For many retirees, there is a pretty big question about how to handle living off a finite amount of money. Whether it’s because they weren’t able to save or had to use savings for something prior to retirement, this is a very real scenario for many people retiring soon.
In the case of one Redditor, they are trying to understand if it’s possible for their father to live off dividends from the $250,000 they have in retirement savings. Posting in r/dividends, there is a question about how much the dad could earn off just this money alone.
Living Off a Finite Amount of Money
According to this Redditor, their father has approximately $250,000 in retirement savings at 65 years of age. On the plus side, the dad is mostly debt-free and has both his and his widow’s Social Security/401(k) to collect, as well as being an overall frugal individual. On the downside, the $250,000 is about all that is available to live on during retirement, minus a potential inheritance from a family member that may or may not materialize someday.
While the dad is financially savvy for day-to-day living, they are wondering whether or not dumping all of this money into dividend-earning accounts is a great way to “live” during retirement. Given the recent surge in popularity of dividend investing, particularly with YieldMaxETFs, it’s no surprise that this individual is considering this path to earn some money without touching the principal every month.
The challenge is that we want to be conservative with the money, as earning dividends while the $250,000 balance decreases would reduce the future impact of those returns.
One immediate piece of advice I would give this Redditor is to try to look at qualified dividends, which do not get taxed until the income starts to exceed $47,500 annually in income as a single individual. Anything over this number, which the dad could easily exceed with Social Security, is something to definitely consider.
What About SGOV?
Before diving into the dividend deep end, it might be worth recommending to the dad to invest in a U.S. Treasury fund like SGOV. Currently, the YTD return is at 3.08% while the one-year return is at 4.46%, and it’s a far safer investment than dividends, as the share price of around $100 doesn’t fluctuate all that much. The downside is that as interest rates start to come down, which the FED has already indicated could happen 2x more times this year, it will affect the SGOV interest payout.
Knowing that the dad only requires around $800 per month in expenses and that his $600,000 home is just about paid off, there is also the question of potentially downsizing and using whatever equity there is to increase the buying power of dividends. It’s for this reason that something like SGOV is a pretty good idea, as it’s low-risk and doesn’t take anything else off the table.
Can You Live Off Dividends?
Here’s the thing: if the dad only needs roughly $800-$1,000 per month to live, has Social Security coming, and a potential inheritance, the dad can absolutely live off dividends. The goal would be to generate just enough income to cover all expenses while leaving a little for entertainment and living.
For the moment, the Redditor could tell their father and I would agree with this move, to go into things like QQQI or SPYI, with the latter paying around $29,650 annually with a $250,000 investment. These are riskier investments than the Redditor’s father might feel comfortable with, but there is no question that they would generate more than double what is needed right now.
Let’s assume for a moment that the father, who didn’t earn a significant living, is earning around $2,000 per month off of Social Security. Add to this a safe investment like SGOV that generates around $10,000 to $12,000 per year in dividends, and you have a solid plan moving forward.
You’ll need to monitor interest rates, but the likelihood of a dramatic shift in rates anytime soon is low. This should hold for a while until the situation stabilizes and the dad has a clear understanding of his monthly expenses.
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