How To Retire With A Million In 10 Years And Live Off Dividends

How Much Money Do You Need to Live Off Interest

The first step in figuring out if you can live off your investments and savings is to determine how much you need to cover your expenses. That begins by working backwards in a sense. Start by calculating the cost of your current required and desired expenses. Required expenses are for necessities like housing, health care, and food. Desired expenses are luxuries like travel, entertainment, and possessions.

Once you determine your ideal monthly or annual income goal, you can more accurately predict if your current wealth can sustain this for an extended period of time.

One of the reasons working backward may seem complicated is due to the longer life expectancy we all have. Modern medicine and technology advancements in health care are extending lifespans. This means your wealth may have to last for a significant period, perhaps 20 or 30 years after you leave your job. Multiplying the number of anticipated years in retirement by the annual cash flow can help indicate if your current savings and investments are enough to survive comfortably.

You should also factor in income in addition to your retirement savings and investments. Social Security is still in play for nearly all American workers, but the amount varies based on your income and date of birth. You can estimate your Social Security by visiting the SSA website, or by reviewing the Social Security statement you receive in the mail.

If you are expecting a pension or other payment in retirement, evaluate these income streams as part of your retirement income as well. These evaluations may seem overwhelming, but financial advisors are available to help you.


How You Feel About Living off Investments from Income Vs Capital Gains Vs Savings

Let’s pull all this together.

While all the money (dividends, capital gains, and capital) is lumped together in your account, when you think of living off investments in different layers, you’ll want to first see if you can live off investment income only.

This allows you to feel like you aren’t spending your hard earned money every time you pay bills since you’re truly not. You’re spending what your money is earning for you.

Otherwise, spending from your investment accounts can feel very scary and induce guilt.

But at Layer 1, your money is working for you, and paying you income.

Again, the formula to calculate how much money you need to live off investments at Level 1 is simple as you saw earlier. You can estimate that now with your investments, or check the previous year’s brokerage statement from your investment accounts to see how much investment income you made last year.

At the next layer down, Layer 2, which includes capital gains, your money has also worked for you to make more money. For most people, spending at this layer is not quite as comfortable as spending from the income layer except for those with very high net worth.

But spending both income and capital gains, Level 1 and 2, can, however, can work if either the investment account has significant funds or if capital gains are consistent and above average. This emphasizes the importance of good investment returns.

Click here to read more about that in my post How Much Money Do You Need to Retire?

At the next spending layer, Layer 3, you’re spending your hard earned money, which is your capital. It’s your savings.

Spending savings feels scary for most people except those with very high net worth.

Envision Layers of Money in Retirement Accounts

Even though it seems like your money is all lumped together in your investment accounts, think of your investments or retirement accounts in layers to differentiate truly living off investments vs withdrawing your investment capital.

This is a very important concept that many investors get confused about so let’s use the example of that layer cake to demonstrate this point.

Envision 3 wealth layers in your investment accounts, again, much like in a chocolate layer cake.

Wealth Layer 1 – Investment Income Only

At the top layer of your investment accounts, you have dividend or other income, such as bond interest. Spending from here is literally living off investments since you’re using only the income that your investments generate for you.

Think of this as the very top layer of that cake which is made up of all chocolate. The top layer of icing is usually thinner than the other layers, but we all know it’s the best, richest part.

Much like the chocolate icing layer of cake, layer 1 is the most desirable way to live off investments. This is because you can leave both your entire capital gains and past savings deposits in the account to continue to compound wealth.

It’s literally like having your cake and eating it, too.

But much like getting a fork and scooping off that top layer of rich icing, there’s a drawback. The drawback is that living off investments from income only isn’t going to give most stock and bond investors much income to live on.

As you can see, having enough to live well requires a very high amount of money in your investment accounts, high yield investments, or both to generate enough income for most people to live. This has been compounded by the fact that over the past decade, interest rates have dwindled to nothing.

This is only one of many reasons why the old retirement model of 4% withdrawals is less reliable than it was over two decades ago when it first became popular.

Investment Yield and Account Size

As you can see from the formula and the two examples above for income from $1,000,000 and $500,000, the amount of money, the types of investments you have, and the yield they earn determines how much money you need to live off your investments without running out of money eventually.

