Seeking Alpha” Retirement < How To Retire With A Million In 10 Years And Live Off Dividends Feb. 19, 2022 9:00 AM ET | AAPL, ABBV, CLX... | 334 Comments | 109 Likes Financially Free Investor Summary If you are 50 or older and haven't done retirement planning, there's no better time to do this than now. In fact, it's never too early. We demonstrate how to plan, save, and grow your capital to retire in 10 years. We ran multiple simulations for our hypothetical couple to show how they could grow modest savings into a significant sum that can last them for a lifetime. Lastly, we provide a simplified model portfolio to grow the capital safely at a 10% rate or more while at the same time preserving the capital to a large extent. Looking for a portfolio of ideas like this one? Members of High Income DIY Portfolios get exclusive access to our model portfolio. Learn More »We like to publish on this topic a couple of times a year as we want to show our readers, especially the new and relatively younger investors - what is possible with starting and investing early for the future. The earlier you start, the easier the path will be. However, whatever your stage may be, there is no reason to be disheartened because it is never too late to start. If you are already into your late 40s or even 50s, it is still not late - it will just require a little more sacrifice and determination.So, why a million dollars? A million dollars is simply a milestone. If you're a diligent saver and investor, the first time you hit a million dollar mark in retirement savings, it's an important achievement. That said, a million dollars is not the same as it used to be just two decades ago. In the early 2000s, most financial planners used to agree that a million dollars were more than enough to have a comfortable retirement with a high middle-class living. However, most planners would now advise shooting for 2 million to have a comfortable retirement. Due to inflation, the buying power of one dollar in the year 2000 is only worth about 60 cents today. So, even with that basis, now you would need over $1.6 million to maintain the same standard of living as you could afford with one million in the early 2000s. In fact, folks who have retirement 20 years away should definitely target 2 million to retire comfortably. Nonetheless, these are just numbers thrown for a wider audience. They can vary greatly from person to person, depending upon basic living expenses, health status, personal spending habits and hobbies, availability of other sources of fixed income like pension and social security, and most importantly, the place where you decide to live in retirement. To plan for retirement, you may have to answer some of the basic questions: 1. What would be your basic expenses in retirement? 2. How much savings would be enough to retire? 3. When and at what age should you retire? The three questions above are interrelated and interdependent. Once you have answered the first two questions, it is easy to determine when and at what age you should or could retire. As such, there is no pre-set or generic answer. Besides how much money you would need in retirement, there are other factors, mostly determined by your personal situation. Life expectancy has gradually increased in the last many decades, and people are working longer for a variety of reasons. Some feel they have not saved or prepared enough. Some just want to have that extra margin of safety and choose to work longer. Then there are many who just enjoy their work and rather continue to work and keep an active lifestyle for as long as possible. So, we guess the goalpost here may not be to just retire (for the sake of retiring) but to become financially free and ready to retire if you so desire or if the need arises for any reasonFor the vast majority of people, Social Security and Medicare play an important financial role in their retirement planning. For Social Security purposes, the full retirement-benefits age is considered as 66 years, which gradually rises to 67 years for folks born in 1955 or later. The early Social Security benefits become available at age 62, albeit at 25%-30% lower rates. Medicare plans are available to retirees at the age of 65, which is essential for many folks to be able to retire. That said, we think you should at least have a plan for early retirement by 62, just in case it is forced upon by any circumstances, or you may simply feel burned out and decide to retire by choice. Let's say you and your spouse just turned 52 and have not given serious thought to retirement; well then, it's probably high time that you make a plan and put it into practice. For the purpose of this article, we will consider a couple who have just turned 52 and want to be prepared for retirement in 10 years. Note: This article is part of our Retirement Series, where we periodically write on retirement themes for different age groups and circumstances. At times, you may notice some repetition of some core principles and strategies, but we feel that is necessary for the benefit of new readers. All of the tables and charts in this article have been prepared by the