Retirement planning is one of those tricky subjects that leads to millions of finance articles and $1,000 seminars dedicated to talking about (preying upon?) the insecurities of individuals as they enter an age in which they can’t rely on their labor anymore and must rely on a combination of Social Security, pensions, and ownership interests to get the pills paid.
To be honest, the real formula for retirement is this: “You can safely retire once you can safely generate 125% of the amount of money that you project you will spend in a given year.” The extra 25% difference accounts for unexpected expenses that show up and give you a nice margin of safety to reinvest dividends or whatever it may be so that you can make sure that you spend your later years skating on the thick part of the ice (after all, once you enter thin ice territory, no one lets you know the point at which you’d sink).
What doesn’t get as much attention, though, is what can happen if you put together a tidy collection of assets in your 40s or 50s and then let it grow for another 7 years.
For a moment, let’s assume that Johnson & Johnson can serve as an illustrative example for your portfolio as a whole. In 2006, Johnson & Johnson paid out $1.46 in dividends. By the end of 2013, Johnson & Johnson was paying out $2.64 in dividends. That’s an 80% increase in income (without doing any reinvestment). Someone bringing in $40,000 in Johnson & Johnson dividends would be bringing in $72,000 today even while cashing the twenty-eight dividend checks that arrived over the past seven years.
It’s one of the most insulting bits of financial advice that exists, “Hey buddy, I’ve been working my whole life, who the heck do you think you are to tell me to work another couple of years???” I get that part. But once you get the calculator out and start running the numbers, allowing a well-endowed dividend generating portfolio to reinvest and grow the dividends for a couple more years can do wonders in terms of increasing the threshold baseline for which you set up your life.