Tip of the Day: Dividend Income Can Help Retirees Weather Market Volatility
Tip of the Day: Dividend Income Can Help Retirees Weather Market Volatility
By: Stacey Nickens
Clients often ask me: How much money do I need to have saved for retirement? However, instead of selecting a specific number, I prefer to look at how much money you will need to withdraw from your investment portfolios during retirement. Think about how much money you spend each month and how much money you will receive from other income sources, such as a pension or Social Security. For example, pretend you spend $8,000 a month, will receive a $500 a month from a pension, and will receive a $2,500 a month from Social Security. Between your Social Security benefit and your pension, $3,000 of your monthly spending is covered through other income sources. You would then need to withdraw $5,000 a month from your investment portfolio.
Knowing your monthly withdrawal needs, you could invest your portfolio to accrue enough dividend income to cover $5,000 a month in withdrawal needs. Such dividend income has the bonus perk of being relatively unaffected by market volatility. While the valuations of dividend-paying stocks may fluctuate, their dividend yield is unlikely to be impacted unless the company experiences financial distress. (Keeping an eye out for healthy, dividend-paying companies could help mitigate this risk factor.)
Many companies offer preferred stocks at $25 a share. The value of these shares can drop, especially in the current market. However, despite the drop in valuation, the preferred stock will often still pay a dividend. Preferred stock holders also must be paid dividends before common stock holders. What’s the moral of the story? By relying on dividend income, retired investors can rest peacefully knowing that market volatility may impact stock valuations but will likely not impact their dividend income.
That being said, you also must keep taxes in mind. Dividend income is taxable, and if you’re paying taxes on dividend income, you should be living off of that income. For example, pretend you receive $5,000 in dividend income in a brokerage account, and you pay taxes on that income. However, instead of withdrawing that dividend income to cover your monthly living expenses, you withdraw $5,000 from your IRA instead. By drawing from your IRA, you ended up paying taxes on income that you didn’t use. Instead, live off the taxable dividend income and allow your IRA funds to continue to grow.
Dividends are an incredibly useful investment tool. I encourage you to read about the strength of dividends, even during volatile market times.
