In a recent Charles Schwab survey of its investors, most respondents believed that $1.8 million in capital would provide a comfortable retirement.
It got me thinking. Do you know how much you need to live the lifestyle you want to live in retirement? Because that number sounds far from adequate.
Our industry loves to tout the 4% rule of thumb, which suggests you can safely withdraw 4% of your retirement nest egg each year without running out of money. That’s how we get our number: 4% of $1.8 million = $72,000 annually.
With a potential 30-year retirement ahead and inflation running at an estimated 3%, this amount might not be enough to maintain your desired lifestyle if your dream retirement involves more than just Netflix and chill—think world travel with the grandchildren, fine dining, and those bucket list golf retreats. As I tell my clients, you might need to aim slightly higher.
But don’t worry—there are a few ways to make it work:
- Save More: Increase your nest egg to $3 million, $5 million, etc.
- Increase Your Withdrawal Rate: Accept the risk of running out of money during retirement.
- Find Ways to Get a Larger Distribution from Your Current Nest Egg: Let’s focus on this option.
Getting a Higher Distribution Rate on Your Money
What if you could get 10% or 12% distributions? Then, $1.8 million, as suggested by the survey, is enough. Here’s how to approach it:
- Yield on Cost or Cash on Cash Returns
Most investors focus on the total return on their investment, which reflects the account’s value—whether it has gone up or down. However, for a portion of your investment dollars, consider the income it might produce. It may sound unconventional, but what if you invested in stocks, real estate, or a private company and only lived off the dividend or distribution? We call these forever investments.
- Dividend Stocks
Dividend stocks are typically categorized into two broad types:
- Stocks with a High Starting Dividend: These stocks don’t increase their dividend.
- Stocks with a Lower Dividend: These stocks increase their dividend frequently.
Your situation determines which you should buy. If you’re in your 40s or 50s and have time before retirement, go for a dividend grower. You need a higher payer if you’re already in retirement or nearing it.
Why aren’t more people doing this? Because it’s boring! No one goes to a party and says, “Woo hoo, I just bought some more J&J stock!” They want to talk about the hot item of the day—currently, it’s Artificial Intelligence (“AI”). In the late 1990s, it was internet stocks, gambling stocks, or cannabis-related stocks.
But when it’s your hard-earned money, boring can be beautiful. Think of these as your golden geese—stocks or investments that keep laying those dividend eggs for you to live off indefinitely. Who needs drama when boring is so darn lucrative?
- Other Ways to Get a Higher Distribution/Income Stream
Consider private financing. Numerous private lending situations are available, from financing spec homes to providing mortgages to people who can’t get bank financing or to private companies.
National home builders hire companies to develop raw land into buildable lots; those developers need to borrow money.
Real estate “flippers” need a source to finance their improvements.
Small business owners don’t have W-2 income and have difficulty borrowing from banks, so they need someone to provide a mortgage.
And small businesses often need short-term loans to finance their inventory.
These are all opportunities I’ve participated in. Initially, they were out of my comfort zone, but once you get to know the people and the business, they present great investment options.
Got your number in mind? Let’s build that.