How To Live Off Dividends The Filthy Rich Way

how to live off dividends foreverThis is all about how to live off dividends the filthy rich way.  You might be wondering what I mean by that statement.  We have all watched movies and news shows about how the rich live.  You know what I am talking about…private planes, yachts, limos, mansions, and a never ending amount of cash to spend on frivolous things.  Now as much as you might want to me to teach you how to get that kind of cash, it just ain’t going to happen, noway and nohow.  But if you are looking to take advantage of the tax breaks given to long term investors and how to live off dividends the right way, then you are going to love this.  I am not just writing to teach others, but for my own family to someday live off of them.

First things first, you cannot live off of nothing.  Some people refer to dividends as a form of passive income, but the passiveness doesn’t come without actual work.  You have to work for the original principle amount that will be invested.  So if you are looking for a get rich quick scheme or a way to never work again even though you never worked to begin with, this article is not for you.  But with that being said, if you have a decent amount of money to invest, the information I am presenting to you today will help you in formulating a plan to relax on a beach living off the dividends off you work.  So you can see that the money we will make can be termed passive income, but it didn’t come passively to begin with.  It took hard work and time to get to this point and it will take a decent amount of research and diligence to make it work for us for the rest of our lives.  If you want to learn how to live off dividends, then you are in for a treat.

how to live off dividendsI have written another about how to live off of dividends forever here.  That article is about particular stocks that you can buy and what kind of money that you are looking at earning for the rest of your years.  I have been asked by quite a few readers to elaborate on the details on the actual steps to get to living off your dividends forever.  I am going to show you down below the steps needed to earn anywhere from $25,000 to $100,000 a year in passive income so you don’t have to work forever.  So without further ado, here is what it takes to live the good life and have your money work for you instead of you for it.

Step 1:  You Have To Earn The Money First!  Many people think that what they have in the bank is enough to live off of if they invest it right.  But even though having a cool fifty grand or even a hundred thousand in the bank sounds like a ton, it just isn’t enough to give you the financial freedom you are dreaming of.  It takes many times that amount to get you the kind of cash you need to live a life of travel and constant leisure that most people dream of.  That, my friends, is not an impossible task though.  With proper long term funding into a well structured and maintained portfolio, you can build up the required capital in a much shorter time then you would think.  It would be just a matter of saving and spending wisely to help you get to the point of living off dividends forever.

I teach my students that if you can save at least 10% of your income starting with your first paycheck and invest in properly, you will have the required funds to live off of when the time comes.  That might be 60 years old or 50 or even 40 if you are fortunate.  The bottom line is that you need to earn the required capital to get to the point of relaxing. If you already have the required funds, you can skip down to step 2, but if you don’t have that money yet, then it is never too late to start.  Check out the following example of compounded growth for a few different aged starters…

A.  25 Year Old:  If you are young and fairly new to the workforce, you have the best chance of living off your money when the time comes.  The average income for those aged between 16 to 34 is about $33,000 according to recent data found here.   Now that we have our income, we can figure out what we will have at different ages to retire with.  I am going to pick an easy to do 10% investment rate for the aforementioned income with a fair 3% annual gain in income and thus investments.  With all that math completed, the numbers below represent what you would have in your portfolio at different ages investing this way.  I am looking at a long term average gain of 8% per year for our investments.  I arrived at this number by taking the average lifetime gain of the S&P 500.  So if we basically invest all our investment capital into a fund matching the S&P 500, this is roughly what we will be earning over decades of time.  The following numbers are based on a starting income of $33,000 and getting a 3% raise a year and investing 10% of your income annually as well as earning an 8% a year on these investments.  When it comes to the how to live off dividends part, these numbers represent just a small fraction of the potential that is waiting.

At 30 years of age, you will have $21,340.