author unless explicitly specified otherwise. Part I: Retirement Planning for our Hypothetical Couple - John and Lisa As usual, to make it easy to understand the concept, we would use our hypothetical couple - John and Lisa - to demonstrate the planning process. Let's assume John and Lisa are 52 years of age and wish to retire in 10 years at 62. It's possible that they would change their mind in the future and may decide to work longer, but the idea is to be prepared to retire by the age of 62 if they had to. We will assume that they both work full time, and their current household gross income is $130,000 a year, which falls solidly in the middle-class income group.Their current savings are quite reasonable at $350,000 and mostly invested in tax- deferred plans like 401K and/or IRAs. Now, this is not a very large sum at their stage, but it is not too bad either. Moreover, we have to keep in mind that this also has been possible due to the fact that the market has done exceedingly well in the last decade. The fear is that the next decade may not be as good as the last one. In any case, they have done a great job of accumulating the current savings of $350,000. Unfortunately, so many folks in the US are not able to save as much by this stage. Still, it falls short of their goal to retire by the age of 62 and be able to maintain their current living standards. The rule of thumb that many financial experts suggest is that you should have saved five to six times your annual income by the time you step in your 50s, which should grow to at least eight to ten times by the time you retire. If you plan to spend more in retirement on things like travel all over the world extensively, it is recommended that you should target even higher savings. However, everyone's needs are different. Nonetheless, John & Lisa are clearly lagging to some extent. The first thing they do is to recognize that their current savings are not enough, and they need to make some tough choices if they hope to have a comfortable retirement starting in 10 years. They would have to make some sacrifices now and cut down some of their discretionary spending in order to save and invest more. While trying to plan for their retirement: The first question they need to answer is how much savings would be enough for them to retire. Retirees of today have to plan for 30-40 years of retirement because people are living much longer than just a few decades ago. Also, they realize it's better to plan for longer and have some surplus left for their heirs or any other causes than running out of money in their 90s. The answer to the above question lies in the realistic estimate of expenses in retirement. If they underestimate, it can prove to be a big problem because that means that they would not have saved enough. If they overestimate it, they will end up with more savings than they need at the cost of working longer than needed. But the second scenario will still be a good problem to have. One way that has been suggested over the years by many financial planners is that one should plan for about 75%-80% of their pre-retirement expenses. We think it is too high a target for many folks, and actual expenses in retirement may actuallybe much lower. Nonetheless, they should make an honest assessment of their estimated expenses in retirement. Let's make some more assumptions about John and Lisa's situation. They currently carry a mortgage on their house and have 15 more years to repay in full. By maintaining the status quo, they will be taking the mortgage payments beyond their retirement at 62. They definitely do not want to see themselves taking any large debt into retirement. They decide that they will make some extra payment each month on the mortgage so that they are able to pay off the house in 10 years instead of 15 by the time they retire. They will pay $300 extra every month to pay off the loan early. This decision is very personal, as some would consider it wise to invest those extra $300 rather than paying off the mortgage early. But we think that it's better to take that extra burden off of your mind in retirement. John and Lisa decide that they will not carry any type of debt into retirement, be it car loans or credit cards. They have one child in college whom they are currently supporting and will continue to do for the next several years They currently have one new car on the five-year term loan. They will continue to make existing payments on this car. However, once this car loan is fully paid, they would start putting away $400 a month for a future car so that they would not need to finance another car, just when they are about to retire. Most importantly, they decide that they both will increase their current 401K contributions to 16% of their earnings. Once their child's education is complete, they will bump the savings rate to 20%. This will require some sacrifices, but this is fundamental to reaching their retirement goals. This will help boost their savings significantly and also reduce their current taxes. Table 1: John & Lisa's New Budget (estimated) vs. Old ** The author is not a tax expert/consultant. This