How To Retire With A Million In 10 Years And Live Off Dividends

Summary

• If you are 50 or older and haven't done retirement planning, there's no better time to do this than now. In fact, it's never too early.
• We demonstrate how to plan, save, and grow your capital to retire in 10 years.
• We ran multiple simulations for our hypothetical couple to show how they could grow modest savings into a significant sum that can last them for a lifetime.
• Lastly, we provide a simplified model portfolio to grow the capital safely at a 10% rate or more while at the same time preserving the capital to a large extent.
• Looking for a portfolio of ideas like this one? Members of High Income DIY Portfolios get exclusive access to our model portfolio. Learn More »

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A million dollars is simply a milestone. If you're a diligent saver and investor, the first time you hit a million dollar mark in retirement savings, it's an important achievement. That said, a million dollars is not the same as it used to be just two decades ago. In the early 2000s, most financial planners used to agree that a million dollars were more than enough to have a comfortable retirement with a high middle-class living. However, most planners would now advise shooting for 2 million to have a comfortable retirement. Due to inflation, one dollar in the year 2000 is only worth about 64 cents today. So, even with that basis, now you would need over $1.5 million to maintain the same standard of living as you could afford with one million in 2000.

Nonetheless, these are just numbers thrown for a wider audience. They can vary from person to person, depending upon basic living expenses, health status, personal spending habits and hobbies, availability of sources of fixed income like pension and social security, and most importantly, the place where you decide to live in retirement. So, maybe the basic question one needs to answer is how much savings would be enough to retire?

Also, the second most relevant question would be, when and at what age should you retire? There's no preset or generic answer. Again, it depends largely upon the answer to the first question that we discussed above. Sure, there are other factors, mostly determined by your personal situation. Life expectancy has gradually increased in the last many decades, and people are working longer for a variety of reasons. Some feel they have not saved or prepared enough. Some just want to have that extra margin of safety and choose to work longer. Then there are many who just enjoy their work and rather continue to work and keep an active lifestyle for as long as possible. So, we guess the goalpost here may not be to just retire (for the sake of retiring) but to become financially free and ready to retire if you so desire or if the need arises for any reason.

For the vast majority of people, Social Security and Medicare play an important financial role in their retirement planning. For Social Security purposes, the full retirement-benefits age is considered as 66 years, which gradually rises to 67 years for folks born in 1955 or later. The early Social Security benefits become available at age 62, albeit at 25%-30% lower rates. Medicare plans are available to retirees at the age of 65, which is essential for many folks to be able to retire. However, according to the census data, the average age of retirement is somewhere between 63 and 65 years. That said, we think you should at least plan for retirement ready by age 60 or 62, even if later you decide to work much longer. Early retirement can be by choice but, at times, maybe forced upon by circumstances.

Let's say you and your spouse just turned 50 and have not given serious thought to retirement, well then, it's probably high time that you make a plan and put it into practice. For the purpose of this article, we will consider a couple who have just turned 50 and want to be prepared for retirement in 10 years.

Note: This article is part of our Retirement Series, where we periodically write on these retirement themes for different age groups and circumstances. At times, you may notice some repetition of some core principles and strategies, but we feel that is necessary for the benefit of new readers.

All of the tables and charts in this article have been prepared by the author unless explicitly specified otherwise.

Part I: Retirement Planning for our Hypothetical Couple - John and Lisa

We would use our hypothetical couple - John and Lisa - to demonstrate the planning process. Let's assume John and Lisa are 50 years of age and wish to retire in 10 years at 60. It's possible that they would change their mind in the future and may decide to work longer, but the idea is to be prepared to retire between 60 and 62 if they had to. We will assume that they both work full time, and their current household gross income is $130,000 a year, which falls solidly in the middle-class income group.

Their current savings are quite reasonable at $350,000 and mostly invested in tax-deferred plans like 401K and/or IRAs. But this also has been possible due to the fact that the market has done exceedingly well in the last decade. The fear is that the next decade may not be as good as the last one.

In any case, they have done a great job of accumulating the current savings of $350,000. Unfortunately, so many folks in the US are not able to save as much by the age of 50. Even then, it falls short if they want to have a comfortable and worry-free retirement in 10 years that can afford them their current lifestyle. The rule of thumb that many financial planners suggest is that you should have at least five times your annual income by the time you step in your 50s, which should grow to at least eight times by the age of 60. So, they're clearly lagging to some extent if their target was to save over one million by age 60. They recognize that their current savings are not enough, and they need to do some serious planning and make some tough choices if they hope to have a comfortable retirement starting in 10 years. It is necessary to recognize that the status quo will not be sufficient, and they would have to make some sacrifices and cut down some of their discretionary spendings in order to save and invest more.

