At 60 and Ready for Retirement with $1.2M: Why Living Off Dividends Might Be Safer Than Selling Assets

If at age 60, you've managed to save $1.2 million for retirement, this amount is over twice what many of your contemporaries typically have set aside. according to Statistics Canada .

But even though that’s a lot of money, it’s important to manage your sizeable nest egg carefully. You could try to live off of dividend income from your portfolio, or draw down your total portfolio over time.

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Living off of portfolio income alone

A 2024 CPP Investments survey discovered that 61% of Canadians are more concerned about exhausting their funds during their retirement years.

One of the benefits of relying on portfolio income during retirement is that you do not deplete your capital, which means it could potentially remain stable or increase instead of decreasing.

But it takes a lot of principal to generate sufficient income to live on, especially when dividend yields are as low as they are today.

The average S&P 500 dividend yield is currently just 1.27%. Even if you assemble a portfolio of individual stocks with higher dividend yields, you may only be looking at 5%.

For a portfolio valued at $1.2 million, that equates to an annual income of $60,000, which might or might not suffice to sustain your current standard of living.

Of course, it’s not a good idea to keep your entire portfolio in stocks A more secure approach would be to divide your investments between stocks and bonds, potentially yielding just below a 5% return. This can work, but whether this level of income meets your financial requirements will depend on your specific needs.

Remember that you'll also receive the CPP benefit. On average, retired workers gathering roughly $808 each month Or if you postpone receiving it, you might see up to $17,200 in annual benefits, which can amount to as much as $1,433.00 more.

By merging these government pension benefits with the returns from your investment portfolio, you will have an annual retirement income totaling slightly above $77,000 per year.

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However, there’s an important exception: Although relying on your portfolio income lets you safeguard your initial investment to some extent, neither the expansion of that portfolio nor the income it generates can be assured.

Market fluctuations imply that the value of your shares might drop, diminishing your initial investment. Unlike with bonds—where interest payments and repayment of principal are assured provided you keep them until they mature—the payouts from stock dividends come without such guarantees.

Another drawback of relying solely on income is potentially losing your ability to purchase goods and services as inflation erodes your buying power over time, causing expenses to rise. If the consistent annual income from your investment portfolio remains at $60,000 yearly, it might suffice initially during retirement; however, it could become insufficient after 10 or 20 years.

The “total return” approach

An alternative strategy involves living off both the income and the principal from your investment portfolio—the "total return" method—gradually reducing your capital while benefiting from dividends.

This method offers greater flexibility. You have the option to offload major assets and capitalize on market increases. As your investment portfolio expands, adopting a total return strategy provides increased potential for yearly earnings, simplifying the process of staying ahead of inflation.

Let's consider an example: Suppose you start with $1.2 million and opt for the 4% rule, withdrawing 4% of your initial amount each year to make sure your funds will cover three decades. During your inaugural year in retirement, you would get $48,000 as yearly income. Should inflation climb by 2% the following year, you'd take out $48,000 along with an additional 2%, which amounts to $960, bringing your total withdrawal up to $48,960.

As your investment portfolio increases in value, you have the option to continually adjust your withdrawal amounts for inflation, which makes it simpler to stay ahead of rising costs associated with daily expenses.

The 4% rule is just a guideline. There are other factors to consider as you determine your withdrawal rate: market conditions, your investment mix, and your life expectancy.

For example, Morningstar found that A 3.3% withdrawal rate proved ideal for retirement savings in 2021; it increased to 3.8% in 2022; and stood at 3.7% in 2024.

This indicates that although the "total return" strategy provides greater adaptability, it necessitates a continuous adjustment to both market circumstances and your individual requirements. It would be wise to seek assistance from a financial advisor capable of helping you modify your withdrawal amounts when necessary.

In this approach, too, if your portfolio loses value, you may have to withdraw less temporarily until the market settles. It’s wise to have one to two years’ worth of living expenses in the bank so you can leave your portfolio alone for a period of time if need be.

It’s also important to have income-producing assets in your portfolio that help it gain value from year to year. Dividend and interest income could help offset market losses.

So all told, no matter which approach you take, the right investment mix is crucial.

Sources

1. Statistics Canada: Assets and debts held by economic family type, by age group, Canada, provinces and selected census metropolitan areas, Survey of Financial Security (Oct 29, 2024)

2. Y Charts: S&P 500 Dividend Yield

3. Government of Canada: CPP retirement pension: The amount you might get

This article At age 60, I'm preparing for retirement with $1.2 million set aside. My strategy involves living off of dividends rather than selling my investments. However, I wonder if this method poses greater risk compared to adopting a 'total return' approach. originally appeared on Money.ca

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At 60 and Ready for Retirement with $1.2M: Why Living Off Dividends Might Be Safer Than Selling Assets

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