estimate is just to provide a broad idea for the purpose of demonstration; the actual amounts could vary. Estimation of Expenses in RetirementTo know the total savings requirement, they will need to first estimate their expense in retirement. There are several wavs to work out an estimation of exnenses in retirement. Different people in similar situations will probably come to different conclusions. That's why it's important to keep some flexibility, and one should plan for a 10%-20% variation from year to year. We list some of the ways to get started: The first method may be to multiply your current gross income by some percentage, like 70% or 80%. This is something many financial planners suggest. However, in our view, i's highly generalized and prone to overestimation. Another simple method may be to make a list and add all of the likely expenses in retirement. This can work, but for many items, it may be difficult to estimate accurately. Furthermore, there's the possibility that you may forget to list some of the likely expenses entirely. A third method that we recommend and may be more appropriate is to take your current household gross income and subtract all the expense items that you are pretty sure that you would "not" incur in retirement. Also, don't forget to add any additional expenses that you may have in retirement that you do not incur currently. For example, there may be an increase in medical premiums/costs, especially until the time you are eligible for Medicare. It basically means figuring out how much of the money currently goes into items that will no longer be needed. Then, adjust this remaining amount for inflation for the number of years that are left prior to retirement. This method will ensure that you are able to maintain your current lifestyle into retirement. Based on the above (third option), this is what John and Lisa came up with: When they retire, they will no longer need to put 16% or 20% savings contributions into their 401Ks or retirement funds Assuming that they would not have any earned income in retirement (unless they decide to work part-time), they will not be putting any more money into Social Security/Medicare deductions (usually 7.65%). Their tax bracket may change to a lower slab, so they would need to account for that reduction.Besides, they will not have work-related expenses, like commuting, new clothing, dry-cleaning expenses, etc. They would be done with kids' college education, which will cut down another $10,000 - $14,000 a year. They will not have the house mortgage payments anymore (monthly mortgage $1,200 or $14,400 yearly), based on the assumption that they plan to pay it off early, They will not have the current medical premiums that get deducted from their paychecks. However, they will need to earmark higher medical premiums since they will not be eligible for Medicare until 65. It may be an option for one of them to work part-time until 65 so that they could get affordable and cheaper medical insurance plans through their employers. Table 2: Expenses in Retirement (broad estimates) In the above example, it's easy to see that nearly 55% of their current gross income goes to expense items that they will no longer have or need in retirement. However, these are not universal numbers and can vary greatly based on individual situations. That said, for John and Lisa, it means that they should only require roughly 45% of their current gross income to support their existing lifestyle. Based on their current gross income of $130,000, it comes to $63,000 a year in today's prices. However, due to inflation in the next ten years (assuming an average of 3% a year), they will require $83,000 a year. Even though we already have accounted for additional expenses for medical premiums, we want to be extra cautious and put some additional dollars for deductibles and out-of-pocket expenses. So, let's add an additional $700 a month (or $8,400 a year) for medical premiums/costs. However, this higher cost is needed just for the gap of 3 years until they get eligible for Medicare. So, it will be better to keep the three-year worth of money (roughly $24,000) as a cash reserve. In addition, they would like to keep a cash reserve of $80,000, roughly equivalent to one year's worth of living expenses. So, in summary, they will keep a total cash reserve of $104,000 (80,000+24,000). Table 3: Expenses in retirement after inflation45% of the current gross income: $63,000 Inflation-adjusted Amount (10 years later) $84,666 Total: (Approx.) $85,000 a year How Much Savings Are Needed? Since John and Lisa have worked out their yearly expenses budget in retirement, they can easily determine how much of the total savings they would need by the time they retire. In fact, John and Lisa have a few options to consider with regards to the optimal age when they should draw on social security: John would withdraw Social Security benefits at 62 but delay Lisa's benefits until she reaches age 70. This will allow Lisa's Social Security benefits to get to the highest payout possible. The rest of the income needs (from age 62-70) could be met from the investment portfolios. Both