While trying to plan for their retirement:

• The first question they need to answer is how much savings would be enough for them to retire. Retirees of today have to plan for 30-40 years of retirement because people are living much longer than just a few decades ago. Also, they realize it's better to plan for longer and have some surplus left for their heirs or any other causes than running out of money in their 90s.
• The answer to the above question lies in the realistic estimate of expenses in retirement. If they underestimate, it can prove to be a big problem because that means that they would not have saved enough. If they overestimate it, they may have to work longer than actually needed. But the second scenario will still be a good problem to have. One way that has been suggested over the years by many financial planners is that one should plan for about 75%-80% of their pre-retirement expenses. It would certainly be commendable if one could do that. But, obviously, not everyone could do that easily. We think it may be too high a target for many folks, and actual expenses in retirement could be much lower. Nonetheless, they should make an honest assessment of their estimated expenses in retirement.

Let's make some more assumptions about John and Lisa's situation.

• They currently carry a mortgage on their house and have 15 more years to repay in full. They decide that they will make some extra payment each month on the mortgage so that they are able to pay off the house in 10 years instead of 15 by the time they retire. They will pay $300 extra every month to pay off the loan early. This decision is very personal, as some would consider it wise to invest those extra $300 rather than paying off the mortgage early. But we think that it's better to take that extra burden off your mind in retirement.
• John and Lisa decide that they will not carry any type of debt into retirement, be it car loans or credit cards.
• They have one child in college whom they are currently supporting and will continue to do for the next several years.
• They currently have one new car on the five-year term loan. They will continue to make existing payments on this car. However, once this car loan is fully paid, they would start putting away $400 a month for a future car so that they would not need to finance another car, just when they are about to retire.
• Most importantly, they decide that they both will increase their current 401K contributions to 16% of their earnings. They will increase it further to 20% of their earnings after their child's education is over in four years. This will require some sacrifices, but this is fundamental to reaching their retirement goals. This will help boost their savings significantly and also reduce their current taxes.

Table 1: John & Lisa's New Budget (estimated) vs. Old

** The author is not a tax expert/consultant. This estimate is just to provide a broad idea for the purpose of demonstration; the actual amounts could vary.

Estimation of Expenses in Retirement

To know the total savings requirement, they will need to first estimate their expense in retirement.

There are several ways to work out an estimation of expenses in retirement. Different people in similar situations will probably come to different conclusions. That's why it's important to keep some flexibility, and one should plan for a 10%-20% variation from year to year. We list some of the ways to get started:

• The first method may be to multiply your current gross income by some percentage, like 70% or 80%. This is something many financial planners suggest. However, in our view, it's is highly generalized and prone to overestimation.
• Another simple method may be to make a list and add all of the likely expenses in retirement. This can work, but for many items, it may be difficult to estimate accurately. Furthermore, there's the possibility that you may forget to list some of the likely expenses entirely.
• A third method that we recommend and may be more appropriate is to take your current household gross income and subtract all the expense items that you are pretty sure that you would "not" incur in retirement. Also, don't forget to add any additional expenses that you may have in retirement that you do not incur currently. For example, there may be an increase in medical premiums/costs, especially until the time you are eligible for Medicare. It basically means figuring out how much of the money currently goes into items that will no longer be needed. Then, adjust this remaining amount for inflation for the number of years that are left prior to retirement. This method will ensure that you are able to maintain your current lifestyle into retirement.

Based on the above (third option), this is what John and Lisa come up with:

• They will no longer need to put 16% (or 20%) savings contributions into their 401Ks or retirement funds.
• Assuming that they would not have any earned income in retirement (unless they decide to work part time), they will not be putting any more money into Social Security/Medicare deductions (usually 7.65%).
• Their tax bracket may change to a lower slab, so they would need to account for that reduction.
• Besides, they will not have work-related expenses, like commuting, new clothing, dry-cleaning expenses, etc.
• They would be done with kid's college education, which will cut down another $10,000 - $14,000 a year.
• They will not have the house mortgage payments anymore (monthly mortgage $1,200 or $14,400 yearly), based on the assumption that they plan to pay it off early.
• They will not have the current medical premiums that get deducted from their paychecks. However, they will need to earmark higher medical premiums since they will not be eligible for Medicare until 65. It may be an option for one of them to work part-time until 65 so that they could get affordable and cheaper medical insurance plans through their employers.

