My previous article on retiring with a $1,000,000 portfolio left plenty of investors thinking that they might never be able to retire. The intent was to simply ask about the magic number, but somewhere along the line the message got somewhat confusing.
I believe that anyone can retire if they decide that they want to, and follow just a few basic steps. The "Team Alpha" portfolio was designed for investors who seek a combination of dividend income winning stocks, dividend income opportunity stocks, and potential future dividend winning stocks.
Our Team Alpha portfolio now consists of McDonald's (MCD), Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), CSX Corp. (CSX), Realty Income (O), Coca-Cola (KO), Linn Co, LLC (LNCO), Wal-Mart (WMT), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), General Dynamics (GD), and iShares S&P U.S. Preferred Stock Index Fund (PFF).
Dividend income investing could be the path for just about any investor to take for future financial security. While not risk free by any means, it has proven to be a fruitful strategy for many decades and for many families.
The amount of the actual portfolio size is far less important than taking prudent steps, and investing wisely.
Let's Get Real
I think it would be a mistake if anyone were to suggest that throwing caution to the wind will not be a problem for those who seek to retire. I also believe it is misleading for anyone to suggest that retirement can ONLY be achieved by having lots of money.
Let me be clear - if an individual spends frivolously, saves nothing and cannot hold a job, retirement will not be a pretty phase of life. Some folks might be able to live in a refrigerator box under I-95, but most folks do not aspire for that.
If an individual or a couple decide that a secure and reasonable retirement is what they aspire to, then any regular working person or couple can do it in my opinion.
To break it down to the true basics, follow just a few simple rules:
- Spend less than you have as income for your entire lifetime.
- Save as much as you can for as long as you can.
- Have an emergency fund of about 3-5 years of essential living expenses set aside.
- Eliminate all debt and cut up the credit cards.
- Drive a car you can afford to pay for in full up front.
- Make certain you have the right kind of health insurance for your situation.
- Invest money AFTER you have followed the other rules.
There are millions of other suggestions but these are the basics. Follow these rules and I promise you will have a better chance at a more secure and happier retirement.
How About A Portfolio of $250,000?
Since the median savings of a couple aged 65 or older, just now ready to retire, is about $75k (many have much less), having $250,000 in your portfolio puts you in the higher brackets. The amount invested in the "Team Alpha" portfolio, allocated as we have done here, would be generating roughly $10,000/per year in dividends based on a 4% yield. (The yield on cost for Team Alpha is currently 4.63%.)
Here is the breakdown of allocation percentages that Team Alpha currently has:
|Starting Lineup||Allocation% Goal||Current Allocation %|
While there are so many different strategies to choose from, this portfolio has grown about 26% in the last 14 months, but the point is, this could be a place to begin.
If a couple has a $250k portfolio that yields $10k/year, and an average Social Security benefit (for a married couple) of $36,000 per year before taxes, this retired couple has an income of $46,000 per year. Not including any value in their homes (already paid for) and not including the 3-5 year separate cash reserves for emergencies.
It also does not include any other pensions the couple might receive either. If we reduce their income by the nominal tax rate of about 15%, they would have spendable assets of roughly $39,000 per year.
Since this couple would be invested in dividend growth stocks and other equities that can increase over time, an inflation rate of roughly 3% would probably be covered. Not only that, but the couple would still have 100% access to their entire portfolio.
By tweaking, rebalancing and perhaps even selling some timely covered calls, this couple could potentially generate even more spendable cash.
The only requirement at this stage: Spend less than you take in, period.
Having tons of money is wonderful, but for us regular folks, I believe we should not focus on a specific "magic number."
It is much more prudent to follow sound financial principles and to know what our priorities are for a much richer, healthier life.