Can You Retire on Dividends?

I think you can retire on dividends and I plan to have dividends provide the majority of my income in retirement. Others have very different views on the possibility of retiring on dividends. At Early Retirement Extreme, Jacob proposes the idea of retiring on $85,000 of dividend stocks. At My Money Blog, Jonathan looks at a hypothetical $100,000 investment for creating retirement income only from dividends. He tests how the investment would have fared in a couple of funds and concludes they wouldn’t provide nearly enough retirement income.

Which one of them is right? I think they are both right, they are just using extremely different variables to come to their conclusions. ERE supposes you can live on $6000 a year and receive a 7% dividend yield. With those variables you only need a sum of $85,000 to fund your retirement. Most people will consider the living expenses and dividend yield unachievable but they are possible. Jacob lives on $6000 a year and you can find plenty of others who live on a similar amount at the ERE or MMM forums. It is probably more difficult to consistently earn a 7% yield. I’m not sure if Jacob has done that. I’d like to hear from anyone that has.

Jonathan looks at investing in the Vanguard 500 Index Fund and the Vanguard Wellesley Income Fund. The index fund isn’t designed to provide income so it is not surprising that it doesn’t produce much income. The more interesting information is looking at the income fund results. The income fund actually produced less income over time. This was because the fund is heavily invested in bonds which have much lower interest rates now then they did twenty years ago. The conclusion is that you can’t just buy an income fund and collect the dividends.

I do believe it is possible to retire on dividend income from a portfolio of dividend stocks. In my next post I’ll share some of the stocks I own.

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