John and Lisa could delay taking the Social Security benefits until the full eligibility age of 66 years and ten months. They could withdraw the entire income needed from their investment portfolios from 62-67 until they start taking the Social Security benefits. Their withdrawal rate will be quite high during the initial five years, after which it will drop drastically. One of them works part-time for a few more years and delay the social security for both of them at least until 65 or 66 years. This will help bridge the income gap for the need for social security. They could also get employer-provided health care benefits, and their premiums would be much lower. As it's obvious, option-3 will be much easier to pursue. It also will afford them to increase their investment capital more than planned. But what if circumstances do not allow them to opt for this route, or maybe they are not willing to work any longer after 62. We will model the first two options, which are more challenging in the financial sense.Options 1 and 2 appear to be difficult since they both will be fully retired at 62. As decided earlier, they would reserve one year of expenses in cash as well as three years' worth of extra medical expenses. We will consider option 1 in detail. They would withdraw roughly 5%-6% from their portfolio from 62-70 years of age. Even though a withdrawal rate of 5%-6% may seem to be too high; however, as it's demonstrated in the table below, this could be easily done since it's for a limited window of 8 years, after which the withdrawal rate would fall to 2% - 3%. Let's consider Option 1 in more detail: Both John and Lisa retire at 62. They do not opt for part-time work (or, let's say, suitable work is not available). John will take Social Security benefits starting at age 62, and the approximate benefits are assumed to be $2,000 per month or $24,000 per year (after counting inflation increases). Since Lisa will wait to withdraw Social Security benefits until 70, her benefits will be much higher at approximately $3,600 a month or $43,200 a year (after counting inflation increases). They will reserve roughly one-year expenses (80K) in cash from their retirement portfolio. They also put aside $24,000 for payment of medical premiums for three years until they are eligible for Medicare. By doing some reverse calculation, here is what they would need Table 4: Calculation of savings needed So, this couple will need at least $1.125 million at the time of their retirement at 62 years of age. As the calculations below will demonstrate that they can easily reach their target if they can get at least 7.5% average annual returns over the next ten years. We think it is very reasonable and doable to get at least 7.5% average annual returns. In fact, we will show in the later section how to achieve safely 10% returns on a long-term basis. Investment Returns Calculations (Age 52-62)As is clear from above, John and Lisa have defined their savings target. Now they need a plan that could get them from $350,000 to $1.1 million-plus in 10 years. They assume that their investments would grow at a very conservative rate of at least 7.5% a year for the next ten years, while they contribute 16% of income every year along with employer's matching (assuming 80% on the first 6%). Once their child's education is complete, they will bump the savings rate to 20%. Also, their annual income is likely to increase, but let's assume it to be constant at $130,000. At this point, John and Lisa want to make their assumptions as safe and achievable as possible. Even though they will target 10% annual returns, to provide an extra margin of safety, they will calculate the returns on the basis of 7.5%. As you can see below, even with 7.5% returns and a 16% annual savings rate, John and Lisa would accumulate $1.125 million and meet their savings goal Table 5A: Investment portfolio growth from Age 52-62 If they are able to grow the same level of savings at a rate of 9% or 10% average annual returns, their ending balance would be much higher, as shown in the table below: Table 5B: Average Rate of Annual Returns Ending Balance at 62 75% $1.14 milion 9.0% $1.278 million 10% $1.375 millionWe know from the historical perspective that the stock market, over a very long period of time, can comfortably return 9% to 10% annualized returns. However, the big question mark is roughly 8% steady growth over ten years. The above assumption about growth would be just fine over two or three decades, but over ten years, it may or may not materialize. The market's ups and downs from year to year can change the outcome. If history is any guide, it can vary greatly depending on how the markets do in the first few years after investment. If there was a big setback right in the first couple of years, it would need time to recapture the losses and come back net positive. However, this is mostly the case when you're invested in broad indexes. But there are strategies that you can build which can protect you from corrections and big drawdowns. We will address such strategies a little later in section II. Retirement Years Age 62-90 - Calculation