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Key Points
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A Reddit poster has built a portfolio that produces $20,000 in dividend income.
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Retiring in eight years is the goal but what’s the best path forward?
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The poster will need to consider income needs and make sure the portfolio is sufficiently diversified to reduce risk.
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When you’re getting ready for retirement, you need to make sure your investments can produce enough income to keep you comfortable.
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A Reddit poster is wondering exactly what needs to happen in order to make that happen. The poster has just hit $20,452 in annual dividend income. He is 50 years old, and he’s hoping to retire in eight years. After he reached this milestone, he wondered what steps he should take to make it happen. So, what should the Redditor do?
How to make sure you’re on track for retirement when the deadline is looming
The Reddit poster seems to have a good mix of investments, with most of his money spread across a variety of different exchange-traded funds (ETFs), so while several posters commented that he may want to diversify his investments a bit to be exposed to less risk, he’s not necessarily too off-base on his asset allocation. However, with just eight years to retirement, it may not be a bad idea to move some of his money out of stocks.
Generally, a recommended portfolio allocation involves subtracting your age from 110 and investing that percentage of your portfolio in equities with the remainder in bonds or other similar assets.
Image source: Getty Images.
What the poster did not do, though, is specify how much income he needs his retirement investments to produce. While he has $20,000 in dividend income coming in right now, he will have to carefully consider things like what his withdrawal rate will be and how distributions from his accounts will be taxed once he retires. That’s especially true since some of his money is in a taxable brokerage account. Running these numbers is going to shape exactly what he needs to do for the next eight years.
Most experts recommend a 4% withdrawal rate (or less) to reduce the risk of running short of money, so the poster should think about what his retirement budget will look like to determine the total size his nest egg must grow to before he can stop earning a paycheck. Since he’s hoping to retire before he becomes eligible for Social Security and before Medicare age, he’s also going to have to make sure he can cover healthcare costs, and do so without Social Security benefits coming in until at least age 62.
Doing this work to define his income needs will make it possible for him to get his top-line number and, armed with that information, he can calculate the monthly amount he needs to invest so that, when combined with the growth of his current portfolio, he ends up with enough.
If the poster is hoping to spend $80,000, for example, he would need a nest egg of about $2.8 million to be able to retire in eight years, assuming he followed the 4% rule. The amount he has to save to get there will depend on where he is starting from, as compound growth can help put him over the edge.
Making a detailed plan is key when retirement is drawing near
The Redditor has clearly done a lot of work to get his portfolio to the point where it is producing $20,000 a year in dividend income, but that’s almost certainly not going to be anywhere near enough for the poster to live on. While he’s rightly proud of his accomplishment, an eight-year retirement goal is a tight timeline to make sure he’s financially prepared for the future.
When you’re this close to retirement, if you don’t have a clear path forward, often the best option will be to get professional help in setting goals and allocating investment dollars. Doing this can help the poster to ensure that when he hits his preferred retirement age, he’s ready to give notice and join the ranks of the comfortably retired.
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Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
