Retirement would be much easier if you could quit your job but keep your salary. Unfortunately, no employer is so generous. Most of us need to replace our retirement income in order to stay afloat. Such income replacement may come from savings distributions, sources of passive income, or both.
Passive income is good for retirees
Passive income is especially attractive to retirees. Here’s a great reason. When you have money coming in, you rely less on investment settlements to fund your retirement distributions. Investment settlements are not bad, but they reduce your earning potential in the future.
Stock settlements also expose it to short-term market fluctuations. If the market is down on the day you liquidate, for example, you will get less value for a position than you would like.
Fortunately, you should already have a passive income stream – your Social Security benefit. And there is another source of passive income that is easily accessible: dividend stocks. Together, these two sources of income can realistically produce passive retirement income of $ 30,000 or more per year. Keep reading to find out how.
1. Social Security
The average Social Security benefit in 2022 is $ 1,658 per month, which equates to just under $ 20,000 a year. Depending on your income history, your profit may be higher or lower.
To project your estimated benefit on the scheduled retirement date, open an account in my Social Security. The online portal estimates your monthly benefit at different claim ages.
You will see that delaying the start of Social Security increases your monthly benefit. Posing for retirement is a strategy to increase passive retirement income, but it is not the only one. Other actions that could increase your Social Security income include:
- Correct any missing information in your work log. You can find your work record in your Social Security account. If your work record is incomplete, your calculated benefit will be too low. Contact Social Security to have your work file corrected.
- Working for at least 35 years. Your benefit considers your average income, calculated from your 35 years of highest paid work. If you only worked for, say, 30 years, the average calculation is zero income for the remaining five years. This creates a lower average income and, in turn, a lower profit.
- Earn more now. Higher incomes now and for the rest of your career will increase your Social Security benefits at the time of retirement. You can try it on my Social Security portal. Look for the box to update your future average annual salary and see how those changes come to your benefit.
2. Dividend shares
Shares and premium dividend funds typically produce between 2% and 4% of their invested capital. Using that data point and some quick math, you can calculate how big your dividend portfolio should be to produce the income you want. Divide the target income by 2% for a conservative estimate. If you are targeting $ 10,000 in dividend income, for example, you would need $ 500,000 in dividend-paying shares that yield 2%.
Accumulating $ 500,000 in dividend-paying shares is no small task, but it is feasible if you have a longer term. A compound interest calculator like this can help you determine the details. As an example, a monthly investment of $ 650 can reach $ 500,000 in 25 years with an average annual growth rate adjusted for inflation of 7%.
You could invest this money in a low-cost, high-quality dividend fund. A fund offers you a quick diversification. In addition, the fund will automatically remove actions that do not meet the quality criteria. Funds for research include Vanguard Dividend Appreciation ETF (VIG 1.68%)o iShares Core Dividend Growth ETF (DGRO 1.24%)or o iShares Core High Dividend ETF (HDV 0.39%).
You will want to keep these shares in a retirement account with tax benefits. Otherwise, you will pay annual dividend income taxes. And one more thing: automatically reinvest your dividends while you’re still working. You can switch to cash distributions once you retire.
Cash flow is king
Even a small flow of passive retirement income improves your financial flexibility and the longevity of your savings. You should earn some Social Security income, but you can do much more with planning.
Specifically, you can increase your income to increase your Social Security benefit. And you can increase your retirement contributions and start investing in dividend-paying stocks. Make those changes today and start a new and improved perspective on your retirement.