Table 2: Expenses in Retirement (broad estimates)

In the above example, it's easy to see that nearly 55% of their current gross income goes to expense items that they will no longer have or need in retirement. However, these are not universal numbers and can vary greatly based on individual situations. That said, for John and Lisa, it means that they should only require roughly 45% of their current gross income to support their existing lifestyle. But let's say we want to be a little generous, and it's better to err on the side of caution. So, we will assume their expenses in retirement to be 50% instead of 45%. Based on their current gross income of $130,000, it comes to $65,000 a year in today's prices. However, due to inflation in the next 10 years (assuming an average of 2.5% a year), they will require $83,000 a year. Even though we already have accounted for additional expenses for medical premiums, but we want to be extra cautious and put some more dollars for deductibles and out-of-pocket expenses. So, let's add an additional $700 a month (or $8,400 a year) for medical premiums/costs. However, this higher cost is needed just for the gap of 3-5 years until they get eligible for Medicare. So, it will be better to keep the five-year worth of money (roughly $40,000) as a cash reserve. In addition, they would like to keep a cash reserve of $80,000, the equivalent of one year's worth of living expenses. So, in summary, with a total cash reserve of $120,000, they will need roughly $80,000 a year of annual income in retirement to be able to sustain their current living standards.

Table 3: Expenses in retirement after inflation

50% of the current gross income: Inflation-adjusted amount (10 years later):	$65,000 $83,000
Total:	$83,000 a year

Click to enlarge

How Much Savings Are Needed?

Once John and Lisa have answered the question on their yearly expenses in retirement, they can easily determine how much of the total savings they would need by the time they retire.

In fact, John and Lisa have many options to consider:

• Option 1: Both John and Lisa could delay taking the Social Security benefits until the full eligibility age of 66 years and 10 months. At least, one of them could work part-time for another five years until 65. This will help them avoid paying higher medical expenses/ premiums from 62-65 (65 is when they become eligible for Medicare). This will bring some extra income as well. They could withdraw the rest of the income needed from their portfolios from 60-67 until they start taking the Social Security benefits, after which their withdrawal rate will drop significantly.
• Option 2: Just as in option-1, at least one of them works part time until 65. However, John starts taking Social Security benefits at 62, but Lisa delays them until she reaches the full retirement age of 66 and 10 months. From age 60-67, they could withdraw the rest of the income needed from their portfolios to supplement other income.
• Option 3: John would withdraw Social Security benefits at 62 but delay Lisa's benefits until she reaches age 70. One of them also would work part-time until they get to 65. By doing this, they will be able to balance out the income needs along with compounding Lisa's Social Security benefits to the highest payout possible. Besides part-time work income and Social Security payments, the rest of the income needs could be met from the investment portfolios.
• Option 4: Neither of the two works after 60. John would withdraw Social Security benefits starting at 62 but delay Lisa's benefits until she reaches age 70. They withdraw 5%-6% income from their portfolios (a majority of it from dividends) from age 60-70. After that, the second Social Security benefit will kick in, and they will need to withdraw less than 3%.

As it's obvious, options 1, 2, and 3 will be much easier to pursue. It also will afford them to increase their investment capital more than planned. But what if circumstances do not allow them to opt for this route, or maybe they are not willing to work any longer after 60. In the financial sense, this is the most difficult option. Well, that's why we will model option 4 to see if it could work for them.

Option 4 appears to be most challenging since they both will be fully retired at 60. They would reserve one year of expenses in cash as well as five years' worth of medical expenses. They would withdraw roughly 5%-6% from their portfolio from 60-70 years of age. Some readers may question that a withdrawal rate of 5%-6% is too high. However, as it's demonstrated in the table below, that this could be easily done since it's for a limited window of ten years, after which the withdrawal rate would fall to less than 3%.

Note: If John and Lisa think that they would need a higher starting capital than one million dollars, then they should work longer and beyond 60 years (or even 62) of age, maybe until the full retirement age.

Let's consider Option 4 in more detail:

Both John and Lisa retire at 60. They do not opt for part-time work (or, let's say, suitable work is not available). John will take Social Security benefits starting at age 62, and the approximate benefits are assumed to be $1,800 per month or $21,600 per year. Since Lisa will wait to withdraw Social Security benefits until 70, her benefits will be much higher at approximately $3,200 a month or $38,400 a year (after counting inflation increases). They will reserve roughly one-year expenses (80K) in cash from their retirement portfolio. They also put aside $40,000 for payment of medical premiums for five years until they are eligible for Medicare.

