Retire In 12 Years With $200K?  It's Not As Crazy As It Sounds

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Includes: AFL, AMP, APU, ATO, BKH, BPL, BT, CBRL, CMCSA, CNI, ED, HEP, MCY, MO, OHI, OMI, ORI, SCG, SCL, SJM, SKT, SO, T, TCP, VGR, WELL, WM
by: Stan Stafford

Summary

Retirement can be scary, but it doesn't have to be.

There are several countries where you can retire with significantly less money than you would need in the U.S.

No matter how far from retirement you are, this article will give a solid example of how you can retire with $200,000 in as little as 12 years.

Overview

Retirement can be scary. It can be scary for those who are nearing retirement and it can be scary for those who are still many years away from retiring. But it doesn't have to be. If you search the internet, you can find several places where $200k, along with your social security benefits (average monthly amount of $1,404 for a typical retired worker), is enough to comfortably live for 30 plus years.

Where Are We Talking About?

Looking through sites such as Investopedia, Moneywise, and World Lifestyle can provide a long list of countries where this is possible.

  • Ecuador - where in the city of Quito you can find 1 bedroom apartments for under $300 a month, and average monthly expenses (excluding rent) for a single person is under $600.
  • Thailand - where the cost of living is 35.37% lower than in the U.S. and rent is 55.39% lower.
  • Belize - where the cost of living is 28.17% lower than in the U.S. and rent is 75.02% lower.
  • Spain - where the cost of living is 19.67% lower than in the U.S. and rent is 43.36% lower.
  • Costa Rica, Malaysia, or Malta.

If You Don't Want to Use Your Passport

If you can't imagine living in another country, don't worry. There are plenty of places right here in the U.S. where you can retire on less money. Looking through sites such as usa today or the street, provides a list of cities that include:

  • Montgomery, Alabama - Annual expenditures of $36,971 ($7,149 on housing, $3,500 on groceries, $6,746 on transportation, $3,796 on utilities, and $5,335 on health)
  • Akron, Ohio - Annual expenditures of $36,147 ($5,401 on housing, $3,767 on groceries, $7,291 on transportation, $3,442 on utilities, $5,514 on health)
  • Brownsville, Texas - Annual expenditures of $35,461 ($6,513 on housing, $3,178 on groceries, $6,746 on transportation, $3,477 on utilities, $5,694 on health)
  • Memphis, Tennessee - Annual expenditures of $33,859 ($6,354 on housing, $3,221 on groceries, $6,133 on transportation, $3,016 on utilities, $5,694 on health)
  • Rochester, New York - Annual expenses of $37,611
  • Shreveport, Louisiana - Annual expenses of $37,749
  • Des Moines, Iowa - Annual expenses of $37,840
  • Amarillo, Texas - Annual expenses of $38,115
  • Winston-Salem, North Carolina - Annual expenses of $38,435

While these U.S. cities have a lower cost of living compared to the national average, it will probably still be pretty difficult to retire 'comfortably' with just $200,000 saved. So if you're staying in the U.S., I would double that figure to at least $400,000.

So How Do We Get There?

Dividend Growth Investing

That's the short answer. I'm a big believer in dividend growth investing. I believe that having a broad portfolio of dividend growing stocks that offer attractive yields, provides the benefit of not having to rely solely on price appreciation to get a solid return on your investment.

For the purposes of this article, I'm going to assume an average 8% yearly return. I think this is a reasonable and fairly conservative assumption given historical averages:

Since 1965, the S&P 500 has produced total returns (including dividends) of 9.7% annualized. Over the past 100 years, the Dow Jones Industrial Average has risen by an average of 5.8%, which when you add in dividends that have historically been in the 3%-4% ballpark, the total return is in the 9%-10% range.

The current average annual return from 1923 (the year of the S&P’s inception) through 2016 is 12.25%.(1,2) That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.

So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%. From 1987 to 2016, it’s 11.66% In 2015, the market’s annual return was 1.31%. In 2014, it was 13.81%. In 2013, it was 32.43%.

