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The short answer is: it depends.
In the past, people would amass a nice portfolio and grow it to the point where, in retirement, they could take the dividends and interest generated by the portfolio and live off of that income.
Things have changed over the years and this strategy isn’t as foolproof as it used to be.
Average Dividends and Interest Rates in the Current Market
Right now, the ten-year treasury bond is under 2%. The average dividend from stocks would be 1.5 to 2%. So for example – “If you have a million dollars and are earning 2% interest a year, you would be living off of $20,000 a year.” Most people can’t live off of that. So while it’s a noble thought to live off only the dividends and interest of the portfolio and never touch the principal, you would have to have a much larger investment portfolio in order to achieve that.
The Total Return Approach: A More Prudent Solution Today?
In the total return approach, you live off of dividends, interest, AND a portion of capital gains. It’s also called the 4% rule. A moderate investment portfolio has historically averaged around 7%. If you have a million-dollar portfolio and live off of 4%, it’s now $40,000 a year.
Yes you are dipping into some of the capital gains, but if you’re averaging 7% a year and are only taking 4%, that still leaves 3% that has the potential for growth, which should help make up for inflation over time.
There are ways to increase yield with your dividends and interest, but that also comes with a higher risk. When you try to get a really high-paying dividend stock or a high yield bond, your risk is also increased significantly. If the market does take a hit, your portfolio takes a big hit. At that point, those companies cut their dividends and interest rates, so those go down as well.
In retirement, you don’t want to be dealing with this kind of stress and volatility.
There’s no one answer and things aren’t as they used to be, but AllGen is here for you on your journey to financial freedom – whatever that may look like for you. Call us anytime at 407-210-3888.
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