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Step 1: Define what wealth means to you

There’s no perfect number, right? A person who’s paid off their modest mortgage and grows their own veggies in a small town may feel far more at ease than the city dweller who still has a raft of high monthly expenses that forgot to read the retirement memo.

With your desired lifestyle, thinking about whether passive dividends will do the trick is indeed all about the numbers. Major banks and institutions like Knight Frank use seven digits to define their ideal customers.

According to its 2022 Wealth Report, a person with $1 million in investable assets qualifies as high-net worth, while someone with $30 million or more is considered ultra-high net worth.

What’s more, if you earn more than $570,000 a year or have more than $11.1 million in assets you’re “richer” than 99% of Americans. But that’s where “location, location, location” comes in. A million dollars in Midtown Manhattan isn’t the same as a million in Mumbai.

Why does this matter? If you consider wealth relative, you’ll want to generate more money in passive income, or just enough, compared to others in your age group. It depends on your geographic region or other variables — a major one being whether your home is paid off.

If you consider wealth absolute, then hit the Excel sheet or QuickBooks program to nail down how much you’ll spend — both fixed and flexible expenses — versus your pre-retirement earnings.

Whatever the difference will be once you start living off savings and Social Security is your magic number to solving the dividend equation.

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Step #2. Calculate your rate of return

Let’s assume you’ve arrived at a target of $100,000 in annual income. With forecasting how much dividend income you can safely expect, historical numbers provide a reliable barometer.

The S&P 500 offers a current dividend yield of 1.6% and has delivered an average of 2.34%. That means if you want to generate $100,000 in annual passive income from a vanilla index fund, you would need $4,273,504 in assets ($100,000 divided by 2.34%).

Close the gap with whatever retirement income you already have and if the number is lower than that $100,000 — say, just $10,000 — you’ll be in better shape to experience dividend-derived freedom. To hit the $10,000 mark, you’d need roughly $427,000 at a 2.34% return.

You could extract a higher return from a dividend-focused fund like the Vanguard High Dividend Yield ETF (NYSEARCA:VYM). Since 2018, the fund’s median dividend yield has been 2.97%. That means you’d need just $3,367,003 to generate $100,000 in passive income annually.

Read more: UBS says 61% of millionaire collectors allocate up to 30% of their overall portfolio to this exclusive asset class

Step #3. Name your margin of safety

Remember those surprise bills that came in your working years? Well, they’re not about to stop now. But if you use a strategy based on what’s called the safe retirement rate, you can forecast how much money will get you through 30 years. According to Morningstar, that’s 3.8% of your retirement portfolio annually.

That assumes a 50-50 split of stocks and bonds, and how many of those stocks award dividends. As you can see, it often gets complicated, because how much your stock appreciates in value and how much you get in dividends are not the same thing.

What’s more, dividend stocks could underperform in the years ahead, and inflation will make it more expensive to retire in 2033 versus 2023; Morningstar predicts a long-term annual inflation rate of 2.8%.

That’s why it’s smart to seek out a financial adviser with all your financial questions, including the Great Dividend Question.

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Putting it all together: Simple is a smart starting point

Otherwise intelligent people find the task of pulling together their numbers so overwhelming that they make the baffling choice of leaving retirement to chance.

But what might’ve worked in an adventurous youth doesn’t square with the wisdom and prudence that comes with old age.

Starting simple will bring your retirement lens into focus as you discover your unique vision of wealth and financial freedom, the twin pillars of a sound investment strategy.

No matter your worries or challenges, start from where you are. Don’t leave things up in the air — and if you want to ignore the numbers, Powerball has plenty worth skipping.

Need help? Call in an expert

Setting yourself up for a comfortable retirement is nerve-racking — especially with still-hot inflation and potential recession peeking around the corner.

One solution to help you sleep better: Find a financial adviser who can help navigate your finances and make sure your assets are safeguarded.

Researching and calling multiple financial planners can be a time-consuming hassle, but there are ways you can easily browse vetted advisers that fit your needs. Booking a consultation is free and only takes a few minutes.

If you're unsure how to safeguard your savings during a recession, it’s better to find answers sooner than later, while time is still on your side.


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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.