Getting To The Crossover Point
Let’s think about getting to the crossover point. You can adjust the numbers according to your own situation, the idea is to get a feel for the process.
We’ll say you start out at $0 and have the ability to contribute $10,000 per year. You have a variety of investing options, but for this demonstration perhaps you elect to go with a strategy of selecting high quality dividend paying companies. Think about The Coca-Cola Co (NYSE:KO)‘s, Johnson & Johnson (NYSE:JNJ)’s and Procter & Gamble Co (NYSE:PG)’s of the world.
The Dividend Aristocrats Index and Dividend Kings List are great places to identify high quality dividend growth stocks in general. For a specific list of dividend stocks suited for retirees, take a look at these 10 dividend stocks for retirement.
We’ll suggest that the average dividend yield is 3% and you expect this to grow by 6% annually.
In the first year your starting $10,000 investment would generate $300 in dividend income.
That’s nice, but not exactly the type of cash flow that screams “early retirement.”
In the second year you’d expect that $300 to turn into $318, as the companies collectively increase their per share payouts. In addition, if you elected to reinvest that $300 in dividends you could be receiving an additional $9 in income.
So based on your original $10,000 investment $300 in dividends in year one would become $327 by year two. Which is also why your total income can grow much faster than a company’s per share payout.
If you added another $10,000 your income would increase by $300, leading to a total amount of dividends received of $627 by the end of year two. We haven’t yet reached retirement, but be patient – it’s a compounding process.
I’ll save you the ongoing math and provide a summary:
The math above shows the amazing power of compounding accrued by long-term investing.
Once again expenses become especially important. Under the above circumstances it would take you 20 years to reach retirement or financial independence if your expenses were $15,000 per year, as compared to double that amount of time – 40 years – if you wanted to spend $100,000 a year. The numbers are not inflation adjusted, but the point is to illustrate the concept.
Moreover, it’s important to think about the expenses and income in a “net” sense. If you have a social security or pension payment coming in or other income source, you may only be looking to supplement this rather than covering all of your expenses completely.
That’s how I’d start to think about the process if you’re considering retirement or financial independence in the future.
You want to be cognizant of both the expense side and income side, realizing that there’s an inherent connection between the two. Now we can get to the “fun” part (although I personally like both sides).
