How To Retire On Dividends And How Much You Need (2024)

Dreaming of replacing your paycheck with dividend payments? You'll give up some things in the process—including your boss, your alarm clock and a weekday schedule chock-full of responsibilities.

If you can accept those trade-offs, it may be time to start making the dream a reality. Let's explore how to retire on dividends, starting with an overview of dividend investing. We'll also walk through the math for understanding how much dividend income you'll need and cover the four essential strategies that'll help you live comfortably on passive income in your senior years.

Benefits Of Dividend Investing

Dividend stocks are an appealing source of retirement income for several reasons. Below are six benefits you can expect from a dividend portfolio.

  1. Cash income: Dividend stocks provide periodic cash income, which improves your liquidity and financial flexibility.
  2. Appreciation potential: Dividend stocks gain value over time. Relative to stocks that don't pay dividends, the appreciation gains are usually lower. However, dividend stocks are competitive on a total return basis, which include dividend yield plus appreciation gains. So, the lower gain potential makes sense if you consider the dividend payments to function like cash advances on your total return.
  3. Inflation protection: Dividend payments can rise over time, which provides some protection against inflation. A BlackRock analysis indicates that has significantly outpaced inflation over the long-term.
  4. Stability in tough markets: Reliable dividend stocks continue shareholder payments no matter what's happening in the stock market. When stock prices are falling, the dividend income may be your only source of positive returns.
  5. Tax efficiency versus bonds: Qualified dividends are taxed at the capital gains tax rates. Bond income is generally taxed as ordinary income.
  6. Compounding opportunity: Reinvesting dividends compounds the earnings and expedites the growth of an income-generating portfolio.

In short, the potential for appreciation plus rising income gives dividend stocks an edge over other asset types. The primary downside relative to bonds is that dividend stocks can lose value, while bonds will repay the principal unless there's a default. The disadvantage of dividend stocks compared to stocks that don't pay dividends is lower appreciation potential.

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How To Calculate Your Retirement Income Needs

The trick to retiring on dividends is advance planning. You'll need to estimate your expenses in retirement, then outline an investment plan to cover those expenses.

Calculate Your Expenses

There are two ways to estimate your living expenses in retirement. You can start with your current income and adjust it to reflect future changes. Or, you can start from zero and your expected costs. The first method of adjusting from your current budget is often easier. The risk of starting from zero is that it's easy to overlook costs that occur quarterly or annually.

Starting with your current income, the process is:

  1. Use your net annual pay as the starting point. This is what you're spending today.
  2. Add estimated health care costs. Your medical costs will include medical insurance premiums for Medicare plus out-of-pocket costs such as deductibles and copayments. Visit to learn more.
  3. Subtract work-related costs. This bucket includes commuting costs, dry cleaning and whatever you spend on clothes you only wear to work. You'd also include what you spend on buying lunch if you expect to eat at home going forward.
  4. Add in costs associated with your bucket list. If you plan on traveling the world, for example, define your budget for those activities.
  5. Adjust for housing changes. Subtract any expected reduction in your housing costs, from paying off the mortgage or downsizing.
  6. Add in estimated income taxes. Retirement withdrawals from your 401(k) or traditional IRA are taxable. Note that you pay federal and state income taxes on these withdrawals, but not FICA taxes. Withdrawals from Roth accounts are not taxable.

Assess Your Investment Portfolio

The retirement income you'll need from your investment account is your projected living expenses less any expected pensions and Social Security income. You can visit my Social Security to estimate your federal retirement benefit. Note that Social Security does have an expected funding shortfall brewing, so it's wise to assume a lower benefit for the sake of being conservative.

Let's say you've run the numbers and estimated you need $68,000 in annual dividend passive income to retire. You can divide $68,000 by an estimated dividend yield to calculate a targeted portfolio size. So, if you're earning 2% in dividend yields, you'd divide $68,000 by 2%. The answer, $3.4 million, is the size of the portfolio needed to produce your income target.