By doing some reverse calculation, here is what they would need:

Table 4: Calculation of savings needed

So, this couple will need at least $1.225 million at the time of their retirement at 60 years of age. Obviously, if they work just two more years until 62, their savings requirement becomes much smaller, $1.087 to be exact (on similar assumptions). So, if their capital growth realized (until age 60) is smaller than the expected 8.5%, the best option would be to work for another two years.

Investment Returns Calculations (Age 50-60)

As is clear from above, John and Lisa have defined their savings target. Now they need a plan that could get them from $350,000 to $1 million-plus in 10 years. They assume that their investments would grow at a very steady but conservative rate of 7% a year for the next 10 years, while they contribute 16% of income every year along with employer's matching (assuming 80% on the first 6%). Also, their annual income is likely to increase, but let's assume it to be constant at $130,000.

We know from the historical perspective that the stock market, over a very long period of time, can comfortably return 9% annualized returns. However, the big question mark is 8% or 9% steady growth over 10 years. The above assumption about growth would be just fine over two or three decades, but over 10 years, it may or may not materialize. The market's ups and downs from year to year can change the outcome. If history is any guide, it can vary greatly depending on how the markets do in the first few years after investment. If there was a big setback right in the first couple of years, it would need time to recapture the losses and come back positive. However, this is mostly true when you're invested in broad indexes. But there are strategies that you can build which can protect you from the huge corrections. We will address such strategies a little later in section II.

At this point, John and Lisa want to make their assumptions as safe and achievable as possible. So, to provide an extra margin of safety, they will calculate the returns on the basis of 7.5% (instead of 8 or 9%). As you can see below, even with 7.5% returns and a 16% annual savings rate, John and Lisa would comfortably accumulate $1.140 million and exceed their goal of $1.070 million.

Table 5A: Investment portfolio growth from Age 50-60

If the actual realized growth is much less than 8.5% (let's say 7.0%), then it will be best to work until 62 years of age to compensate. By working until 62, they not only can be more conservative in their investment style but would end up with more money than the target. Please see the table below.

Table 5B: Investment portfolio growth from Age 50-62

Retirement Years Age 60-90 - Calculation of Growth and Drawdown

For John and Lisa, during actual retirement, their strategy looks something like below. If everything works out according to the plan, they should never run out of money. In fact, as you would see below, at 80 years of age, their portfolio would be roughly double what they started with at age 62 while withdrawing and spending a substantial amount of income. That leaves plenty of scope for margin of error, and in all likelihood, they should never run out of money:

• At the start of retirement, they reserve one year of expenses in cash from the total capital, a total of $80,000. They also reserve $20,000 towards medical premiums for the next three years. This leaves them the investment capital to $1,040,000.
• Also, (as per option-4), John would start withdrawing Social Security at the earliest eligible age of 62. Due to early withdrawal, he will receive roughly 73% of the full benefits. We will assume that SS-1 to be $1,500 a month and grow at a very conservative rate of 2% per annum due to COLA (Cost Of Living Adjustments).
• This will allow Lisa to wait until the age of 70 years to collect and let the Social Security benefits be compounded to a much higher amount. We will assume that the SS-2 will be $3,200 per month, starting at 70 years, and due to COLA increases.
• However, at age 70, due to inflation (from age 62-70 years), their expenses would go up each year as well (assumed at 2.5%).
• They assume that investments of $1,040,000 (after cash reserves) will grow at a realistic rate of 8%. This is addressed in a later section.

Below is the table that simulates the income and withdrawals from the age of 62-90 years. As you can see below, with 8% growth, their balance grows very nicely over the years and provides them a large scope of error or overspending. However, we're going to present three tables with 8%, 7%, and 6% annual growth rates.

Table 6A: Calculation of growth and drawdown with an 8% rate

** Cash-reserve ($80,000 + $40,000 (5 years of Med prem)).

Note: Some rows (from the age group, 76-79, 81-84, 86-89) have been hidden to keep the table size presentable.

Table 6B: Calculation of growth and drawdown with a 7% rate

With a 7% annual growth rate, John and Lisa are still able to grow their capital significantly and are still left with a large amount of cushion over their spending needs. Now, most people would agree that a 7% return over a long period of time is a very reasonable expectation, especially if you're doing your homework. Anything less than 6% growth would start eating into the capital a bit but still last until the age of 95. However, there would be very little scope for any error.