But if you can live off the icing, or Level 1, you don’t even have to touch your savings. This required a shift in thinking about retirement investing that hit us square in the face two decades ago! This awareness led us to shift into more than a traditional stock and bond portfolio based on standard asset allocation.

In the examples below let’s vary the investment income yield, and the amount of money in the investments to demonstrate this point better, and explore potential ways to live off investments with less savings.

You saw the examples above with 3% from dividend income on $1,000,000, or $30,000 a year, but let’s expand on this formula into more alternative investments. Remember, we’re looking at income only, not capital gains. Doing so allows for the potential to live off investments while leaving the capital intact to compound, and/or use when you’re 85, not 65!

When it’s Time to Retire

You can see that living off interest in retirement depends on several factors, including how much you have saved and invested, and the amount you need to cover basic and extra expenses throughout your lifetime.

Create a realistic picture of your retirement lifestyle and determine the most appropriate time to retire. Also, remember that there could be more expenses later in life due to medical issues, or a need for long-term care services. Include these unknowns when figuring out when you can retire comfortably.

Time To Live Off Investment Principal?

After a 12-year bull run, perhaps the easy money has already been made. Valuations are expensive, the Fed plans to taper, and we haven’t had a 10% correction in a while.

Even Vanguard is estimating only a 4.02% annual return for U.S. stocks over the next 10 years. The estimate seems low, but it could certainly happen, especially if there’s another bear market during this time.

Therefore, it might make sense to finally cash in some of the gains to live a better life. If a stock market crash does happen, you’ll be pleased to have utilized your investment returns for things and experiences. Dying with too much money would be such a shame.

Instead of just arbitrarily selling off investments to fund your retirement lifestyle, you could simply raise your safe withdrawal rate. Spent more money so you can enjoy your returns instead of lose it in an inevitable correction.

Case Study Of Living Off Investment Returns

Let’s say you believe in the Financial Samurai Safe Withdrawal Rate Formula = 10-year bond yield X 80%. As a retiree, your average withdrawal rate over the past five years was 1.5% to ensure that you didn’t draw down any principal. With a $3 million portfolio, you were living off $45,000 a year in gross income.

However, during these five years, your investments appreciated from $3 million to $5 million. They did so due to a 10.8% compound annual return. If you continue to withdraw at 1.5%, you will be able to live off $75,000 a year in gross income.

$75,000 is more than enough income to live a comfortable retirement lifestyle. You don’t need that much money. But you’re older now and feel like you might die with too much.

Given you were confident enough to retire with $3 million, the past five years feel like you’ve won five consecutive lotteries.

Not only have you been able to do whatever you’ve wanted for the last five years, but you’re also $2 million richer! With five years less life to cover for, your desire to spend more has increased.

The YOLO economy is calling your name.

Cost To Fund New Initiatives

First, you want to use your lottery winnings to superfund four 529 plans to the amount of $300,000. The idea of using a 529 plan for generational wealth transfer purposes sounds like a no-brainer.

Next, you want to rent the Symphony Of The Seas Ultimate Family Suite for an around-the-world cruise. The cost? $20,000 a week for 10 weeks!

Although $200,000 is a lot of money, the suite is 1,346 square feet and large enough to comfortably accommodate your four grandkids. It would be the time of all your lives!

The total cost to fund these two items is $500,000, for a one-time withdrawal rate of 10% ($500K / $5 Million). If you consider taxes, then perhaps you really need to withdraw closer to $700,000. But let’s just use $500,000 for simplicity’s sake.

After the adventure is over, you’re now left with $4.5 million, or still $1.5 million more than you need.

You decide after spending so much money so quickly, you should take a break and go back to normal. Therefore, you adopt the FS safe withdrawal rate formula again and withdraw at 1.1% since the 10-year bond yield has declined.

With $4.5 million left, you get to live off $49,500, which is still $4,500 a year more than you were living off five years ago. All hail the benefits of a glorious bull market!

Dividend Tax Considerations

Don’t forget to factor taxes into your dividend calculations. If you’re receiving your dividends from equities in a traditional 401(k), IRA, or taxable brokerage account, they will be taxable income.

However, they’ll be subject to different tax rates. With a traditional retirement account, you won’t pay taxes on dividends while you reinvest them. Once you start taking them as distributions, though, they’ll be taxable at ordinary income rates.