The next step involves using a compound interest calculator like this one to make an investment plan. You'll input your goal, how much you've saved already, an expected interest rate and your investment timeline. The calculator returns a monthly investment amount needed to reach your goal.

For the expected interest rate, you can use 7%, which is roughly the long-term return of the S&P 500, net of inflation. This assumes you'll reinvest your dividends continually until you reach the investment goal.

Note that the above calculations assume you'll live entirely off dividends, with no liquidations. That's usually not necessary unless you're committed to leaving the entire balance—$3.4 million in this case—to your loved ones. If analysis proves the target portfolio value to be unrealistic, see the section below on the 4% rule. You can likely live a comfortable retirement with a much smaller portfolio.

Calculated Retirement Needs Examples

Here's another look at the calculations in a table format.

Source: Author estimates and calculations.

This table shows what it might look like if you built your living expenses estimate from zero.

Table data sources:, author calculations.

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Strategies To Retire And Live Off Your Dividends

As the numbers show, you need a sizable portfolio to cover your retirement living expenses entirely with dividends. Fortunately, you have options beyond these two scenarios. Let's talk about the specific steps you'll take to generate sufficient retirement income from a dividend portfolio.

Build A Dividend Portfolio

The assets you select for your dividend portfolio will define your expected dividend yield. The scenarios above use 2%, but you could go higher or lower with this number. For context, the average dividend yield of the S&P 500 is 1.35% currently and 1.84% long-term.

Planning for a yield above 2% would reduce your targeted portfolio value but also increase your risk. You could mitigate some risk by opting for an unleveraged high-yield exchange-traded fund. Vanguard has several choices, including the Vanguard High Dividend Yield ETF VYM . VYM yields 2.8%. REIT ETFs and leveraged or covered call ETFs will have even higher yields, along with more risk and potentially lower appreciation potential.

You could engineer a slightly higher yield by combining predictable funds or stocks with smaller positions in higher-yielding assets. You could also opt to invest aggressively in yields now, with the goal of moving into more reliable income-producing assets as you get older.

Reinvest Your Dividends

No matter how you structure the portfolio, you must reinvest the dividends consistently until you retire. Each reinvested dividend buys you more income-producing shares without any out-of-pocket costs. Let that process work for you and watch your income potential grow well beyond the amounts you can contribute each month.

Monitor Your Portfolio

Companies do cancel, reduce or pause their dividends. Worse, those decisions are usually followed by stock price declines.

Monitoring your portfolio can help you catch those problems early before they derail your investment plan. If you are investing in individual stocks, check in on your portfolio at least monthly. That way, you can adjust to any surprises before too much damage is done. Mutual funds and ETFs require less oversight because the impact of any one canceled dividend will be muted within the overall portfolio.

Consider the 4% Rule

The 4% rule defines a safe withdrawal rate for retirees who need their savings to last for 30 or 40 years. The rule comes from in-depth analysis in the mid-1990s by financial advisor Bill Bengen. Bengen's study suggests that a 4% annual withdrawal rate, adjusted annually for inflation, should sustain your retirement funds for 30 years or more.

This is an important point, because it means you don't have to fund your living expenses entirely with dividends. You can periodically sell some of your investments to supplement the dividend income. As long as you keep the withdrawal rate at or below 4%, your money should last for decades.

To apply the 4% rule, divide your income requirement by 4% to calculate your targeted portfolio size. If $75,000 is your income requirement, for example, you can safely get it from a $1.87 million portfolio.

Bottom Line

To create an income machine that will support your dream retirement, start building your dividend portfolio now. Your future self will appreciate the opportunity to live the good life with nothing to do but count the dollars rolling in.


Can You Retire On Dividends?

You can retire on dividends. To do so, you generally need to start investing in dividend-paying assets early and reinvest the dividends until you retire.

Can You Live Off Monthly Dividends?

You can live off monthly dividends if you are savvy about budgeting.

Are Dividends Tax-Free In Retirement?

Dividends earned within a taxable brokerage account are taxable annually, whether or not you are retired. You can reduce taxes while you're working by building your dividend portfolio within a tax-advantaged retirement account. The dividends themselves won't be taxable, but you will pay taxes on withdrawals from traditional IRA and 401(k) accounts. Roth account withdrawals are not taxable.