of Growth and Drawdown For John and Lisa, during actual retirement years, their strategy looks something like below. If everything works out according to the plan, they should never run out of money. In fact, as you would see below, at 80 years of age, their portfolio would be roughly double what they started with at age 62 while withdrawing and spending a substantial amount of income. That leaves plenty of scope for margin of error, and in all likelihood, they should never run out of money: At the start of retirement, they reserve one year of expenses in cash from the total capital, a total of $80,000. They also reserve $24,000 towards medical expenses (in addition to the premiums) for the next three years. This leaves them the investment capital to $1,036,000. Also, John would start withdrawing Social Security at the earliest eligible age of 62. Due to early withdrawal, he will receive roughly 73% of the full benefits. We will assume that SS-1 to be $1,500 a month in today's dollars, but with COLA (Cost Of Living Adjustments) increases in the next ten years, it should be about $2,000 a month or $24,000 a year. This will allow Lisa to wait until the age of 70 years to collect and let the Social Security benefits be compounded to a much higher amount. We will assume that the SS-2 will be $3,600 per month, starting at 70 years, and due to COLA increases.However, at age 70, due to inflation (from age 62-70 years), their expenses would go up each year as well (assumed at 3.0%). Now, this is the average rate of inflation. Sure, the current inflation is running very high, but it should cool down in a year or so. They assume that investments of $1,036,000 (after cash reserves) will grow at a realistic and conservative rate of 8%. This is addressed in a later section. Below is the table that simulates the income and withdrawals from the age of 62-90 years. As you can see below, with 8% growth, their balance grows very nicely over the years and provides them a large margin of error or overspending. However, we're going to present two tables with 8% and 7% annual growth rates. Table 6A: Calculation of growth and drawdown with an 8% rate * Cash-reserve ($80,000 + $24,000 (3 years of Med prem)) Note: Some rows (from the age group, 71-74, 76-79, 81-84, 86-89) have been hidden to keep the table size presentable. Table 6B: Calculation of growth and drawdown with a 7% rate With a 7% annual growth rate, John and Lisa are still able to grow their capital significantly and are still left with a good amount of cushion over their spending needs. Now, most people would agree that a 7% return over a long period of time is a very reasonable expectation, especially if you're doing your homework. Anything less than 6% growth would start eating into the capital a bit but still last until the age of 95. However, there would be very little scope for any error or overspending. Now, let's consider another scenario - what if both John and Lisa start withdrawing Social Security benefits at age 67? The overall results will be very similar to what we saw with John drawing at 62 and Lisa at age 70; however, they would draw on the investment much more during the first five years of retirement. If the broader markets were to take a deep dive during the first few years, then this option may not be too desirable. Below is an example assuming they get 8% annual returns on their investments. We will see the calculations in the table below:Table 6C: Calculation of growth and drawdown with an 8% rate, SS withdrawals at age 67 Autor Part-ll: How to Get 10% (or more) Investment Returns Consistently We know that it may be too risky to put all your money in the S&P 500 or any other set of index funds, mainly because in the investment world, ten years is not a very long time frame, and our portfolio will be subject to the risk of the sequence of returns. Note: Sequence risk, or sequence of returns risk, is defined as the risk that the stock market crashes early in your retirement or just prior to retirement. So, what's the alternative? We will suggest a portfolio with two buckets (preferably three) that will greatly reduce the risk of the sequential return DGI Bucket: 40% to 50%. Rotational Risk-Adjusted Portfolio: 40% to 50%. Optional/Flexible Bucket: 15% allocation. (This is a flexible bucket that could be a growth bucket prior to retirement and replaced with a CEF-based income bucket after retirement. Highly conservative investors could keep this in CASH-like securities). The DGI portfolio will provide a safe and consistent 4% (and increasing) level of income from dividends. It also will protect and preserve the capital better than the broader market during a correction, if not entirely. At the same time, the second bucket consisting of a Rotational portfolio will provide the necessary hedge and protect the overall capital DGI Bucket: (40% - 50% of assets) If you're a passive investor, you may create a portfolio of dividend ETFs. However, if you're an active investor, you should have a DGI portfolio of individual stocks. Not only could you save the ETF or fund fees (however low they may be), but you could buy your