how much money do you need invested to live off dividends?
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Most such funds pay dividends and capital gains that vary from year to year but might average between 2.5 and 3.5% per year. If you have a large enough investment so that 2.5–3% will be enough to live on, you can live off of dividends and be relatively safe in doing so.
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Financial services company Fidelity recommends having the equivalent of your annual salary saved. That means if you earn $50,000 per year, by your 30th birthday, you should have $50,000 socked away.
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That means you'll need to plan for at least 30 years or more of sustainable portfolio income. But, while two million dollars may seem like a lot, there are big hurdles to jump over to make sure your money lasts the rest of your life.
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According to a CIBC survey released in February of 2018, most Canadians think they need $750,000 in savings to retire. But surveys aside, it's important to plan for retirement by determining how much you need to be comfortable.
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Here's a broad rule of thumb that you can use to determine the amount of money you will need when you retire. Multiply your current annual spending by 25. That's the size your portfolio will need to be in retirement for you to safely withdraw 4% of that portfolio amount every year to live on.
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If you have a household income of $100,000 when you retire and you use the 80%income benchmark as your goal, you will need $80,000 a year to maintain your lifestyle. Assuming your 401(k) savings grow at 8%, you can expect to have $80,000 a year in interest income without having to touch your principal.
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That's how much you should save each year to reach your goal. For example, if you're earning $45,000, you'll need 80% of that, or $36,000 a year, in retirement. Multiply $36,000 x 20 years and you get $720,000.
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Retirement experts have offered various rules of thumb about how much you need to save: somewhere near $1 million, 80 to 90% of your annual pre-retirement income, 12 times your pre-retirement salary.
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If you're 30 when you start saving, 10% won't be enough. You'll need to save 15% of your income, or about $7,200 per year, to meet your retirement goals. If you start at age 40, you'll need to save 24% of your income, or $12,000 per year, to reach your goal.
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The traditional withdrawal approach uses something called the 4-percent rule. This rule says that you can withdraw about 4 percent of your principal each year, so you could withdraw about $400 for every $10,000 you've invested. But you wouldn't necessarily be able to spend it all.
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If you need $40,000, the number rises to around $1 million. When you know how much you need, you can play around with the numbers. If you can reduce your expenses and live comfortably on less income, you'll probably be able to retire earlier.
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As a rule of thumb, you should multiply your yearly expenses by 25. That will give you a rough idea of the amount of money you'll need to be able to cover all your expenses. This assumed a dividend yield of 4%. (Hence 4%*25 = 100% of your expenses!)
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Totally depends on how much you need to live and what interest rate you can get. Your average person can live comfortably on around $20,000. With some solid investments, you can probably pull around 5% interest. So, you would need a starting sum of $400,000.
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The dividend tax rate you will pay on ordinary dividends is 22%. The federal income tax brackets range from 10% to 37% for the 2018 tax year after being 10% to 39.6% in 2017. Qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower.
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According to some investment advisors, you would need to have as much as 70% of your working income for a comfortable retirement. Others believe you should save ten times your final salary at the point at which you retire.
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Based on the safe withdrawal rate, you can calculate the needed size of your portfolio to be 25 times your annual cost of living. For example, let's say you need $50,000 per year to sustain the lifestyle you want. Using the safe withdrawal rate of 4%, you multiply $50,000 by 25, giving you $1.25 million.
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It's 15% if you are in a 25% or higher tax bracket and only 5% if you are in the 15% or lower tax bracket. Profits from stocks held for less than a year are taxed at your ordinary income tax rate. Ordinary dividends earned on your stock holdings are taxed at regular income tax rates, not at capital gains rates.