Mar 11, 2025
No wonder you’re thinking about retiring in five years. You’re 58 with a $2.5-million portfolio — more than 13 times the $185,000 nest egg most of your peers have saved up, according to the Federal Reserve.
Adding to the appeal? Once you’re 59½, you can take penalty-free withdrawals from an IRA or 401(k). If you want, you can start collecting Social Security benefits at 62, albeit at a reduced rate. You aren’t eligible for the full monthly benefit until you’re 67.
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You might be able to live off of your dividends without touching your $2.5-million principal, provided you manage your portfolio well. But there are caveats.
Diversification
With a dividend yield of at least 3.2%, a $2.5-million portfolio could easily generate $80,000 in annual dividends. That kind of yield is doable if you diversify beyond a basic S&P 500 ETF portfolio and focus on stocks with higher-than-average dividends.
REITs, or real estate investment trusts, can be a great choice for dividend seekers, since REITS required to pay out 90% of their taxable income to shareholders.
Be aware that over time, particularly in a portfolio loaded with growth stocks, the value of specific stocks can grow so that those companies occupy a larger percentage of your portfolio.
Companies experiencing rapid growth and accelerated gains don’t always pay high dividends because they reinvest their profits to fuel growth and boost stock prices.
Keep tabs on a portfolio of dividend-paying value stocks. A good bet is to rebalance your portfolio on a quarterly basis — either on your own or with a financial adviser.
And remember, companies are not obligated to raise dividends over time, nor are dividend increases guaranteed to match inflation.
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Inflation
Inflation could impact your investment income dramatically, as an annual dividend income of $80,000 could lose purchasing power over the years.
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The Federal Reserve has long targeted a 2% annual inflation rate, but even a 2% inflation can erode the spending power of $80,000. Stimulus policies amid the pandemic rapidly drove the cost of goods and services above 2%.
Taxes
Consider tax implications in your dividend calculations. If you're pulling in $80,000 a year in dividends from a taxable brokerage account, there's no tax break, and your dividends and Social Security benefits can be taxed.
On the other hand, if you have a traditional IRA, you only pay taxes on dividends when you withdraw them. Better still, dividends on a Roth IRA are tax-free.
Your taxes will depend on your filing status and income, as well as what tax thresholds look like in the future. In 2025, if you're a single tax filer, you'll pay 0% taxes on dividends if your income is $48,350 or less.
If your a single tax filer and your income is anywhere between $48,351 and $533,400 — and you’d fall into that bracket with dividend income of $80,000 a year — there's a good chance you're looking at a 15% tax rate.
Meanwhile, if you're filing a joint tax return, you'll pay 0% taxes on dividends with an income of up to $96,700 in 2025.
Remember that tax laws and rates can change over time. It’s a good idea to consult a financial adviser to plan your short- and long-term retirement strategy.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