If you take your dividends from a taxable brokerage account, they will receive one of two tax treatments, depending on whether they are:

  • Qualified: These are taxable at the discounted long-term capital gain rates of 0%, 15%, or 20%.
  • Ordinary: These are taxable at ordinary income rates, which range from 10% to 37%.

If your dividends come from after-tax accounts like Roth 401(k)s or IRAs, you can avoid the issue altogether. You won’t pay taxes on reinvested dividends or those you take as distributions.

Make sure you know the significance of these two types of taxation, as they can skew your numbers significantly.

👉 For example, $30,000 in qualified dividends taxable at 15% is $25,500. The same amount in ordinary dividends taxable at 24% is $22,800. That’s $2,700 less each year and $225 less per month.

It’s always a good idea to get personalized tax advice regarding the implications of any investment strategy. Consider discussing your approach with a tax expert like a Certified Public Accountant or Enrolled Agent, or read what the IRS has to say about dividends.

📘Learn More: If you need to brush up on the different types of personal income taxes, take a look at our overview of the subject: Taxation 101: How Do Taxes Work For Individuals?

Own 10 Rental Properties that Net You $420 Per Month Each

Ten rentals properties that provided you a net income of $420 per month after figuring in things like vacancies, maintenance, repairs, property management, taxes, and insurance would bring you in $50,400 per year.

Depending on the locations and types of properties you have, it may take more or less properties for you to reach that $50k per year mark.

If rental properties are something you’d like to get into I’d highly suggest that you start doing learning now. Real estate is something that has always interested me and from my research it seems like everyone has different goals and different criteria for how they choose their investments.

That means you’ll need to create your own path and consider your risk tolerance to reach your particular goals.

Examples of living off interest 

Here are two hypothetical examples of living off of interest. 

Example 2: Morgan

Morgan has $1 million in the bank. But unlike Alex, all of her money is in high-yield savings accounts and certificates of deposit (CDs) that have low interest rates. 

While these funds are secured by the FDIC, she only brings in just 0.2% APY. As a result, Morgan only generates about $2,000 annually in interest—far less than if she put her money into the stock market and made enough cash flow to live off of for an entire year. 

Dividends and Taxes

Dividends – like just about any other kind of income – are subject to taxation. How they are taxed, however, depends on a few factors. And because of the effect of compounding, the amount of tax one pays on dividends can meaningfully impact the balance of a portfolio over time.

Let’s first start with the rates that investors must pay on qualified dividend income. Below we have 2022 tax rates for the various ways a taxpayer can file, and for the income brackets.

Source: Investopedia

For those that earn $41,675 or less in terms of taxable income for the year, they’ll be subject to zero federal taxes on their dividend income. There are also 15% and 20% brackets, which vary by filing status and income amount. However, the main point here is that dividends are taxed at much lower rates than that of capital gains, or labor income, in most cases.

That means that not only is it attractive because it is passively generated, but the taxation rate one owes on the proceeds is lower than most other forms of income. This makes dividends doubly attractive.

In addition to filing status and income bracket, dividend investors must also understand that some dividends are qualified, and some are unqualified. The tax rates we see above are for qualified dividends only, because unqualified dividends are taxed at the investor’s ordinary income rate.

Most dividends are qualified, but there are certain popular income methods that aren’t. This includes REITs, MLPs, and special dividends. Dividends from these sources, or dividends from stocks that don’t meet the IRS’ holding period requirement, are subject to higher taxation than those of qualified dividends.

However, if an investor wants the lower tax rate on dividends, the majority of common stocks qualify so long as the investor isn’t trading in and out of those stocks frequently.

The Investment Returns Crossover Point

I believe there are two conditions an investor must achieve before they can drop active income due to investment returns. Again, we are differentiating between investment returns and investment income. Once you generate enough investment income to cover your desired lifestyle, you can leave immediately.

Condition #1: At Least Three Years Of Outperformance

If your investment returns are greater than your active income for at least three years in a row or four years out of the last five years, I think you have the green light to take things down a notch.

Three years helps minimize the chances that your investment returns are not a fluke. And given bear markets (-20% sell-offs) tend to happen every 3.5-4 years, I use the benchmark of four years out of five years to account for a couple of bad years.

