Why living off dividends no longer appeals to me

Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

When I envisioned my retirement years, I dreamed of being so unbelievably wealthy – so fabulously rich – that I’d happily live off the income generated from my multi-million dollar investment portfolio. As I began my investing journey, the idea of living off the dividends had tremendous appeal. After all, what retiree wouldn’t love the thought of collecting a steady stream of dividend cheques while their principal investment remains intact?

There were also some crazy assumptions about what it would take to generate the kind of income I’d need to maintain my lifestyle in retirement. Looking back, it was foolish to assume that a $1,200,000 portfolio can produce up to $90,000 in income each year, when less than half that amount is more realistic (assuming a 3.5% yield).

Related: Financial independence – Why I pushed it back five years

The trouble with a “live off the dividends” approach is that I’d have to save too much in order to create my desired retirement income. For example, I’d need to save between $2.5 million and $3 million in order to generate $90,000 per year in dividend income. Alternatively, I could get the same $90,000 per year simply by withdrawing from a portfolio of $1.45 million (assuming 5% annual growth and the portfolio lasts 30 years).

At my current savings rate I could hope to reach $1.45 million by the time I turn 57. To get to $3 million I’d have to work and save for another decade, or else increase my savings rate by a factor of 2.25 for the next 22 years. Not ideal scenarios.

That’s why I’ve adopted more of a total-return approach to my investments now that I’ve shifted gears from dividend investing to my two-ETF solution. Rising dividend income is meaningless when I’m in my mid-30s and looking for growth from my investments.

(Read this excellent piece in MoneySense on how to generate retirement income by selling ETFs)

Sure, there are many retirees in Canada who live off the income produced by their investment portfolios and do just fine with that approach. Add in the dividend tax credit and there’s further incentive to create a dividend income stream in retirement.

But living off the dividends no longer fits into my retirement plan. Unless the goal is to leave behind a million-dollar estate to your kids, there’s no need to save so much that you’ll never have to touch the capital.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site  on April 19th and is republished here with his permission. Note too the 38 reader comments. A related piece is Marie Engen’s blog shortly after the above one: What’s the Right Amount of Retirement Income?

2 thoughts on “Why living off dividends no longer appeals to me

  1. Good article Robb and similar to where I find myself today with $900K in cash after selling out of my TD Strategic Managed Portfolio and waiting to dive into a ETF DIY portfolio with TD DI. I’m almost 56 and not confident of future returns with a 50/50 balanced portfolio. I will have to spend less or work more… or both.

  2. Robb, you continue to generate great articles that make me think. I’m in love with my dividend portfolio but willI reduce it down over time as need be. I’m not concerned with leaving the kids a large inheritance as I’m helping them now while they are in school and after they graduate it’s all up to them.

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