Retirement – How To Know When You Can Retire With Dividend Investing by Eli Inkrot, Sure Dividend

When I consider the topic of retirement the first thing that comes to mind is John Maynard Keynes 1930 essay titled “Economic Possibilities For Our Grandchildren.”

Back in 1930 people were not thinking about long walks on the beach in your 80’s or a few decades of leisurely golf and jazzercise.

Retirement is a new concept – at least if you grant that the last half century or so still counts as “new.”

Here, I’ll show you what I mean:

Dividend Investing Retirement

Source: Work In Retirement, Merrill Lynch

I can’t vouch for the early 1900’s, but the more recent period details the current situation well in my view.

People are living longer than ever before.   The average life expectancy is now up to 80 and beyond.  The assumed “normal” retirement age is around 65, the actual number is closer to 62.

You ought to be thinking about 20 years of retirement – or even more if you achieve early retirement.

What strikes me about the John Maynard Keynes essay is that he foresaw this coming. Keynes knew that small economic improvements would lead to substantial results over the long-term.

He indicated that a larger issue in the future would not be solving the “economic problem” but instead trying to figure out what to do with an abundance of time.  So here we are today.

Keynes also indicated that the average work week, one hundred years hence, could only be 15 hours. And even then, this would only be to give workers small tasks and routines to stay active.

As a result of this statement, the late Keynes now takes a good deal of indefensible flak. Today’s blog writer will dig up a stat that suggests the average work week is 35 or 40 hours and point out how far off Keynes judgment has been, scoffing at the notion.

Yet here’s where things get really interesting in my view. Keynes did not call the essay “Economic Guarantees For Our Grandchild.” Instead, he simply indicated that they were “possibilities.”

This concept is perhaps more important than you first realize.

Keynes pointed out that humans had “needs” which fell into two classes.

The first is what he called “absolute” which I would describe as “basic” or “fundamental.” Think shelter and food, the things that you must have to continue living. These needs can surely be satisfied.

The second class of “need” that Keynes described is the desire to be better than others. To feel more accomplished, have more possessions or otherwise feel superior. Contrary to basic needs, this desire may never be satisfied. As the general population gains more, so too will this “need.”

In today’s parlance, I’d call it the “keeping up with the Joneses” desire. Only more than keeping it up, it’s an aspiration to keep up and then zoom past them in your new Ferrari.

Retirement - How To Know When You Can Retire With Dividend Investing

It reminds me of a classic Benjamin Franklin quote:

“It is the eye of other people that ruin us. If I were blind, I would want neither fine clothes, fine houses or fine furniture.”

Which, incidentally, brings us to the most important part of figuring out retirement…

Expenses

I’m actually more of a fan of the phrase “financial independence” – having the ability to spend your time as you choose.

I think the term “retirement” conjures up the image of a golden watch or some golf commercial you happen to see on a Sunday afternoon.

Some never actually “retire” and instead simply focus on doing what they enjoy – whether that happens to produce money or not. I think that aspect should be celebrated and not diminished.

The most important part of figuring out retirement or financial independence or even a gap year (or ten), is going to be your expenses. That’s the baseline, that’s where you start.

The unfortunate part is that I cannot easily detail what your expenses happen to be (or what they should be).

It’s unfortunate in that it makes this article a bit one-sided (not in that I want to control your expenditures). It’s a personalized decision. Highly personalized in fact.

To this point I’d simply like to indicate one thing. Spending ought to reflect your personal desires and passions.

If you’re spending money just to impress your neighbor, that’s often a quick path toward being both unhappy and broke.

If you enjoy expensive cars, and learning about them and using them and working on them, then that’s a fine passion and you can plan for that accordingly. But if you’re only buying a new car because your neighbor just got the newest series, you’re flirting with an insatiable desire to “keep up.”

Given a limited amount of dollars, you don’t want to be throwing away a good chuck on them on stuff you don’t care about. That forcibly detracts from the stuff you do care about. And this applies to all expenditures. Thinking about whether or not something is actually important to you can better define your expenses and goals.

Whether you spend $20,000 a year or $80,000 will have a large influence on your ultimate success. I’m not suggesting that you spend as little as possible. Instead, I’m simply indicating that you ought to think about spending in a way that works toward your ambitions and cut out the stuff that doesn’t really move the needle.

Thinking About The Portfolio

With that, I’d like to think about the other side of retirement: income; in this case specifically with dividend paying securities.

A lot of people like to quote the Trinity Study indicating something along these lines:

“A safe withdraw rate for a retirement portfolio is 4%.”

That’s a highly simplified conclusion from the study, but I’ll give you an example of what that would mean.

Let’s imagine that your annual expenses are $25,000 per year.

Based on a 4% withdraw rate, that equates to needing a portfolio balance of $625,000 to begin (you can think about it as 25 times your expenses as well).

The concept of the 4% withdraw rate is that you should be able to withdraw this amount each year and live off of that portfolio indefinitely. It works because the portfolio is comprised of profitable businesses generating earnings year-after-year. So the profits (and dividends) are likely to be growing even as you’re subtracting from the balance.

Incidentally, I have previously done some work on this concept and came to the conclusion that this idea is a fine baseline, but there are a lot of different withdraw rates that could work out there. That is, I’d consider this as more of a guideline instead of a steadfast rule.

You can also think about the time to retirement in terms of your savings rate. It works on a similar concept as the withdraw rate mentioned above, but puts it in different terms. Here’s a link from Mr. Money Mustache on “The Shockingly Simple Math Behind Early Retirement” that could be helpful.

While both are reasonable guidelines, I personally prefer the idea of the “crossover point” as presented in the

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