Imagine receiving a $200,000 windfall, perhaps through an inheritance, lottery winnings, or even a lawsuit that ended in your favor.
This is the scenario Devon faces. At age 45, he found himself with a $200,000 shot in the arm that gave him the opportunity to dream of a more comfortable retirement than he might otherwise have had. But it also makes him worry about the best next steps.
He feels like he’s not very financially savvy and hasn’t done much with his retirement savings. Actually he didn’t do anything. But now, with a hundred thousand dollars boost to his retirement fund, he’s actually better off than most Americans his age.
That’s because the average retirement savings account balance among Americans ages 45-54 is $115,000 by 2022, according to the Federal Reserve (1).
Considering Devon doesn’t plan on retiring for another twenty years, this also gives him the advantage of time when investing.
Additionally, while many people aim to retire at 62 (since that is the earliest age to enroll in Social Security), if Devon can delay retirement until age 67 as he plans, he may find that additional benefits will come his way.
That’s because filing at age 62 means accepting a reduced monthly benefit for life, even though it means starting retirement earlier, as many seniors want to do.
Another disadvantage Devon avoids is that he won’t have to rely on retirement savings As long as there is someone retiring at 62 (experts recommend planning from anywhere 25 to 30 years.
This is where Devon’s portfolio comes into play; especially if it is set up to generate passive income.
But how realistic is it to turn $200,000 today into $100,000 a year? passive income Over 22 years, assuming no additional contributions? Let’s find out.
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Since 1926 the stock market has been approximately average annual return 10%This is the reason for years of excellent performance as well as setbacks. (2)
Let’s say you have $200,000 investment Today you are 45 years old and you aim to: retire He is 67 years old. While it’s OK to lean heavily on stocks for the next 15 years, it’s often wise to reduce the amount as retirement approaches. stocks and move into more stable assets like bonds.
Therefore, we cannot assume that a $200,000 investment today will generate a 10% return over the next 22 years. A smarter approach is to assume something more modest, say a 7% return, just to be safe. If that $200,000 earns 7% over the next 22 years, it will grow to approximately $886,000.
Now let’s get back to the $100,000 per year goal. passive income. If that $886,000 portfolio is your only source of assets, frankly, $100,000 may be difficult to come by.
These days, you can expect a dividend yield of roughly 1.17% from a company. S&P 500 portfolio. (3) But let’s say, instead of investing in the S&P 500 ETF, you build a portfolio full of stocks that provide particularly high returns dividends.
Even so, an average return of 5% would be generous in this case. And at $886,000, you’re looking at around $44,000 in passive dividend income.
Of course, this all depends on Devon’s definition of passive income. If it includes Social Security, it could be reaching its $100,000 goal.
Devon would be looking at a pretty generous monthly Social Security benefit (also because he’d avoid the discount by filing early).
Here’s how this math breaks down:
In 2025, at full retirement age, the maximum Social Security benefit is $4,018 per month. (4)
If we assume it will be $5,785 per month 22 years from now (this figure is tied to the inflation target of 2% per year from now on), then if we multiply that by 12 we see that Devon receives approximately $69,430 per year from Social Security.
With another $44,000 in dividend income, he would earn just under $113,500 annually, slightly above his target.
And of course, $113,500 a year is no small retirement income. According to a report by the Bureau of Labor Statistics, in 2023, US consumers spent an average of $77,280. (5) However, it is common for retirees to spend less than typical consumers; So Devon’s projected retirement income suggests we could have a comfortable retirement, given what we know.
On the other hand, one of the biggest risks to your retirement income is inflation. It has become quite common in recent years.
We don’t know what inflation will look like over the next few decades. However, if living costs increase significantly, the value of any passive income that Devon’s portfolio may provide may decrease.
Fortunately, Social Security benefits are eligible for an annual cost-of-living adjustment. If this scenario occurs, you may still need to make changes to your portfolio during retirement to account for a faster rate of inflation.
If you’re in the process of building a retirement portfolio, it’s best to give yourself a longer investment window, as Devon plans to do. But no matter how far away retirement is, you’ll need to ask yourself what strategy you want to implement.
Some investors like to focus on value stocks that tend to produce higher dividends. However, value stocks tend to see slow, steady growth as opposed to explosive growth.
Other investors prefer growth stocks, which, as the name suggests, focus on rapid growth. Growth stocks tend to pay minimal dividends or none at all. This is because these companies prefer to invest their profits in their own businesses rather than sharing the wealth with shareholders to further increase their share prices.
In reality, there is no such thing as right versus wrong strategy. You can grow your portfolio nicely with value or growth stocks, or both at the same time. But you should know that while growth stocks are a suitable investment for your wealth-building years, they can also be more volatile than value stocks.
Therefore, you may want to focus on value stocks during retirement, both for their relative stability and the income they tend to generate.
Of course, when it comes to retirement, it’s also important to have stable assets like bonds in your portfolio to protect yourself against market fluctuations. But the beauty of bonds is that they are also great income generators.
So, if you’re focusing on passive income, a combination of bonds and value stocks with strong dividend rates can give you a good return. casual lifestyleespecially when combined with a pretty generous Social Security paycheck.
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Federal Reserve (1); Covenant Wealth Advisors ((2)[https://www.covenantwealthadvisors.com/post/how-average-stock-market-returns-can-fail-investor-expectations]); Y Charts (3); Social Security Institution (4); Bureau of Labor Statistics (5)
This article was first published on: moneywise.com under the title: I am 45 years old and want to invest an amount of $200,000 so that I can retire at age 67 with $100,000 a year. Should I focus on dividends or growth?
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