry tragedy hitting your portfolio.

You Are Going To Need to Start Low and Slow

The problem that most people today are going to have with the high dividend stocks that exist is the fact that they are priced rather high. Companies like PepsiCo, Walmart, or Kimberly-Clark all have stock prices that will only give the average investor with $1k to invest with a dozen or so stocks at best. Of course if you can contribute more, then do so because it will only help to increase the chances of having enough money for retirement.

It isn’t going to be a process that provides instant gratification for almost all investors. It is a process that is about developing long-term growth. That’s why putting your low-value monetary contributions into something like a Roth IRA right now is going to benefit you immensely. The contributions can provide a tax credit and the wealth will grow in a tax-deferred way. You won’t have to worry about the tax liabilities that are sometimes only on paper within the confines of trades that are within the IRA.

Once your portfolio begins to grow, however, you will want to watch how much you’re actually receiving in dividends from your investments. There is a limit to the amount of dividends that can be received in the account without receiving a penalty. In tax year 2014, that amount was $1,000. When all you’re doing is investing with $1k, that isn’t something that you’ll have to worry about for some time. Many dividend yields are 7% or less, so with an equity in a business of $1,000, you’ll be making $70 of profit.

There Is One Potential Disadvantage of This Method

Putting your money into tax deferred accounts when you’re near retirement age is a pretty solid decision. There’s not a whole lot that can go wrong since most accounts allow for withdrawals to occur around the age of 60. It can be problematic, however, for individuals who are thinking about retiring at younger ages. If you retired at the age of 50, for example, you wouldn’t be able to touch the funds in the tax-deferred account for nearly 10 years without paying a substantial penalty that is above and beyond what the tax withholding would be.

The key to this is being able to save $1k per month and invest it. With an average return that fits between 3-7%, it will take about 10 years for the investments to begin doubling. At the 10 year mark, you’ll have created an investment ladder with your monthly investments where your $1,000 essentially turns into $2,000 per month. At 20 years, assuming the same dividend percentages, the ladder moves up from $2,000 to $4,000 per month. Even if you’ve got a mortgage, many retirees can enjoy a comfortable life with that kind of profitability coming in from investments every month.

You can retire on time, even if you haven’t saved much yet, at the age of 55. You just need to start saving right now for your retirement and take advantage of all the increases in contributions that are allowed. Under this scenario, in 30 years of investing, you’d have $40k in annual income just from dividends. That’s the perfect amount to supplement a pension, other benefits, and allow for the perfect retirement.

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