You Don’t Need A Million Dollars To Retire

I’ll show you how to “retire” with much less than a million saved

Before you do anything, let go of traditional conceptions of retirement.

If you’re under 50, you’re probably not going to retire the way your parents did anyway.

The math retirement calculators spit at you helps very little with your present financial situation. Even if you make a lot of money, what the experts say you need to save to retire tends to trigger anxiety over sustainable action.

According to NerdWallet’s retirement calculator, a 25-year old who makes $60,000 a year, has current savings of $30,000, and saves $500 a month will amass $1.74 million by the time she’s 67, assuming 2% annual salary increases and a 6% rate of return. This same calculator argues that $1.74 million won’t even be enough. It notes that you’ll actually require about $2.11 million to retire at 67.

The days of working, consistently, for 42 years and retiring as a senior citizen are long gone. The days of scrimping to do this ought to be long gone.

Retirement investing that focuses on hitting some arbitrary nest egg number north of a million belongs in history’s dustbin. It’s out of step with reality for an increasing number of us.

Your sole focus from here to eternity should be on income — generating and allocating it.

Allocating Income

Make priority number one earning and sustaining enough income to meet your basic needs and wants. I suggest setting up a series of savings accounts, each designated to satisfy a series of needs or wants.

I have a subsistence fund and an emergency fund.

The subsistence fund covers living expenses for a couple of months. I add up everything I tend to spend in a month — from fixed expenses such as rent to discretionary purchases like my morning coffee — and make sure I keep enough money in this fund to satisfy these obligations. I do the math a few times a week to ensure my subsistence fund is adequately stocked with cash. It only takes a few minutes.

The emergency fund sits in cash and, in a perfect world, will sit in cash forever. It consists of enough money to cover three to six months of the aforementioned living expenses. If you lose your job or face a reduction in income, you might need to draw from it. Hopefully you won’t.

From here, create, label, and periodically direct income to funds you’ll need to access for a near- or mid-term purchase or series of purchases. The most obvious examples are buying a new car or home or taking a vacation. At the moment, I am building a fund that will serve two purposes — a move to Portland, Oregon in 2021 and temporary retirement.

I need money to facilitate my move to Portland and to live in both PDX and Los Angeles for a couple of months at the outset. I also want cash on hand that I can use to “temporarily retire” in Portland. In other words, when I get there I might continue to work, but I want to give myself the option of not working. I don’t want to use subsistence or emergency fund money to service temporary retirement so it’s built into the “move to PDX” fund.

Generating Long-Term Income

I always want to have my subsistence and emergency funds adequately supplied with ample cash. I also want to have money set aside to get to other places I want to be. Again, take a few minutes several times a week, to ensure current and projected cash flow meets these goals.

From there, I need to ensure I save money for the future. Not necessarily retirement, but the future. Maybe a long stretch of temporary retirement. Or, knock on wood, a period of time when I simply cannot work.

To make the latter less of a concern, I do two things.

One, I do my best to stay in shape. I also spent the last four years, pre-pandemic, working in a physical job. I know I can do it if I have to. But I don’t necessarily want to.

Two, I work in freelance capacities for several clients as well as myself. I continue to be hyper-focused on diversifying my income streams. I want multiple income sources, some of them that are not only passive, but will build on themselves over time and as I contribute to them either through additional work (such as writing an article) or, here it goes, investment.

Dividend Growth Investing

There isn’t a more powerful way to generate long-term income in the stock market than investing in dividend growth stocks.

A dividend growth stock is simply a stock from a company with a history of raising its dividend every year.

Several dozen stocks have increased their dividends every year for 25 years or more. These are dividend aristocrats. Companies such as 3M and Coca-Cola, who have increased their dividends annually for 57 years. Younger dividend aristocrats include Realty Income and Ross Stores at 25 years apiece.

There are companies who will, almost without a doubt, end up dividend aristocrats someday. The most notable — Apple, which has increased its annual dividend payment for seven years.

When you invest in these stocks, they’ll pay you a quarterly dividend (there are monthly dividend payers, including Realty Income). You can (and should) choose to reinvest the dividend payment into more shares of the stock. As you do this, you’ll increase your position size. As your position size and the company’s dividend increases, the number of shares you purchase with each reinvestment also increases.

Over time, you will build significant wealth utilizing this strategy.

Take AT&T as an example. A seemingly boring stock, but 100 shares of AT&T (an investment worth about $3,000) presently generates $208 of annual income.

This doesn’t sound like much. It’s only $17.33 a month. However, compounding works its magic over time.

If AT&T’s stock doesn’t move at all for the next ten years, but it continues to increase its dividend by about 2% annually, the company will have paid you $3,333 in dividends over that period. That’s $333 in annual income.

And that’s only on one $3,000 investment. Replicate this with a diversified portfolio of dividend-paying stocks and regular investments after filling your subsistence, emergency, and other funds, and you will have created a long-term, sustainable source of income.

However, the bigger part of the picture is that this portfolio of stocks only represents one source of income. If you’re constantly cultivating other sources of near- and long-term income while consistently meeting your current wants and needs, you have created a comprehensive financial plan for yourself. One that bypasses the anxiety unrealistic expectations of getting to $1 million (or more) can cause.

Anxiety leads to failure. And a lot of heartache along the way.

Allocating income for today and generating consistent pools of income for the future provides a less stressful way to achieve your financial goals in the here and now and in whatever “retirement” ends up looking like for you.

I write about doing life and personal finance, focusing on the psychology of our relationships with other people and money. I’m anti-guru, pro-empowerment.

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