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The big incentive to save for retirement is to be able to have a huge nest egg to live off of, so that you're not dependent on other sources of income. And if you've accumulated significant savings, then you can use that to generate a lot of recurring dividend income.
Below, I'll show you how you can bring in at least $30,000 in annual dividends by the time you retire, assuming you have at least 30 investing years left.
Investing in a growth-oriented fund can help maximize your long-run returns
For long-term investing, an exchange-traded fund (ETF) can be an ideal investment to put into your portfolio. It can be a fairly safe way to grow your savings for years. A diversified ETF has a big advantage over stocks in that it offers much more stability; there's less risk that there might be a big one-day drop in value due to a bad earnings report or company-specific news.
One of the best ETFs for investors to consider is the Vanguard S&P 500 ETF (NYSEMKT: VOO). It tracks the S&P 500 index, which is made up of the largest and best stocks on the market. With this investment, you'll get exposure to tech stocks and many other sectors. And to simplify your long-term investment strategy, or if you're not comfortable with picking individual stocks, you can just put money into this one ETF.
Over the long term, the S&P 500 has generated average annual returns of around 10%, and the ETF has done a good job of mirroring the index's performance, which is what it's set up to do.
You can invest monthly or through a large lump sum
To be able to generate significant dividend income in retirement, you'll need to build up a large balance -- ideally, at least $750,000. To get there, you can invest on a monthly basis or invest a large lump sum today. And you can always add to your position over time if you're able to do so.
If you were to invest monthly into the Vanguard S&P 500 ETF, and assuming that it grows at an average rate of 9% per year (which factors in a potential slowdown in the markets), then you would need to set aside roughly $410 per month. And here's how that size of an investment might grow over the years.
| Growth of a $410/Month Investment (Assuming 9% Growth) | |
|---|---|
| Year | Portfolio Balance |
| 5 | $31,156 |
| 10 | $79,936 |
| 15 | $156,310 |
| 20 | $275,887 |
| 25 | $463,107 |
| 30 | $756,234 |
Calculations by author.
Another option is to invest a large lump sum today and allow it to grow. In this case, you would need to invest approximately $57,000 today under the same assumed growth rate.
| Growth of a $57,000 Investment (Assuming 9% Growth) | |
|---|---|
| Year | Portfolio Balance |
| 5 | $87,702 |
| 10 | $134,940 |
| 15 | $207,622 |
| 20 | $319,451 |
| 25 | $491,516 |
| 30 | $756,258 |
Calculations by author.