Can You Invest In Dividend Stocks Through A Retirement Account?

You can invest in dividend stocks through a retirement account. An IRA or Roth IRA will have the most options. In a 401(k), you likely must select a mutual fund that holds dividend stocks, unless your account offers a brokerage window.

Read Next

  • 7 Best Gold Stocks To Buy Now
  • Is A Mega Backdoor Roth Right For You? How To Figure That Out
  • How Loud Budgeting Can Boost Your Investing Success

The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download Forbes' most popular report, 12 Stocks To Buy Now.

How To Retire On Dividends And How Much You Need (2024)


How To Retire On Dividends And How Much You Need? ›

Consider the 4% Rule

How do you calculate how much you need to live off dividends? ›

How Much Money You Need to Retire on Dividends. As a rough rule of thumb, you can multiply the annual dividend income you wish to generate by 22 and by 28 to establish a reasonable range for how much you need to invest to live off dividends.

How much is enough to live off dividends? ›

For example, say I need to earn $50,000 a year to live comfortably and my average dividend yield is 5%. So, I would need to own $50,000 / 0.05 = $1 million worth of shares to meet my income needs. (Note that this is a bit oversimplified -- there are also taxes to consider.)

How much money do you need to make $50,000 a year off dividends? ›

This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.

Can you live off dividends of $1 million dollars? ›

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

Can you retire and live off dividends? ›

The short answer is yes – it's entirely possible to live off dividends in retirement. In fact, more and more people are doing it every day. The key is to start early, invest wisely, and reinvest your dividends so your portfolio can continue to grow.

How much do I need to invest to make $1 000 a month in dividends? ›

The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets.

Is living off dividends realistic? ›

Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.

How do millionaires live off interest? ›

Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.

How much money do I need to invest to make $3000 a month in dividends? ›

If you were to invest in a company offering a 4% annual dividend yield, you would need to invest about $900,000 to generate a monthly income of $3000. While this might seem like a hefty sum, remember that this investment isn't just generating income—it's also likely to appreciate over time.

How much do I need to invest to make $500 a month in dividends? ›

With a 10% yield and monthly payout schedule, you can get to $500 a month with only $60,000 invested. That is, $6,000 per year paid on a monthly basis. Unfortunately, most stocks don't have yields anywhere near 10%. Many do have high enough yields to get you to $500 a month with diligent savings, but don't pay monthly.

How much to invest to get 200 a month in dividends? ›

The first high-octane income stock capable of generating $200 in monthly income from a beginning investment of $27,000 that's split in thirds is retail real estate investment trust (REIT) Realty Income (O -0.02%).

How much do I need to make 4000 a month in dividends? ›

But the truth is you can get a 9.5% yield today--and even more. But even at 9.5%, we're talking about a middle-class income of $4,000 per month on an investment of just a touch over $500K. Below, I'll reveal how to start building a portfolio that could get you an even bigger income stream than this today.

How much money do most people retire with? ›

The average retirement savings for all families is $333,940, according to the 2022 Survey of Consumer Finances. The median retirement savings for all families is $87,000.

How many people have $1,000,000 in retirement savings? ›

Putting that much aside could make it easier to live your preferred lifestyle when you retire, without having to worry about running short of money. However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.

What is the best retirement income? ›

These seven low-risk but potentially high-return investment options can get the job done:
  • Money market funds.
  • Dividend stocks.
  • Bank certificates of deposit.
  • Annuities.
  • Bond funds.
  • High-yield savings accounts.
  • 60/40 mix of stocks and bonds.
May 13, 2024

How many dividends does 1 million dollars make? ›

Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.

What is the 4% dividend rule? ›

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

How much do I need to invest to make $5 000 a month in dividends? ›

To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.

How much dividends will I get from 100K? ›

How Much Can You Make in Dividends with $100K?
Portfolio Dividend YieldDividend Payments With $100K
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May 1, 2024

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