It struck me recently that I should really try to estimate if I’m even on track to reach FI based on dividend income, and if I’m not, what I would need to do to reach it. And since this thought involved making another Calculator which is always fun, I thought I’d do that instead of doing what I should be doing; namely some work at home.
So here’s my first attempt at a target retirement age calculator.
I’ve done some high-level estimates in the past in trying to project the next 30 years of expected living expenses, monthly income and so forth. Those estimates usually arrive at me retiring at around 70. And considering that expenses won’t be as high when I do retire means that this timeframe is likely a worst case number.
To keep things fairly simple, I’ve not included such adjustments in the calculator below. I’ve set it up where you can enter an initial monthly living expense / budget and your age. The living expenses will then be increased each year by the inflation amount that you enter and displayed in the chart in red.
On the income side, the calculator needs your current (average) income from investments (it doesn’t care how much capital you have) and how much you expect your income to grow organically per year if you didn’t add any new investments. In addition it allows a yearly contribution amount and an expected initial yield on those contributions. The dividend income from the yearly contributions is combined with the organic dividend growth to give a new monthly income amount which is displayed in green.
The intersection between the two lines is when your dividend income exceeds your living expenses, aka the Crossover Point. I’m calculating the age you’ll be when you reach that point.
The ‘kink’ in the green line is where I made the assumption that no new capital is added at age 65 and over, so the dividend growth is organic at that point and that’s a lower growth rate than before age 65.
My “Work Freedom Age” calculator
What I like about this calculator is how the chart dynamically recalculates its axes depending on the age you enter. That took a bit of fussing around in Excel but it works pretty well and it kept my inner geek happy!
What really made me revisit this topic was a recent post about the amounts needed to live of dividend income and if it’s worth it.
The article makes valid points, and it’s certainly something to think about. In my case, if I’m honest with myself, the desire for living off dividend income is based purely on fear of running out of money during retirement. The idea of constantly selling investments to live off each year is just depressing.
What’s certainly clear though is that you need much more money to live off dividend income, than you do if you’re adopting a total return strategy. If you’re living entirely from dividend income you’re not selling any investments and you’re living off a fairly low yield on a large capital amount and essentially ignoring any capital gains you make each year. If you’re living off total return then you’re taking advantage of any capital gain (except when it’s negative) although the number of shares you own each year is reducing. On the other hand you probably don’t need to be 100 years old and have $10 million in the bank.
In the defaults to my calculator, I’ve used current values for me. I will say that the results as shown aren’t achievable since I can’t afford to invest $60,000 a year for the next 30 years. However, what the results don’t show is
- My mortgage payment will finish before I retire which will reduce living expenses by $1,000 a month.
- I’m not including my retirement (401k) account in the above calculations.
But it sets a good target / point of reference for just how much money is needed if I want to keep my budget intact through retirement without touching my retirement accounts.
Incidentally with these numbers, I estimated the overall portfolio as being around $3,000,000 when I’m 70 and $10,000,000 if I lived to 100. These are fairly conservative growth numbers too (4% total capital growth).
Quote of the day
Life is a dream for the wise, a game for the fool, a comedy for the rich, a tragedy for the poor.
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