Retiring on Dividends: When is the right time?

I’ve never really thought too long or too seriously about when or if I could “retire” with passive dividend income before, however seeing a number of blogs start to discuss this issue has got me thinking about this a little more seriously. 


One of the great things for me about having a passive dividend income stream has been the ability to use it to nicely supplement our lifestyle. Its allowed my wife and I to accelerate mortgage repayments in a way that wouldn’t otherwise be possible, purchase vehicles with minimal loans. All the things that one otherwise wishes they could do with a few extra dollars.

But having seen some others use their passive income to completely exit the workforce, has made me think further about if this is possible and when it could be done.

I think there are really two aspects to thinking through this issue. The first is what does it actually mean to be “retired”, and the second is how much money do you need to do it

What is retirement ?

Retirement seems to suggest putting your feet up and officially checking out. Sipping some drinks down by the pool. Playing a few rounds of golf. Its an attractive vision, but I think after a few days I would likely get bored of it.

Work  gives me  mental stimulation and satisfaction and I think I would really miss not having that any longer.

Having said that, I think the spirit of early financial independence is very important because you never know when something you enjoy may be turned into a miserable experience because of changes in your work situation.

What is financial independence?

In my view, its not necessarily income replacement. I think its covering your expenses, having an additional buffer of close to 10%, and increases in your income to cover inflation from year to year.

The beautiful thing about a dividend growth strategy is that you get an ever rising income stream to at least give you the inflation coverage, so if you can work out your a stable level of expense coverage, then you are on the well on the way.

And how do you deal with unexpected blow outs in expenses? This is where an emergency fund comes in.

I’ve never believed in having an emergency fund, because I’ve always believe that my $25k dividend income effectively acts like an emergency fund. Living off dividends probably means that I should have at least a 6 month coverage of expenses in a separate emergency fund.

So now the real question. How much do I need to cover to be financially independent?

How much do I need?

I generally have the view that for any budgeting exercise, you want to run the numbers over a 3 month period and remove any one off expenses.

Unfortunately, I’m not pleased to report that we don’t even hold a candle to Dividend Mantra as far as his disciplined approach to savings and monitoring all his expenses.

Our average expense run rate for the 3 month period I looked at is close to $4500 per month.

One of the big things that I noticed in my expense review was that childrens expenses and the mortgage make up a big chunk of that $4500, close to 75% of it in fact. Between diapers and formula, and childcare expense, the bills for kids start to add up. And I shouldn’t just lump the blame totally on just the kids here! There are a few lunches, and some nice bottles of wine that show up on our expenses also!

My takeaways

1. The amount of passive income you need to achieve financial independence really depends on your personal situation. As a family, we have a bunch of expenses that you don’t have when you single. Many of these are what I would call essential expenses, rather than discretionary (ie/ we want to make sure the kids aren’t deprived of diapers!)

2. When you retire will be influenced by what you choose to give up and how aggressively you cut out expenses.  We have to face up to the fact that we aren’t prepared to give up a few of the small comforts like some nice lunches and dinners out that we enjoy today. While these things are small, they still add up, and still delay the savings/investing goals.

3. We will receive an “expense tailwind” in the next 5 years as our kids transition out of childcare, diapers, formula and as our mortgage gets paid off. This will mean financial independence will be a real possibility at that time, particularly if we can hit our goal of $50k/yr in dividend income in 5 years.

Of course, the inevitable cycle of needing to save for the kids college will soon start, but hopefully our dividend income will have risen substantially during that time to meet this next expense challenge.

I guess its a good thing i still like working 🙂

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