Retiring Early In A World Of Low Returns

Includes: JNJ, PG, XOM
by: Doug Carey

If both stock and bond returns are low for the next 20 years, how can we retire early?

The key is to generate enough income in retirement to meet expenses.

The only reasonable way to do that today is solid dividend growth stocks.

I talk to a lot of people about retirement planning, and one of their biggest fears is that both the stock and bond markets will produce sub-par returns for the next 20 years. This fear is not unfounded. Stock valuations are extremely high given how poor economic growth has been. There is also the widely held theory that all the money created by the Federal Reserve has been propping up a stock market that is poised to decline.

Then, there are bonds. With 30-year Treasury yields at a measly 2.26%, you won't even beat inflation over the long run.

What To Expect

The hokey thing to say here would be, "expect the unexpected." But I will instead say, "expect much lower returns over the next 20 years." That is at least a conservative stance to take so we can plan our retirements accordingly.

So what does "lower returns" mean? I'm going to use 3% for long-term bond returns. For equities, I am going to assume an average return of 4% for the S&P 500. This would be vastly lower than what we have seen throughout history.

Who Can Retire Early With Low Returns?

This is the big question. If returns are terrible, then who can really retire early? That is what I am here to tell you. And I won't just make best guesses and use the same tired-old rhetoric you see in most articles about retirement. You rarely see them put real numbers in front of you and actually run a retirement plan. Clichés and platitudes won't help you create a retirement plan.

Let's take a look at a couple that is 40 years old (I've recently written about things to do in your 40s to prepare for retirement). They want to retire at age 58. They currently have $400,000 saved. I also assumed this couple has 90% of their savings in their 401(k) plan. My other assumptions are as follows:



Social Security (combined, age 67)


Life Expectancy




Savings Rate

Annual Price (Stocks)

$10,000 per year


Annual Return (Bonds)


Annual Spending In Retirement


Asset Allocation

70% Stocks, 30% Treasury Bonds

I plugged their numbers into our publicly available WealthTrace Retirement Planner (you can sign up for a free trial yourself) and found that this couple cannot retire at age 58. They are projected to outlive their money when they turn 70 years old. You can see in the graph below how their investments begin to dwindle until everything is gone at age 70.

We shouldn't be too surprised that they run out of money. Their retirement income isn't even close enough to cover expenses and taxes each year, as you can see below.

Making Early Retirement Possible

Now for a solution to their problem. The main issue here is that this couple is not generating enough income in retirement. They have social security, but no pensions. Interest rates are too low to generate the income they need. So what should they do? I highly recommend that this couple put all of their equity money into solid dividend growth stocks.

Dividend Growth Stocks For Income In Retirement

I have written before about how solid dividend growth stocks can mean the difference between retiring comfortably (and possibly early) and running out of money. What we're looking for is a diversified portfolio of dividend growth stocks which have never cut their dividends and have even increased their dividends during recessions. Three of my favorite dividend payers are Johnson & Johnson (NYSE:JNJ), Exxon (NYSE:XOM), and Procter & Gamble (NYSE:PG).

If we can find a group of dividend payers, like the companies cited above, that yield about 3% and have dividend growth of 7% per year, this couple will now be able to retire at age 58 without ever running out of money in retirement.

You can see below that once their Social Security payments begin when they turn 67, their income now covers all of their expenses in every year.

So, Can You Do It?

Yes, you can retire early! But you have to start saving today, and don't count on 8% returns on stocks for life. Choose outstanding companies to invest in, particularly those that have shown they can increase their dividends during tough times.

Disclosure: I am/we are long PG, XOM, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.