positions when they are attractively priced. Also, you would have the flexibility to aim for a higher dividend yield in the range of 4%.A sample list of 20 DG! stocks with a very attractive dividend yield of over 4% (average) spread over 15 industry segments is presented below. This is not a buy-list per se; however, a starting point to do further research and due diligence. List of Stocks: (LMT), (PEP), (CLX), (UL), (ENB), (XOM), (TROW), (PRU), (ABBV), (JNJ), (MMM), (PFF), (NNN), (DEA), (MAIN), (HD), (TXN), (VZ), (MO), (NEE). Table 7A: A DGI portfolio of 20 Stocks Rotational Risk-Adjusted portfolio: (40% - 50% of assets) We regularly write on many Rotational strategies. One of the strategies that we like in the current environment is our Bull-and Bear Rotation strategy (this strategy is part of our NPP Portfolio and our Marketplace service). This portfolio is designed in such a way that it aims to preserve capital with minimal drawdowns during corrections and panic situations while providing excellent returns during the bull periods. Due to much lower volatility, this portfolio is likely to outperform the S&P 500 over long periods of time. However, it may underperform slightly during the bull runs. The strategy is based on seven diverse securities but will hold any two of them at any given time, based on relative positive momentum over the previous three months. Basically, we will select the two top-performing funds. The rotation will be on a monthly basis. The seven securities are Vanguard High Dividend Yield ETF (VYM) Vanguard Dividend Appreciation ETF (VIG) iShares MSCI EAFE Value ETF (EFV) iShares MSCI EAFE Growth ETF (EFG) Cohen & Steers Quality Income Realty Fund (RQ) iShares 20+ Year Treasury Bond ETF (TLT)iShares 1-3 Year Treasury Bond ETF (SHY) Please note that the last two are long-term and short-term Treasury funds, which are used as hedaina securities. Based on the back-testing results, below are the annualized rolling return rates for 1, 3, 5, 10 years, and CAGR (Cumulative Annual Growth Rate) since the year 2007 (March 2007). The comparison is provided with the S&P500. Table 7B: Duration Model - ‘S&P500 Bull-&-Bear Annualized Rolling Returns 1-Year 17.37% 11.61% 3-Years 17.1% 11.78% 5-Years 16.93% 12.30% 10-Years. 16.78% 12.21% CAGR Since Mar. 2007 15.56% 10.23% Max Drawdown Since Mar. 2007 16.20% -50.97% Note: The above performance results are based on back-testing and provide no guarantee of future results. Also, we do not recommend such a large allocation to this strategy overnight in a lump sum. It may be better to build the position over a period of time. Ifyou decide to have a large percentage of your assets in the Rotational strategies, we recommend that you should have at least two (or more) Rotational strategies to provide reasonable diversification, though it should be determined based on your personal situation in terms of time availability, and preferences. Optional Flexible Bucket: (15% of assets)This bucket can be different for different stages of life. Younger folks or those who are still in the accumulation phase could invest in a high-growth bucket. Retirees or folks who need income could invest this sum in a high-income (CEFs, REITs, BDCs) bucket. The highly conservative investors who prioritize the conservation of capital above everything else could keep this amount in cash-like securities. If you decide to invest in a growth bucket, you should choose these investments very carefully. There's a difference between growth stocks and speculative ones. For example, Apple (AAPL), Microsoft (MSFT), Mastercard (IMA), Home Depot (HD), UnitedHealth (UNH), and Texas Instruments (TXN) are some of the examples of growth stocks that may be reasonably safe. Now, this bucket will not provide much income as such, but the growth of capital should more than compensate in the long run. For the high-income bucket, you could choose some of the CEFs (Closed-End funds), REITs (Real Estate Investment Trusts), and BDCs (Business Development Cos). You should go with the funds that have the best long-term records. Also, they should be selected from many different sectors and asset classes. Concluding Thoughts The importance of planning for retirement and investing at an early age cannot be overstated. In fact, the sooner you start, the better it would be due to the compounding of investment returns. If you're already 50 years or older, it becomes even more critical to consider various options to see how you can reach your goals in a realistic manner. Even though it's always prudent to start saving from an early age, it is never too late. Even if you have not saved much or just have modest savings by the time you turn 50, there's still ample time to make up for the lost time. However, the more you delay it, the harder the choices will be. In the second section of the article, we demonstrated a strategy with two buckets that would not only provide a high level of income but would also lower the volatility and drawdowns to a large extent. It will provide growth during the boom years and preserve capital during recessionary times or big corrections. If we invest with a sound