Using this assumption, you can get to $200,000 in just 12 years, starting with yearly savings of $10,000 (increasing this amount by 1% every year), thanks to the effects of compounding interest. See the table below:

Beginning Balance Yearly Investment Ending Balance
Year 1 $0 $10,000 $10,800
Year 2 $10,800 $10,100 $22,572
Year 3 $22,572 $10,201 $35,178
Year 4 $35,178 $10,303 $49,119
Year 5 $49,119 $10,406 $64,287
Year 6 $64,287 $10,510 $80,781
Year 7 $80,781 $10,615 $98,708
Year 8 $98,708 $10,721 $118,184
Year 9 $118,184 $10,829 $139,333
Year 10 $139,333 $10,937 $162,292
Year 11 $162,292 $11,046 $187,205
Year 12 $187,205 $11,157 $214,231

Looking at this table, you can see the power of compounding interest and how it impacts total returns over long periods of time. While it took 4 years to get to the first $49,119, it took just 2 years to add over $50,000 to the year 10 balance of $162,292. And while saving $10,000 a year might be difficult for some individuals, if you can take advantage of your employer's 401k match, the task becomes much easier.

The compounding effect seen above becomes even greater as more time passes. This can be seen in the second table, where it takes just 6 additional year to more than double the $214,231 value that was saved during the first 12 years of saving.

Beginning Balance Yearly Investment Ending Balance
Year 13 $214,231 $11,268 $243,539
Year 14 $243,539 $11,381 $275,313
Year 15 $275,313 $11,495 $309,753
Year 16 $309,753 $11,610 $347,072
Year 17 $347,072 $11,726 $387,501
Year 18 $387,501 $11,843 $431,292

Sample Portfolio

While mutual funds are a great option for diversifying a portfolio, for the purposes of this article, I will be looking at individual stocks. For readers of my prior articles, you know that I like using the Dividend Champions, Contenders, and Challengers as a great resource to pick stocks from. More information on these lists can be found here.

When looking at creating a strong portfolio of dividend stocks, there are plenty of factors to consider, but one of the most important I look at is valuation. Because of this, I am going to focus on stocks that I feel are selling at an attractive valuation at the moment. These stocks include:

  • Aflac (AFL) - current PE ratio of 7.41x
  • Altria Group (MO) - current PE ratio of 10.14x
  • Atmos Energy (ATO) - current PE ratio of 16.49x
  • Black Hills (BKH) - current PE ratio of 14.29x
  • Consolidated Edison (ED) - current PE ratio of 15.37x
  • Old Republic International (ORI) - current PE ratio of 13.02x
  • Stepan (SCL) - current PE ratio of 19.81x
  • Ameriprise Financial (AMP) - current PE ratio of 13.07x
  • Buckeye Partners (BPL) - current PE ratio of 11.20x
  • Canadian National Railway (CNI) - current PE ratio of 14.55x
  • Comcast (CMCSA) - current PE ratio of 6.75x
  • Cracker Barrel Old (CBRL) - current PE ratio of 16.71x
  • Holly Energy Partners (HEP) - current PE ratio of 11.31x
  • JM Smucker (SJM) - current PE ratio of 9.46x
  • Waste Management (WM) - current PE ratio of 17.53x

This list is a sample of 15 attractively priced dividend stocks (each having raised their dividends consecutively for 10 or more years) that I believer are worth considering as buy and hold stocks. There are numerous others within the dividend champion, contenders, and challengers lists that are worth looking at as well in terms of building a successful and diverse dividend growth portfolio that will yield solid long term results.

Looking at the charts below, you can see that each of these 15 stocks with the exception of Buckeye Partners and Old Republic International has outperformed the S&P 500 over the past 12 years.

Chart ^SPX data by YCharts
Chart ^SPX data by YCharts
Chart ^SPX data by YCharts

While past performance is no guarantee of future results, I feel pretty confident in assuming that this mix of stocks will continue to at least match the overall results of the S&P 500 and not have a problem meeting the 8% annual return that we are using in the savings calculations.