At 35 years of age, you will have $56,094

At 40 years of age, you will have $111,100

At 45 years of age, you will have $196,489

At 50 years of age, you will have $327,249

At 55 years of age, you will have $525,516

At 60 years of age, you will have $823,954

At 65 years of age, you will have $1,270,706

You can easily argue that if you start out at 25 years of age making even more than $33,000 to start earning the same 3% raise every year, then you will have a boatload more of investment money to retire on.  I absolutely agree!  So I took the time to do the calculations of a few different starting salaries for those at 25 years of age.  The following are the total investments at age 45, 55, and 65 down below.  (I stop at 65 because most people will want to retire at that time due to being able to get Medicare.)

$40,000 = 45 years old with $238,168, 55 years old with $636,989, and 65 years old with $1,540,248.

$50,000 = 45 years old with $297,711, 55 years old with $796,238, and 65 years old with $1,925,314.

At this point, I stopped running numbers.  If you are able to earn more money then the above chart represents, drop me a comment and I will run the numbers for you based on your specific circumstances.  Most workers at that age are basically earning what I stated up above.  Now the charts below will represent different starting ages with the same numbers except the starting salary.  I would expect that most workers that are older will be making more than the younger versions of themselves.

B.  35 Year Old:  The average salary for this age is given to us here as roughly $50,000.  The following numbers follow the 25 year example up above.  Here is what you can expect to have in your portfolio at age 45, 55, and 65.

At 45 years of age, you will have $84,991

At 55 years of age, you will have $297,711

At 65 years of age, you will have $796,238

The numbers do not look as good as the 25 year old version.  That is because of the benefit of compounding for our younger version.  That extra 10 years means all the difference when it comes to the total value when we hit 65.  To make up for it, you are going to have to invest a bit more than 10% to make up for the missing time.  The 25 year old earning $33,000 to start had almost 1.3 million dollars by age 65.  To be able to match that number, a 35 year old will have to invest 16% of their checks to end with $1,273,981 when they hit 65.  So if you are in this boat, please consider downsizing your expenses to the bare essentials to make up for lost time.  Some personal examples that I have personally done are cutting the cable bill down to just basic television and internet for 90 bucks a month.  I also reviewed all insurance premiums to make sure I was not overpaying, which I was.  (Cut my car insurance in half!)  I also switched to T-Mobile from Verizon and made out like a banshee there.  (My bill was over $340 a month at Verizon and it is now only $160 for four lines of unlimited data at T-Mobile ANDDDD they gave me a free share of the company for becoming a customer)  And the biggest way most people can save a few bucks a month is to eat in more.  Americans spend a ton of cash on eating out that could be better invested in something likeeee retiring early?  The above are just a few examples to where you can find some extra cash to invest into your nest egg.  Everyone’s situation is going to be different, so look at your own personal budget and see what you can do to increase your investment money.  Knowing how to live off dividends is only half the battle, the other half is spending wisely.

C.  45 Year Old:  The average salary for this age is given to us here as roughly $53,000.  The following numbers follow the 25 year example up above.  Here is what you can expect to have in your portfolio at age 55 and 65.

At 55 years of age, you will have $90,090

At 65 years of age, you will have $315,573

The numbers for a 45 year old trying to start to save for a lifetime of relaxing does not look to good when only saving 10% of their paychecks.  But don’t lose heart, you will just have to buckle your belt a bit tighter and save a bit more.  How much you ask?  Well to equal the 25 year old’s roughly 1.3 million, you will need to save about 40% of your paycheck.  Ouch!  That is not impossible though.  It is pretax money that you are putting into a tax free retirement vehicle to help you grow the portfolio into what you are looking for.  At this point in your life, I am hoping that you are in good control of your finances and are able to make some tough decisions about what to do with your money.  If you want to know how to live off dividends forever, then this will help.  In other words, it is time to start saving today’s money for tomorrow instead of spending tomorrow’s money today.

