Getting a Yearly Raise in Retirement

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Dividend Investing

In my last column, I wrote about dividend stocks and rental real estate as two ways to generate passive income in retirement.

I received many comments, most agreeing with my assessment… But not all.

In fact, Angelo brought up a good point. I’m paraphrasing his observations, but essentially he pointed out: If you have $100,000 and generate a 7% yield, that’s only $7,000. You’d need $1,000,000 to earn $70,000 per year.

He’s absolutely right.

If you’re retired and have $100,000 saved – with no other assets or sources of income other than social security – you’re in trouble.

When $100,000 Isn’t Enough

In 2012, the average retiree collects $1,229 per month from Social Security. That’s just $14,748 per year.

The extra $7,000 that Angelo mentions would certainly help. But it isn’t going to enable you to retire comfortably. Not on $21,748. And besides, 7% is tough to come by these days.

If you’re not yet retired, you can see by Angelo’s example that you need to build up your war chest of cash. You’re going to need significantly more money to generate income.

Do everything you can to save a little more than you already are.

Increase your 401(k) contribution by a few percentage points. Eat out one or two times less per month – anything you can do to add to your nest egg will help.

The other important thing you can do is invest in a way that’ll give you a raise every year – Perpetual Dividend Raisers.

These are stocks that raise their dividends every single year. Just like when you’re working, you want to receive an annual raise. When you’re retired, you still need more income each year to keep up with inflation – even if inflation is low.

Let me explain what I mean…

If inflation is at a low 2.4%, you’ll still need approximately 26% more money in 10 years to buy the same goods and services you’re buying today.

If inflation rises to the 100-year average of 3.4%, you’ll need 40% more money.

If you’re retired, it’s tough to earn more income every year. Perpetual Dividend Raisers can do that for you.

Double Your Income in 10 Years

Find stocks that are raising their dividends by at least 5% – and preferably 10% – per year, with 10-year track records of doing so. Assuming they continue along that path, those dividend increases will generate more income for investors every year, outpacing inflation and increasing your buying power.

For example, let’s say you have a $250,000 portfolio of Perpetual Dividend Raisers – stocks like Intel (Nasdaq: INTC) and AT&T (NYSE: T) – with an average yield of 4.5% and an average dividend growth rate of 10%.

The first year, the portfolio will generate $11,250 in income.

However, the dividend growth will give you a raise each year so that in Year Five, you’re making $16,471 – and in Year 10, you’re up to $26,526, more than double your original figure.

Year

Yearly Income on $250,000

Dividend Yield

Dividend Growth

One

$11,250

4.50%

10%

Two

$12,375

4.95%

10%

Three

$13,612

5.44%

10%

Four

$14,973

5.99%

10%

Five

$16,471

6.59%

10%

Six

$18,118

7.25%

10%

Seven

$19,930

7.97%

10%

Eight

$21,923

8.77%

10%

Nine

$24,115

9.65%

10%

Ten

$26,526

10.61%

10%

And if inflation creeps higher to 3.4% – where you need 40% more money in 10 years – your $26,526, or 136% increase, more than offsets inflation and boosts your buying power.

Lastly, if you’re not yet retired or don’t need the income right now, reinvest the dividends until you’re ready to tap that income stream.

By reinvesting the dividends, you’re compounding them – the dividends are buying more shares, which spin off more dividends, which buy more shares, which spin off more dividends…

Using the same example as above, let’s say we reinvest the dividends (instead of simply collecting the income). In five years, the $250,000 you started with turns into $451,465… And in 10 years is worth $838,533.

If at that point, you need to tap the income, your original $250,000 is now yielding $41,832 per year. And of course, you can always sell some shares if you need to, now that your nest egg is worth over $800,000.

Although, if you can, it’s always better to hang on to those shares that are generating a high yield.

So Angelo is right: With $100,000, it’ll be tough to generate a meaningful amount of income today. But if you invest in Perpetual Dividend Raisers, your future retirement will be a lot more comfortable.