During the saving phase, I wasn't as concerned with dividend yield and focused more on growth, valuation and price appreciation. When the time for actual retirement comes and you are looking at using dividend income, then I think the focus does need to change. In that case, I would look at stocks with higher yields. Stocks including:

  • AT&T (T) - current yield of 6.30%, 34 consecutive years of increasing dividend
  • Altria Group - current yield of 4.82%, 49 consecutive years of increasing dividend
  • Tanger Factory Outlet (SKT) - current yield of 5.77%, 25 consecutive years of increasing dividend
  • Mercury General (MCY) - current yield of 5.38%, 31 consecutive years of increasing dividend
  • TCP Pipelines (TCP) - current yield of 14.20%, 18 consecutive years of increasing dividend
  • Buckeye Partners (BPL) - current yield of 14.07%, 22 consecutive years of increasing dividend
  • Omega Healthcare (OHI) - current yield of 8.21%, 16 consecutive years of increasing dividend
  • Vector Group (VGR) - current yield of 8.29%, 20 consecutive years of increasing dividend
  • AmeriGas Partners (APU) - current yield of 9.06%, 13 consecutive years of increasing dividend
  • Owens & Minor (OMI) - current yield of 5.85%, 21 consecutive years of increasing dividend
  • SCANA (SCG) - current yield of 6.35%, 17 consecutive years of increasing dividend
  • Welltower (WELL) - current yield of 5.82%, 14 consecutive years of increasing dividend
  • Southern (SO) - current yield of 5.06%, 18 consecutive years of increasing dividend
  • BT Group (BT) - current yield of 5.06%, 8 consecutive years of increasing dividend

Each of these 15 stocks have yields over 5% and produce an average yield of 6.95%.

For those interested in living abroad, the $214,231 earned in twelve years would produce dividends of $14,889 a year with a 6.95% average rate. This, along with the $16,848 in SS benefits (average per retired worker) equals $31,737 a year, which should be adequate in several of the locations mentioned at the beginning of the article, considering some places had monthly living expenses between $1,000 and $2,000 including rent.

For those staying in the U.S., the $431,292 earned over an eighteen year period would produce $29,975 a year in dividend payments. This, along with the $16,848 in SS benefits equals $46,823 which is enough to cover annual expenditures in the cities mentioned above with plenty to spare.

Conclusion

Using a dividend growth strategy focused on attractive valuations, future growth and sustained price appreciation during the saving phase of your portfolio and then switching to a yield focused approach during your retirement phase is a sound strategy I think can work for many investors. The benefit of this approach is that if you plan ahead and pick solid investments, you can simply live off of your dividend payments and social security benefits without the need of ever touching your principal and without the need to worry about the length of your retirement.

How much each individual wants to save for retirement or thinks they will need will vary greatly, but hopefully this article has helped show how a simple dividend growth investing strategy can help you retire comfortably even if you have started saving late. But don't wait too long, as the power of compounding interest is strong.

If you have 20 years and can follow the same pattern of saving outlined above, you can change that 12 year savings amount of $214,231 or that 18 year savings amount of $431,292, to over $530,000. And if you have 25 years, that amount can balloon to over $850,000.

Keep in mind that actual rates of return will have a significant impact on end results. Look at the table below to see how a change in average annual return affects portfolio amount as well as dividend income received based on 6%, 8%, and 10% average annual returns:

6% Average Annual Return Yearly Dividend Income (6.95% average yield) 8% Average Annual Return Yearly Dividend Income (6.95% average yield) 10% Average Annual Return Yearly Dividend Income (6.95% average yield)
12 Years $187,339 $13,020 $214,231 $14,889 $245,341 $17,051
18 Years $351,026 $24,396 $431,292 $29,975 $532,426 $37,004
20 Years $384,767 $26,741 $530,058 $36,839 $671,998 $46,703
25 Years $637,233 $44,288 $857,581 $59,602 $1,165,700 $81,016

This is why it is very important to keep reviewing your portfolio and any individual stocks to track performance and make sure that they are meeting your expectations. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.