The thought of running out of money during retirement keeps many people up at night. If you draw down too much of your savings at the beginning stages of retirement, you risk scrambling for funds later on to keep you afloat.
But life doesn't have to be that way. You can set yourself up to earn an extra stream of income in the form of dividends. This can give you access to a recurring stream of income for the rest of your life.
If you're ready to create your dividend income machine for retirement, we've compiled a few tips to get you started.
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Dividends can support your retirement goals
Dividend-paying assets can be a great way to supplement retirement income. You can earn monthly or quarterly paychecks from your favorite companies as a reward for investing in them. There's also a chance to earn an automatic pay raise every year if you add Dividend Aristocrats and Dividend Kings to your portfolio. The best part is that the income keeps flowing in (as long as the board of directors declares a dividend) while you sit back, relax, and enjoy your senior years.
To get started, calculate how much you need to supplement your retirement income every month, and create a plan to achieve your desired goals.
For instance, if you need to earn $1,000 per month of dividend income, you can set an annual dividend goal of at least $12,000. You can diversify your portfolio with multiple dividend-paying assets that can get you to the finish line. Create a dividend watch list, do your research, design your strategy, and build your dividend portfolio.
Get started with retirement accounts
You can earn tax benefits when you set aside money in a retirement account to build your dividend portfolio. Retirement accounts you can look into are:
If you open a traditional or SEP IRA, you'll get an up-front tax break. You can contribute money to the accounts, defer your tax bill, invest in dividend-paying assets, and pay taxes when you withdraw your profits or dividend income.
On the other hand, you can look into a Roth IRA if you meet the income requirements. This account is a treasure if you expect your tax bill to go up later. A Roth IRA allows you to take care of your tax bill now in exchange for tax-free income later. That means you can build a portfolio of tax-free dividends that allow you to fund your lifestyle without the IRS getting in your way.
Retirement plans aren't the only way to earn dividends
Retirement accounts come with contribution limits, which caps how much dividend income you could potentially earn. That's why you should also look into taxable brokerage accounts. If you decide to retire earlier than expected, you don't have to worry about taking a penalty for touching your money.
Let's say you get a sudden cash windfall and decide to allocate $75,000 to your dividend goals. You won't be able to stash this money in an IRA because of the contribution limits. That also exceeds what the average person can contribute to a workplace retirement plan in 2022. A taxable brokerage account will allow you to invest your $75,000 however you please. You can get a mixture of dividend-paying stocks, exchange-traded funds, and index funds.
Another benefit of a taxable brokerage account is that you can withdraw the money whenever you want. You'll have to pay short-term or long-term capital gains taxes on the profits you take out. You will also have to pay taxes on your dividend income. If your dividend income fits the qualified dividend requirements, you can unlock the 0%, 10%, and 15% tax bracket.
Here are the qualified dividend tax rates for 2022.
|
Single Filers With Taxable Income of: |
Married Joint Filers With Taxable Income of: |
Heads of Households With Taxable Income of: |
Qualified Dividends Tax Rate |
|---|---|---|---|
|
$0 to $41,675 |
$0 to $83,350 |
$0 to $55,800 |
0% |
|
$41,676 to $459,750 |
$83,351 to $517,200 |
$55,801 to $488,500 |
15% |
|
Over $459,750 |
Over $517,200 |
Over $488,500 |
20% |
Data source: IRS. Table by author.
Don't delay your dividends
If you want to build a massive dividend portfolio for retirement, get started as soon as you can. Earning enough dividends to fund your lifestyle may take some time, so you want to start creating a game plan now to get you to closer to your financial goals. Your retirement and taxable brokerage accounts can serve as your wealth partners as you start paving the way for an extra stream of income during your senior years.