Now, what if both John and Lisa start withdrawing Social Security benefits at age 67? Results will be very similar to what we saw with John drawing at 62 and Lisa at age 70. This is assuming they get at least 8% annual returns on their investments. We will see the calculations in the table below:

Table 6C: Calculation of growth and drawdown with an 8% rate, SS withdrawals at age 67

Part-II: How to Get 9-10% (or even more) Investment Returns Consistently

We know that it may be too risky to put all your money in the S&P 500 or any other set of index funds, mainly because in the investment world, 10 years is not a very long time frame, and our portfolio will be subject to the risk of the sequence of returns.

Note: Sequence risk, or sequence of returns risk, is defined as the risk that the stock market crashes early in your retirement or just prior to retirement.

So, what's the alternative? We will suggest a portfolio with two buckets (preferably three) that will greatly reduce the risk of the sequential return.

• DGI Bucket: 45%
• Rotational Risk-Adjusted Portfolio: 45%
• Growth Bucket: 10% (this could be replaced with a CEF-based income bucket after retirement).

The DGI portfolio will provide a safe and consistent 4% (and increasing) level of income from dividends. It also will protect and preserve the capital better than the broader market during a correction, if not entirely. At the same time, the second bucket consisting of a Rotational portfolio will provide the necessary hedge and protect the overall capital.

DGI Bucket: (45% of assets)

If you're a passive investor, you may create a portfolio of dividend ETFs. However, if you're an active investor, you should have a DGI portfolio of individual stocks. Not only could you save the ETF or fund fees (however low they may be), but you could buy your positions when they are attractively priced. Also, you would have the flexibility to aim for a higher dividend yield in the range of 4%.

A sample list of 20 DGI stocks with a very attractive dividend yield of over 4% is presented below. This is not a buy-list per se, however a starting point to do further research and due diligence.

List of Stocks: (LMT), (PEP), (CLX), (UL), (ENB), (VLO), (USB), (PRU), (ABBV), (JNJ), (MMM), (PFF), (NNN), (DEA), (MAIN), (HD), (TXN), (VZ), (BTI), (D).

Table 7: A DGI portfolio of 20 Stocks

Rotational Risk-Adjusted portfolio: (45% of assets)

We regularly write on many Rotational strategies.

One of the strategies that we like is our QQQ-Prime strategy. In this strategy, we invest only in two securities, Invesco QQQ Trust (QQQ) and iShares 20+ Year Treasury ETF (TLT). Every month, we compare the performance of these two securities during the past three months and invest 75% of the capital in the security that outperformed and 25% in the security that underperformed. We repeat this process every month. Based on the back-testing results, below are the average annual growth rates for the past 1, 3, 5, 10, 15 years and since the year 2003.

Note: The above performance results are based on back-testing and provide no guarantee of future results.

Another strategy that we like very much is our Bull-N-Bear Rotational strategy (both these strategies are part of our Marketplace service). You could read all the details on this strategy in our previous recent article.

If you decide to have a large percentage of your assets in the Rotational strategies, we recommend that you should have at least two or three Rotational strategies to provide reasonable diversification, though it should be determined based on your personal situation, time availability, and preferences.

Growth Bucket: (10% of assets)

This bucket is optional, but we believe most people need to allocate at least a small percentage of their portfolio to growth stocks or growth strategies. Highly conservative folks should keep this 10% in cash-like securities. If you decide to invest in a growth bucket, you should choose these investments very carefully. There's a difference between growth stocks and speculative ones. For example, Apple (AAPL), Microsoft (MSFT), Visa (V), and Home Depot (HD) are some of the examples of growth stocks that are reasonably safe. Now, this 10% bucket will not provide much income as such, but the growth of capital should more than compensate in the long run.

Concluding Thoughts

The importance of planning for retirement and start investing at an early age cannot be overstated. In fact, the sooner you start, the better it would be due to the compounding of investment returns. If you're already 50 years or older, it becomes even more critical to consider various options to see how you can reach your goals in a realistic manner. Even though it's always prudent to start saving from an early age, but it is never too late. Even if you have not saved much or just have modest savings by the time you turn 50, there's still ample time to make up for the lost time. However, the more you delay it, the harder the choices will be.

In the second section of the article, we demonstrated a strategy with two buckets that would not only provide a high level of income but would also lower the volatility and drawdowns to a large extent. It will provide growth during the boom years and preserve capital during recessionary times or big corrections. If we invest with a sound strategy that we can live through good times and bad, it is not too difficult to get 9%-10% annualized returns on your investments.

Disclosure: I/we have a beneficial long position in the shares of ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, RQI, STAG, STK, USA, TLT either through stock ownership, options, or other derivatives. 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.