How to Retire Early and Live Off Dividends
February 4, 2020
How to Retire Early & Live Off Dividends, Step-By-Step
Imagine what it would be like to retire early and live off dividends.
You start your day each morning by practicing Italian for your upcoming trip to Venice. Then you head out for a run in the mountains as you train for your first half-marathon.
Every weekday, a new dividend check arrives in your mailbox: $250.00 from AT&T Inc. (NYSE:T), $100.00 from Johnson & Johnson (NYSE:JNJ), $500.00 from Coca-Cola Co (NYSE:KO), etc.
You decide to use today’s check, a $150.00 distribution from Exxon Mobil Corporation (NYSE:XOM), to pay for a steak dinner this evening at one of the nicest spots in town.
The best part, however, is what you don’t have to do. You no longer have to deal with bosses or co-workers. You no longer have to start your day by waking up early to an alarm clock, ironing a dress shirt, and scarfing down a quick breakfast. Your neighbors, who still have to battle traffic each morning on the highway, turn green with envy when you talk about sleeping in each morning.
Listen: retiring early to live off dividends doesn’t have to be a daydream. In fact, thousands of people have accomplished this goal already. And most of them didn’t inherit their wealth from rich parents or win the lottery, either.
Take Derek Foster, for instance. In his twenties, Foster committed to saving $200.00 each month and investing it in dividend stocks. Today, he collects between $40,000 and $45,000 a year in dividends. That passive income stream allowed Foster to pay off his house and retire at 34.
And he’s not the only one. Personal finance blogger Jason Fieber retired in his early thirties and now lives off his dividend income. Fieber recently moved to Thailand and spends most of his time traveling through Southeast Asia.
Mike Heroux provides another great example. In 2017, he retired from corporate America at age 35. Heroux now spends most of his time writing and surfing. At the moment, he blogs about traveling through Vietnam with his family.
Sounds impressive, right? The thing is, almost anyone can pull off the same feat with some hard work and a smart strategy. In fact, I’ve met dozens of people who have retired early by living off their dividend income.
Here’s how.
1. Define what retirement means to you
Your first step is to imagine what your early retirement will look like. What kind of lifestyle will you have? What places will you travel to? What restaurants will you eat at? What kind of hobbies will you have?
Keep in mind that your health and priorities might change over time. But the better you can define your vision, the more likely you are to achieve your goal. You’ll also want to estimate the annual income needed to fund this lifestyle.
2. Figure out how much you’ll need to save
Second, estimate how much money you’ll need saved up in order to retire. The rule of thumb is this: take your estimated annual expenses, subtract any government or employer benefits, and multiply this figure by 25.
For example, say you need $35,000 a year to maintain your lifestyle. That means you’ll have to save somewhere in the ballpark of $875,000.
3. Take inventory of your finances
Next, list out all of your sources of income. Then list your fixed monthly bills (mortgage, utilities, insurance, etc.) and your variable expenses (entertainment, dining out, vacations, etc.).
If you want to retire early, you’ll need to keep a tight lid on your spending. That means cutting unnecessary expenditures from your budget.
The daily latte? That might need to go. Weekends at the movies? Netflix could be cheaper. The BMW lease? A Volkswagen should do the job.
Of course, you need to have some fun in your life. But each dollar you trim from your budget means more money added to your nest egg and less time working.
4. Invest in income-producing assets
Dividend stocks represent the best option for early retirees for two reasons.
One, they have historically provided the best investment returns of any asset class. The faster your nest egg grows, the faster you can quit working.
Two, dividend stocks pay higher yields than checking accounts and fixed-income investments. That income stream, of course, will eventually be needed to fund your retirement.
And three, most companies boost their payouts at or above the rate of inflation. This provides built-in protection from the rising cost of living over time.
Savers can attempt the same thing in other assets like rental properties. I avoid real estate, however, because of the hassle of dealing with tenants, and because of my preference for diversifying across different industries. But if you have experience in different industries, these asset classes could be better options.
5. Focus on growth, not yield
Many income investors buy the highest-yielding securities they can find. Big mistake! High yields are often reflections of troubled businesses with unsustainable payouts. And that can result in painful, unexpected losses.
It’s far better, therefore, to focus on small, fast-growing dividends that compound into impressive income streams over time. As I like to say, even a dividend trickle can become a raging river of cash flow, given enough time.
You can see this with the stocks on our Passive Monthly Income scorecard. Many of these companies yielded only two or three percent when we first featured them. But over time, these businesses continuously, but diligently, boosted their payouts to shareholders. Today, long-time investors can collect double-digit yields on the cost of their original investment.
6. Exploit “geographic arbitrage”
Location is a common theme among early retirees. Few choose to live in high-cost centers like London, New York, or San Francisco. Instead, most of them choose to settle down in small towns or rural areas.
“Geographic arbitrage” puts your savings goal on steroids. Many early retirees earn their income in strong currencies while living in places with a low cost of living. For instance, you might work remotely for U.S. clients and get a New York salary while living in Central America.
This strategy has turbo-charged my own wealth accumulation. Since leaving Wall Street, I have written for financial publications in Virginia, Toronto, and New York. But rather than living in those high-cost centers, I work remotely from more affordable locations.
In Spain, for instance, I rented a luxury apartment along the Mediterranean Sea for $600.00 a month. Today, I write from a small, very affordable city on the east coast of Canada. The difference between my “big city” salary and my “small-town” costs translates into a large nest egg.
Bottom Line on Retiring Early
I don’t think most people can—or should even aim to—retire early. The level of sacrifice required to leave the workforce so quickly goes beyond what most people can reasonably accomplish.
Still, it’s interesting to study the strategies of the people who have successfully pulled it off. And that can provide useful insights to those of us who may take a few more years to reach retirement.
