Dividend Investing in Your 60s

You worked hard over the last 30 or 40 years in the workforce. Even better, you saved a large amount of cash in your 401K and Roth IRA.

Conventional wisdom says you should slowly drain your account using the four percent rule. Today, I offer a different method to make your money work for you—dividends.

Welcome back to the Dividend Investing at Any Age series (20s, 30s, 40s, 50s), where we convert your hard work into income.

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What is the four percent rule? Let’s start at the very top. The four percent rule states that you can safely withdraw four percent of your nest egg for 30+ years.

The rule also includes inflation markers, so your income withdrawals continue to increase to keep pace with a hot economy. 

Let’s say you had $1 million in your 401K at retirement. For simplicity’s sake, I will disregard taxes. You can withdraw $40,000 of income in your first year. The following year, you could increase that to $42,000 if inflation was 2%.

The four percent rule is tough to follow. There are many issues with the four percent rule; among them is complexity.

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Most people blindly save money into their 401Ks because they don’t want to bother learning about the stock market. In retirement, they have to follow the market every day because their livelihood depends on it.

The four percent rule depends on the markets continually rising. The expectation is that you can withdraw 4% as the market returns 9%. The additional 5% will keep you from draining your account. 

The sequence of return risk. There is a significant risk with the 4% rule called the sequence of return risk. This rule states that withdrawing your 4% during a major downturn will hamper your returns for the next 30 years.

If the market is down 40% and your account reads $600,000, you’ll have to sell more shares to achieve a $40,000 income. As the market rebounds, you’ll have fewer shares for the rest of your life—scary stuff, right?

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As I wrote in “Income Investing vs. Index Funds,” I don’t want to sell any shares. I want my dividends to fund my lifestyle so I don’t have to worry about market conditions.

The great conversion. Now, let’s say you are sitting on $1 million in your 401K or Roth IRA—what do you do next?

Of course, this is not investment advice; it is just a training scenario. I would convert this $1 million into income.

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First things first, we have to pay Uncle Sam. If you have a standard 401K, taxes will eat a big chunk of your $1 million. Work with a tax professional to see the best way to liquidate your account.

Let’s say you end up with $600,000. It’s time to convert this to an income portfolio. But, you have to be careful here as well. 

Do you have an emergency fund? You don’t want all of your money in the stock market. If you don’t have an emergency fund, take $100,000, put it in a high-yield savings account, and series “I” Bonds. 

Live below your means and pay off your house. $1 million sounds like a lot of money until you start living on it. Ensure you live far below your means (at least for now), and pay off your home. This may leave you $400,000 to invest in dividends. 

Your Income Should Increase Every Year

Become a Passive Income Hero. Do you think you will retire into the sunset, never to work again? Yeah, right, there is plenty of work to do on a home business, rental property empire, or creating content.

Sadly, $1 million is not enough to retire comfortably in the US because America is expensive. You can try to retire overseas, but you’ll still need an excellent residual income outside your $1 million.

Becoming a Passive Income Hero gives you a purpose beyond staring at the stock market. You can simply document your retirement journey and dividend investing progress. Millions of people want to retire on dividends; you can help them from the inside. 

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Back to income investing. Whew, I took a long way to arrive. But, here you are, with $400,000 to invest in dividends. I am a massive fan of income investing because I want my money now.

However, don’t dump your entire lump sum into an income portfolio immediately. You’ll need to learn how bond yields and interest rates affect your portfolio. 

Treasury interest rates affect almost all high-yield products, so you must study these relationships before throwing your money into the pot.

I would start with $50,000 in an M1 Finance portfolio to help learn the process. If you need the income now, consider getting a roommate to help you maintain expenses.

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You’ll have to learn. So many people use the 401K as a savings account. However, they never learned the ins and outs of bonds, interest rates, mortgages, and equities (stocks).

Then, as they retire, they have no choice but to turn their money over to a money manager. Sadly, the money manager is just going to use the 4% rule—with your money.

I’m living an income-investing life today. My wife and I are living an income-investing life today at age 41. I receive $1,000/month in dividends to help me through this inflationary time.

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I reinvest 80% of my dividends to grow my income stream—our plan for the rest of our life. It feels good to have additional income coming right into our accounts—no boss required.

Income is the lifeblood of your household because it gives you cash flow. The last thing you want is your cash flow tied to market performance. Dividends allow you to receive the cash flow without worrying about the ups and downs of the market.

Conclusion. Life is good when you have financial independence. Having $1 million without cash flow is not financial independence because you lack the educational requirement to grow your portfolio. 

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Once you know how to convert that lump sum of money into functional wealth (cash flow), then you will slowly become financially independent.

Turning your cash over to a money manager is the opposite of independence. You’ll be under their control until your last days. 

Time to hit the books to learn about index funds, dividend growth investing, and income investing. With each book you read, you’ll free yourself from being dependent on anyone concerning your money. That is true freedom in your 60s. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing