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Here's How You Can Earn $10,000 a Year in Retirement

By David Jagielski - May 25, 2021 at 6:33AM

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Getting rich is as simple as buying and holding for the long haul.

If you haven't started saving for retirement, it may not be too late to begin. If you have roughly 20 investing years left, then saving $250 each month could be enough to set you up to earn as much as $10,000 per year in recurring dividend income during your retirement years. 

Let's see how this is possible by investing in a safe healthcare stock like Eli Lilly (LLY 0.39%)

Group of seniors visiting a tourist spot.

Image source: Getty Images.

Picking the right investment is key

Eli Lilly is a top healthcare investment that in the past five years has generated total returns (which include dividend income) of 200% -- well above the S&P 500's gains of 123% during that time. That equates to a compound annual growth rate of 24.6%, which is a phenomenal performance. Warren Buffett's Berkshire Hathaway has averaged annual returns of 20% over 50 years.

A 24% return likely isn't sustainable over decades, but with a yield of 1.7% and a solid track record, performing as well as the S&P 500 (which has averaged close to 11% over the past 30 years) doesn't seem unreasonable for Eli Lilly's stock. If you wanted to diversify and go with an even safer investment, mirroring the index could be a good option as well. But odds are that Eli Lilly will continue to outperform the market.

Not only has the business been generating profits in excess of $3 billion in each of the past three years (with a net margin of 13% or better), but it has also shown that it is able to adapt to changing industry conditions. In February, the U.S. Food and Drug Administration issued an emergency use authorization (EUA)  for the company's monoclonal antibody therapy to treat high-risk people with mild to moderate cases of COVID-19. A month earlier, Eli Lilly released results from its phase 3 trials that showed the treatment was 70% effective in reducing the risk of hospitalization and death.

An adaptable business that can and will grow over time is crucial for a stock to be a solid long-term investment. With strong profits and drugs in its pipeline that treat cancer, diabetes, immunology, neurodegeneration, and pain, Eli Lilly looks like a great stock to hang on to for many years.

Growing your portfolio's value

If Eli Lilly's stock were to grow at an average rate of 11% (which includes the dividend and that income being reinvested), here's what your holdings might look like over the next five, 10, 15, and 20 years:

Year Beginning Balance New Investment Growth Ending Balance
5 $20,739 $3,000 $2,611 $26,350
10 $55,684 $3,000 $6,455 $65,140
15 $114,570 $3,000 $12,933 $130,503
20 $213,795 $3,000 $23,847 $240,643

Data source: YCharts. Calculations by author.

By year 21, your investment could be worth more than $270,000 if these assumptions hold true. And if you get to that level, then putting that money into an investment that pays a yield of 4% would be enough to generate more than $10,000 per year in dividend income.

The takeaway for investors

The above scenario is just one example of how you can generate $10,000 in recurring income in 20 or more years. You can also be more aggressive and invest more money if you want to accelerate the growth or have fewer investing years left. For those who are slightly more risk-averse, investing all that money in a more balanced exchange-traded fund may be a better overall option.

There are many other investments you can use to grow your wealth instead of Eli Lilly, and you may prefer to load up on multiple stocks over the years. But finding a great stock is just one piece of the puzzle. The important takeaway is that buying and holding good investments, and benefiting from the power of compounding, is what can help set you up financially for retirement.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short June 2021 $240 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
LLY
$302.50 (0.39%) $1.18
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$439,167.01 (-0.08%) $-361.91
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$292.34 (0.09%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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