If you are thinking about early retirement, you need to have a financial plan.
You have most likely invested in an employer-sponsored retirement plan such as 401 (k) or 403 (b). You may even have money in a traditional IRA or Roth. But you will be on taxes and fines if you touch these accounts before you are eligible. You can withdraw any amounts you have donated to the Roth IRA without penalties but your money will stop working for you as soon as you withdraw it.
This is where dividend investing comes into play. It allows you to make money on the stock market without selling any of your assets. Although dividend investments are often ignored among younger investors, this may be an ideal strategy for someone pursuing early retirement.
Let’s dive into the power of dividend investing so you can determine if this is the right move for you.
How a dividend investment works
When companies make money, they can share their profits with investors through dividends.
Dividend is a percentage of the profits paid to investors. Income investors like dividends because it is a backflow of money that is usually paid on a quarterly or monthly basis. As long as a company’s board announces a dividend, investors can expect dividend deposits in their account.
Dividend investments have been a hit among retirees looking for an additional income stream. Although dividends have generally been a major component for older investors, there is also an opportunity for early retirees to benefit from dividends.
A lesser-known strategy for early retirees
Suppose you manage to live comfortably on $ 40,000 a year. That means you will need $ 10,000 a quarter or about $ 3,400 a month to cover your expenses. Although you may have a healthy retirement account that can sustain you, you will have to pay a price for withdrawing funds before you will be eligible.
If you are building a dividend portfolio that covers your annual expenses, you will not have to worry about touching your pension account. You can look for monthly dividend payers or you can develop a dividend schedule that allows you to get pay slips from different companies every month.
Building a solid dividend portfolio can take time so consistency will be key. Set up a reinvestment every week or month so you can increase your investment portfolio. You should also consider participating in a dividend reinvestment program (also known as DRIP) and allow your dividends to generate more dividends.
If you want to add individual stocks to your investment portfolio, you can start researching blue stocks like Microsoft and Apple Have a high market capitalization. You can also browse the list of dividend aristocrats and dividend kings – a group of elite stocks that have increased their payouts annually for at least 25 or 50 consecutive years, respectively. To raise your investment portfolio to a higher level, you can research real estate investment funds (REITs). These investments usually pay a higher dividend yield than other types of assets.
Let the tax code work for you
Typically, early retirees may not earn as much money as they did when they worked full time. It can work in your favor during tax time. When you trade in a margin income for dividend income, you may be eligible to open eligible dividend tax rates for investments held in a taxable brokerage account. These rates – 0%, 15% and 20% – are the same as the coveted long-term capital gains rates.
Suppose you and your spouse earned $ 50,000 in dividends during your first year of early retirement. For 2021, joint submitters can skip taxable earnings from up to $ 80,800. This means you can fund your lifestyle without tax nuances that will put you off.
A whole life of benefits
Dividend investing can work wonders for your portfolio if you try to retire early. This extra income stream can fill in the gaps to fund your lifestyle until your retirement benefits begin. Even if you do not have to take advantage of your dividend income as an early retiree, you can enjoy the benefits of dividends for the rest of your life.
As long as you are an investor and the company’s board continues to declare dividends, you will continue to earn dividend income – even if you never buy another company that pays dividends.
This article represents the opinion of the author, who may not be in agreement with the “official” recommendation of Motley Fool’s premium consulting service. We are colorful! Investigating an investment thesis – even one of our own – helps us all think critically about investments and make decisions that help us be smarter, happier and richer.