This is it! Your 40s are your prime earning years. This timeframe is when you have the most control of your body and your mind.
You should be earning massive amounts of money during your 40s. If you aren’t there yet, let’s start with that, then move on to dividend investing.
Welcome back to the Dividend Investing at Any Age series (20s, 30s), where we build a lifetime of dividend income.
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Prime earnings. In your 40s, you should be at least earning six figures of income. I am not saying that to be insensitive, but truthful.
What excuse do you have not to earn over $100,000/year? If you don’t have your dream job, create it.
You should also be staying debt-free in your 40s and retirement planning daily. If you haven’t guessed, your 40s is a time to become super-serious about your future.
Creating a paycheck. Now, on to dividend investing. You should have a good idea of how much cash flow you need during your retirement.
Your kids are older now; you know what kind of homes and cars you admire. You have a vision of the future that you can now work towards daily.
It’s time to remove your work paycheck and replace it with dividend income. I love to use income investing as a way to create a paycheck.
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Doing the math. Your 40s are the time to do the math on your retirement. Before, you were estimating what retirement would be like; now you know.
For example, let’s say you and your wife make $120,000/year in earned income from your job. How much of that is for basic living expenses? How much goes to nice-to-haves?
The book “All Your Worth” has the best simple budget I have found. It states that you should follow the 50/30/20 rule (needs/wants/savings).
You would examine your $120,000 salary and determine how the money flows throughout your household. If you live below your means, your numbers should look like 30/20/50.
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Yes, that is a 50% savings rate. But why do you want to live below your means? Shouldn’t you enjoy the money you work so hard to obtain?
Living below your means. The most crucial part of retirement planning is living below your means. If you live below your means in your working years, you’ll have more income during your golden years.
If you make $120,000/year but live on $50,000, you first need to create a paycheck to replace the $50,000.
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You can replace your $50,000/year with an income portfolio. With an 8% dividend yield, you would need $625,000 in your portfolio.
Therefore, your first goal of dividend investing in your 40s is to build a portfolio of $625,000. This is where you would do whatever it requires to make your income portfolio.
The magic of income investing. Let’s say you successfully build your $625,000 income portfolio, earning you $50,000/year.
The magic of income investing is that your income grows every single year. Without adding more money, your stack of dividends will continue to compound and grow.
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If you reinvest even a little, say $10,000/year, your portfolio would snowball even more. That’s why you must build your portfolio as fast as possible in your 40s—you’ll want the magic of compounding to take over.
What about index funds and dividend growth investing? It is a good idea also to build portfolios with index funds and dividend growth stocks.
These portfolios will be a great way to ensure your wealth continues to grow well into the future. However, we live on our income streams. We get used to living on a paycheck, so the first thing we need to replace is our paychecks.
An example of income versus capital gains. Let’s compare income investing to real estate. Let’s say you want to buy a residential home that will serve as your primary residence.
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If you wait for your home to appreciate (grow in value), you are at the whims of the market. Over 30 to 40 years, your home would increase in value, but you wouldn’t earn any cash flow.
You would have the potential for a big payday, but you would need to sell the home for that to occur. Your massive capital gains would require you to sell your asset.
Now, let’s say you converted your garage into a rental space. You earned passive rental income for that 30 to 40 years.
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The amount of income you earned would slowly increase and help you contend with inflation. Your home would also increase in value at the same rate as before, but now you have the income to assist your living situation.
No need to sell. The first housing situation is akin to index fund investing and 401Ks. You would have a massive nest egg but need to sell it to create cash flow.
However, the second scenario doesn’t require you to sell, and you can collect that sweet passive rental income. This is akin to income investing.
Capital gains vs. a paycheck. It’s good to have capital gains, but we live on the income. It’s vital we understand that having a massive nest egg is great to look at, but it doesn’t pay the bills.
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Your 40s are the time to see how much income you will require. The less money you need, the better your retirement scenario.
Build an income investing portfolio first to establish a new paycheck. Eventually, this paycheck will replace your work paycheck.
You can add other sources of passive income to diversify your retirement revenue. However, income investing is an excellent place to start because it will grow behind the scenes.
Conclusion. If you get caught up in living the expensive American lifestyle in your 40s, you will have a tough time retiring comfortably.
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If you have $120,000/year in basic expenses, bills, and debt, you would need $1.5 million in your portfolio to continue that lifestyle.
Be aware of lifestyle inflation because your 40s is the time where it shows up the most. Live below your means and have a relationship-focused lifestyle followed by a beautiful income-based retirement. 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
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