If your investment returns are greater than your active income for five years in a row or five out of the last seven years, you should be able to completely retire if you want to. Here is my latest stock market forecast and housing market forecast.

Condition #2: Investments Equal To At Least 10X Your Annual Active Income

In order for your investment returns to generate more than your active income for three years or longer, you likely need a sizable investment portfolio that is 10X or greater than your annual active income. For example, if you make $100,000 a year, you would likely need at least a $1 million portfolio for a chance to generate $101,000+.

To generate $101,000 in investment returns on a $1 million portfolio would require a 10.1% return. If your entire portfolio is in the S&P 500 and the S&P 500 returns its historical average of 10.2%, then you’ve got a decent chance of outperforming your active income.

However, if Vanguard’s lower return assumptions for stocks and bonds come true, then you will likely need an investment portfolio at least 20X your annual income until you no longer have to work. 20X your annual income is a key metric because it is my recommended net worth target to shoot for before retiring.

Using a multiple of income is better because it keeps you motivated to save and invest more as you make more money. We all tend to make more the longer we work. Further, using a multiple of income is preferable to using a multiple of expenses because it also keeps you honest. You can’t take a shortcut to financial freedom by slashing your expenses.

Once these two conditions are met, you should be able to reduce your work hours or eliminate them altogether. Further, these two conditions are scalable, no matter how much money you have.

Saving 50–70 Percent Of Your Take-Home Income

Photo by Annie Spratt on Unsplash

So step number two that you have to follow here is going to be a tough one, but that is going to be saving 50 to 70 percent of your Take-Home income.

And again, if you’re looking to retire by 30 years old — let’s say you want to work from 20 to 30 and then not work for the rest of your life — you’re going to have to take some drastic actions here, and that is why you need to live off of a microscopic amount of money, and that’s why step number one is so important — by cutting down as much as possible on those monthly expenses.

So, people who are trying to do this, you’re not going to see them driving brand new cars, you’re not going to see them going on vacations. They’re probably going to be eating canned beans and doing campfires in the backyard as summer entertainment.

Not that there’s anything wrong with that, but they are literally spending as little money as possible because they’re focusing on the long term picture of what they are trying to do.

So people who are following this FIRE movement are often aiming to save 30 times their annual expenses, and that will allow them to withdraw about 4% per year without basically touching that principle, and that is where that 4% rule comes into play.

And that is basically where you’re able to draw from an account about four percent per year and over a long period of time, based on the growth of that account and those investments.

So what you’re aiming to do here is to lower your monthly expenses as much as possible.

Figure out what it costs you to live per year, multiply that by 30 and then save up that amount of money by saving 50 to 70 percent of your paycheck every single week or month or however often you are getting paid.

Now the question everyone might have been waiting for — just how much money do you need to have saved up and invested to live off of that money following the 4% rule?

Well, if your annual expenses are $20,000 per year — they would recommend having 30 times that amount of money saved and invested — So $600,000.

If your annual expenses were $35,000, that number becomes $1.05 million.

If you’re somebody spending $50,000 per year on your living expenses, you would need to have $1.5 million dollars saved and invested.

And for the final figure here — if you spent $100,000 per year on cars and housing and food and all of that, you would need to have about $3 million to successfully follow this strategy.

So I’m sure this goes without saying — the best way to follow this strategy and to reach that retirement as quickly as possible is to keep your monthly expenses as low as possible.

And just to put it in perspective for you — every additional $100 that you spend per month if you follow this — is an additional $36,000 you need to have set aside in that freedom fund to support that $100 of monthly spending.

So if you’re serious about this and you want to retire at 30 or even younger, you have to spend literally as little money as humanly possible.

Final Thoughts on Living off Your Dividends

While there are lots of options for investors looking to generate passive income, we believe the best path is to find high-quality dividend stocks with safe payouts, and preferably, higher yields. Three examples that offer different characteristics are Altria for high yield, Lowe’s for dividend growth, and 3M for a blend of the two.

In constructing a portfolio for passive income, we see these characteristics as paramount to success, and the Dividend Kings are a great place to start.

This is a guest post by Josh Arnold for Sure Dividend is one of the top and most recognized dividend newsletters in the investing space. Their research has been featured in publications such as Time, Investopedia, Seeking Alpha, and Yahoo Finance.


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