Mar 10, 2025
At 60, if you have $1.2 million saved for retirement, you have more than six times as much as most of your peers, according to Federal Reserve data.
But even though that’s a lot of money, it’s important to manage your sizable nest egg carefully. You could try to live off of dividend income from your portfolio, or draw down your total portfolio over time.
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Which is better? Let’s explore.
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Living off of portfolio income alone
A 2024 Allianz Life survey found that 63% of Americans are more worried about running out of money than dying.
The nice thing about living on portfolio income in retirement is that you aren’t touching the principal, meaning it should, in theory, hold steady or grow rather than shrink.
But it takes a lot of principal to generate sufficient income to live on, especially when dividend yields are as low as they are today.
The average S&P 500 dividend yield is currently just 1.27%. Even if you assemble a portfolio of individual stocks with higher dividend yields, you may only be looking at 5%.
For a portfolio worth $1.2 million, that’s $60,000 in annual income, which may or may not be enough to maintain your lifestyle.
Of course, it’s not a good idea to keep your entire portfolio in stocks. A safer bet is to split your assets between stocks and bonds, which could produce a little under a 5% return. It is doable, but whether the income suffices depends on your income-related needs.
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Keep in mind you’ll have Social Security benefits, as well. With the average retired worker collecting $1,978.77 a month in Social Security, you could be looking at $24,000 in benefits annually.
Combined with $60,000 a year income from your portfolio, that’s $84,000, which paints a different picture.
One big caveat: While living on your portfolio income allows you to preserve your principal to a degree, neither growth nor income is guaranteed.
Market volatility means your stocks could fall in value, eroding your principal. Stock dividends aren’t guaranteed the way bond interest and principal are guaranteed if you hold bonds to maturity.
The other risk of an income-only approach is that you could lose buying power over time as inflation drives living costs upward. If your portfolio holds steady at $60,000 a year, it may not cover your costs in a decade.
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The “total return” approach
Another option is to live on income and principal from your portfolio — the “total return” approach — as you whittle down your principal while enjoying dividends.
This is a more flexible approach. You can sell principal assets and take advantage of market gains. As your portfolio grows, a total return approach gives you access to more annual income, making it easier to keep up with inflation.
Here’s how this might work. Say you have $1.2 million and you decide to follow the 4% rule, drawing down 4% of your principal annually to ensure your savings last 30 years. In your first year of retirement, you’d receive $48,000 of annual income. If inflation then rises 2% the next year, you’d withdraw $48,000 plus another 2%, or $960, for a total of $48,960.
As your portfolio gains value, you can keep adjusting your withdrawals for inflation, making it easier to keep up with the cost of living.
The 4% rule is just a guideline. There are other factors to consider as you determine your withdrawal rate: market conditions, your investment mix, and your life expectancy.
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For example, Morningstar found that a 3.3% withdrawal rate was optimal for retirement savings in 2021; 3.8% in 2022; and 3.7% in 2024.
This means that while the “total return” approach offers more flexibility, it requires an ability to constantly adjust to market conditions and your personal needs. It’s a good idea to enlist the help of a financial adviser who can help you adjust your withdrawals as needed.
In this approach, too, if your portfolio loses value, you may have to withdraw less temporarily until the market settles. It’s wise to have one to two years’ worth of living expenses in the bank so you can leave your portfolio alone for a period of time if need be.
It’s also important to have income-producing assets in your portfolio that help it gain value from year to year. Dividend and interest income could help offset market losses.
So all told, no matter which approach you take, the right investment mix is crucial.
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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.
