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Dividends4Life (30.26)

What Will Your Dividend Income Be When You Retire?



January 25, 2011 – Comments (2) | RELATED TICKERS: ABT , CL , T

We all want a secure retirement where we don’t have to worry about making ends meet. After spending 30 or more years in the workforce, its time to kick back and enjoy our golden years. Unfortunately, many people don’t plan for retirement and just assume that their company pension, 401(k) or Social Security will take care of them. That’s a dangerous assumption and a recipe for disaster.

Here are some eye-opening statistics from

The latest census figures indicate that only one in every ten Americans today is financially prepared to retire when they reach age 65. Here are a few other facts on retirement gathered from a variety of sources.

* Forty-seven percent of U.S. households are not covered by either a defined benefit or defined contribution plan (The WEFA Group). Twenty-five percent of employees who qualify for 401(k) plans do not contribute to them (an estimate from Buck Consultants).

* At the end of WWII, there were 42 workers paying into Social Security for each person receiving benefits. Today, barely three people contribute for each recipient. Projections are that by 2030, when most baby boomers will have retired, just two working people will contribute for each person receiving benefits (Social Security Administration, Trust Funds Report, 1992).

* Social Security benefits will replace only 16% of the income of married couples earning $50,000 to $100,000 and only 9.5% of the income of married couples earning $100,000 and only 9.5% of the income of married couples earning $100,000-plus (Office of Research and Economic Analysis, Pension and Welfare Administration).

* Sixty-nine percent of American adults aged 25 to 44 expect to retire in the “traditional” sense of spending retirement in leisure. But reality hits home as they near retirement-63% of 45- to 54-year-olds expect a retirement of leisure, and only 49% of those 55 or older say the same (Aetna Life Insurance and Annuity Co.).

* Working people tend to think their retirement lifestyle will be better than their current lifestyle, but retirees report their standard of living has declined. Example: Twenty-six percent of workers say they are “just making ends meet,” but only 16% think they will live this way in retirement. Of retirees, 20% are “just making ends meet,” while 16% describe their pre-retirement lifestyle this way (Employee Benefit Research Institute).

* A Baby Boom Retirement Savings Index, published each year by Merrill Lynch, shows that as of November ’94, baby boomers were saving only 38.2% of what they will need to maintain growth-adjusted living standards in retirement. The index is basically unchanged in the three years the index has been published (Merrill Lynch Strategic Planning).

It doesn’t have be this way. A little knowledge and planning will get you on the road to financial security. Often the first question is ‘what will I make in retirement if I start saving today?’ This can be difficult to answer given all the uncertainties in the future. However, I have made it easy for you by setting up a Google Documents Retirement Calculator Spreadsheet that can be used to model your projected retirement income from dividend stocks. Please do NOT edit the spreadsheet, only enter values in the yellow cells and leave the calculator usable for the next person. For those with access to Excel or Open Office, you can download the spreadsheet here.

The spreadsheet is really easy to use. It has three relevant tabs: 1.) Input, 2.) Results and 3.) Details. Let’s work through a simple example. On the input tab enter:

Current Age: 20
Retirement Age: 65

Income Stocks Current Value: 5000
Income Stocks Cost Basis: 4000 (What you paid for the stocks)
Income Stocks Annual Dividend Income: 225
Annual Contribution: 1200 (or $100 per month)

Dividend Growth Rate: 6%
Contribution Growth Rate: 4% (e.g. your annual raise from your employer)
Inflation Rate: 3% (important, but often overlooked)

Enter this in then go to the Results Tab. Here you will see what things will look like at retirement if all your assumptions are correct. In this case:

In 45 years when you retire at age 65:

- Your portfolio’s market value will be: $2,334,233
- Your portfolio’s cost basis will be: $1,061,365

- Your portfolio’s current yield will be: 4.50%
- Your portfolio’s yield-on-cost will be: 9.90%

- Your portfolio’s annual income will be: $105,040
- The above income In today’s dollars will be: $27,777

The 4.5% yield may seem high, but it is an average yield. Consider the following basket of stocks that would give you about a 4.5% yield and 6% dividend growth rate:

Company | Current Yield | Growth Rate

Abbott Labs (ABT)| 3.67%| 8.27%

Colgate (CL)| 2.59%| 12.48%

CenturyLink, Inc. (CTL)| 6.55%| 3.57%

Harleysville Grp (HGIC)| 3.65% | 8.00%

J&J (JNJ) | 3.37% | 8.42%

Leggett & Platt (LEG) | 4.62% | 2.96%

Procter & Gamble (PG) | 2.94% | 6.96%

AT&T, Inc. (T) | 5.91% | 2.44%

Universal Health (UHT) | 6.61% | 1.47%

Average | 4.44% | 6.06%

A $2 million dollar portfolio paying me $105 thousand a year sounds pretty good, but look at the last line. Could you live on $27,777 today? With 3% annual inflation that $105 thousand in 45 years has the same purchasing power as $27 thousand dollars today. Ouch!

It sounds bad but the reality is that if you know this is coming you can plan for it. After the kids are out of college and your house is paid for you will have a lot more disposable income to put toward retirement. The problem is that many people don’t realize they have a problem and that disposable income goes toward European trips, vacation homes, bass boats, et. al. Also, there will likely be other retirement income sources, such as a pension, 401(k), social security, etc.

Remember, everyone has a retirement plan – some have a thoughtful roadmap that they are following, while the others, by default, are planning to fail. Which group are you in?

Full Disclosure: Long ABT, CL, CTL, HGIC, JNJ, LEG, PG, T, UHT. See a list of all my income holdings here.

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2 Comments – Post Your Own

#1) On January 25, 2011 at 11:07 PM, Option1307 (30.51) wrote:

Those stats are so depressing, people should really pay more attention to what the future hold for them.

Nice write up, +1.

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#2) On January 26, 2011 at 1:29 PM, lemoneater (56.76) wrote:

Very informative topic. I don't expect that Social Security will be around for me. I do wonder if the government in the U.S will try to introduce the VAT to spread societal costs around as most of Europe does. A 20% sales tax seem steep, but that is what Britain has to care for its population.

I wanted to use the calculator but couldn't. I'm 36 and have 20,000 current value portifolio, cost basis was 16,500. Dividend income is $500 yearly (some of my stocks don't pay dividends). I add from $1000 to $2000 yearly contribution so say $1500. (This belongs to my husband and me both.)

I'll assume 6% dividend growth rate.

I usually just get a cost of living raise so that is closer to 2%.

I'll assume 3% inflation rate (although recently it has felt higher).

What are my numbers?

The hidden part of the equation is my husband's contributions. Without him there probably wouldn't be any portifolio and hardly any savings. Also we both have IRA's with our jobs.



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