D. 55 Year Old:  If you are here, don’t think it is too late for you to learn how to live off dividends.  Your savings plan will be much like the 45 year old up above.  You will have to save as much as you can until you hit at least 65.  At this point in your life, paying for health care coverage out of your own pocket is probably not going to happen, so you will be working until you qualify for Medicare.  No biggie there, it allows you to save some cash towards our ultimate goal of having a decent amount of passive income.  You will have about $300,000 to $400,000 in your account if you can save 35% of your pretax income.  There isn’t much more you can do except work a bit later then 65.  But I am guessing that you are not here because you want to work all your life.

As you can see from above, the longer you wait to start to live off of your investments, the higher amount you will be getting in monthly payments during retirement.  The million dollar question always comes to how much will I earn a month during retirement if I follow the above investing strategy?  The next step addresses this concern by looking at different risk appetites and thus different possibles returns.  It always comes down to knowing how to live off dividends so you can maximize your income.

Step 2:  Setup The Right Portfolio.  This is another one of those easier said then done situations.  Now that you have your money saved and ready to work for you and you know how to live off of dividends, there is the job at hand of finding a place for it do just that. If you are wanting to know how to live off dividends forever, then this step is essential.

If one was to just invest all the money in the S&P 500, you would currently earn about a 1.98% dividend yield.  Based on the $1,270,706 that we were shooting for at 65, that would give us an annual income of $25,159 a year in dividend payments as well as the average growth of the S&P 500 of another $90,000+.  (That can be about 8%…if you go by the lifetime average of the S&P 500)  But I want to concentrate on just the dividend payments.  There are a number of ways to do it…overall markets, individual stocks, bond funds, or any type of diversified portfolio of investments.  If try to explain all the different ways to invest your money, we might be here for ever.  So I will just simplify it down to a few quick and easy ways so you better understand how to live off of dividends.

Put all your money in a ETF matching the S&P 500 and earn about $25,159 a year based on that 1.98% dividend.

how to live off dividends APU AmerigasPut all your money in a single stock, such as APU, and take the biggest risk of your life.  If you did that, you would earn a dividend rate of 7.78%.  This would give us a yearly check of $98,860 or a monthly check of $8,238.  There are a ton of stocks out there that can be combined to create a decent portfolio of income producing equities.  Remember at this point, the goal is to create a monthly income that you can live off of FOREVER!  I would think that you would be able to live off of $8,000 with little to no problems.  If not, move to Central Pennsylvania and you will be able to.  In other words, if your money is making ends meet where you live, then it might be time to move somewhere where it does.  (Downsize into a smaller house if moving to a new town is out of the question)  If you want to live off dividends the right way, you will want to have as little debt as possible.

At this point, there are many different funds that you can invest in to get you a wide variety of returns.  You are seeing that knowing how to live off dividends can make or break your retirement.  The two options I listed above are extreme examples of risk tolerance.  The ETF of the S&P 500 is the safest in my mind for a risky strategy of all your eggs in one basket and the APU play is the most riskiest for that same method.  Obviously, you will be looking at some for high returns for the risk, but it is by far not the wisest thing to do.  Professionals today suggest putting your money in a healthy mix of different investments that help reduce risk to a very low level.  The problem is with this though that with lower risk will come lower returns.  At this stage of the game, you will need to figure out how much risk you are willing to take to reach your ultimate goal income.  The question of can you live off dividends forever should never be an issue for you if you follow the above steps towards financial independence.

Step 3:  Buy A Condo And Enjoy Life Somewhere.  You now know how to live off dividends and are enjoying the good life.  If you have worked diligently and invested as much as you possibly could, it is time to uncork the champagne and enjoy all the finer things that life has to offer.  For those that live for the day and spent the same way, they will still be working.  For those that live frugally and made the most out of what they had, today is the day you get to enjoy the fruits of your labor.  There will be the semi-annual checking of the portfolio to make any needed changes that may arise, but for the most part, you should be hitting the golf course or pool.  No debt and no income issues means you will have no worries.  This is now your life, congratulations my friend, you have learned how to live off dividends the filthy rich way.


How To Live Off Dividends The Filthy Rich Way

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