When I defined what Financial Independence means to me (here), $50000 dividend dollars per year seemed good to me….how I came up with that number is listed in that link. I did not have any notion of how to get there apart from creating passive income streams (cash from bank interest + dividends from stocks). How I designed the passive income streams is explained here and here.
The next question for me now is: how do I get to $50000 per year OR roughly $4000 per month. This post will talk about the next steps for me.
Assumptions
- Dividend Distribution Frequency
- Dividends can be distributed with different frequencies i.e. monthly, quarterly, half-yearly, yearly. I have mutual funds with all the above frequencies.
- So, for the entire portfolio, what distribution frequency should I assume?
- Monthly is the most aggressive (most amount of money compounding) and Yearly is the most conservative (least amount of money compounding).
- Most of my funds are either quarterly or less, one of them is half yearly and one is yearly.
- So, I have decided to go conservative and assume a yearly dividend distribution.
- Dividend Reinvestment Plan (DRIP)
- If the dividends are re-invested into the same assets that produced the dividends in the first place, we call this the Dividend Reinvestment Plan.
- The assumption is that I am going to use DRIP as I do not need to use the dividend money right away.
- Dividend Tax Rate
- Dividends are taxed at a different rate depending on the tax bracket.
- I will assume that my dividend tax rate is 15%.
- Average Annual Dividend Yield
- I have assumed 3%….a reasonable, middle of the road dividend yield assuming a 2% to 5% spread.
- Yearly Investment
- I will assume a yearly investment of $12000 i.e. $1000 per month.
- I will assume that I will not increase this investment money each year.
- Investment Time Period
- I will assume 10 years since my wish is to achieve financial independence in 10 years.
- Tool used
- I am going to use a wonderful dividend calculator from Dividend Ladder.
- If I had known about this tool, I would have used this when I defined my goals…I just came to know about this recently.
Case 1: Base Case
- Starting Principal = $225000
- Dividend Distribution Frequency = Yearly/Annually
- DRIP = yes
- Dividend Tax Rate = 15% tax rate
- Investment Time Period = 10 years
- Average annual div = 3%
- Yearly Investment = $12000
- No increase in yearly investment every year.
When I put the above numbers into the Dividend calculator, I got the following results:
- New Annual Dividend Income = $12725
- New Principal = $424176
This is a far cry from the $50000 per year dividends I need to reach. So, which of the above parameters do I need to change to get the dividends closer to $50000 per year?
Case 2: Add 5yrs to the 10yr FI plan
- Starting Principal = $225000
- Dividend Distribution Frequency = Yearly/Annually
- DRIP = yes
- Dividend Tax Rate = 15% tax rate
- Investment Time Period = 15 years
- Average annual div = 5%
- Yearly Investment = $24000
- No increase in yearly investment every year.
When I put the above numbers into the Dividend calculator, I got the following results, which is much closer to $50000 dividend dollars per year:
- New Annual Dividend Income = $45483
- New Principal = $909663
So, to get close to the $50000 per year, I need to do the following:
Contribute $24000 annually instead of $12000 as per Case 1.
- If I buy a house, then this increase in money is impossible. If not, then this should be doable.
- Bottom line is that for the next 15 years, $24000 per year => $360000 investment into passive income streams.
- How this money is spread across 15 years I am not sure yet, but it is a target for me.
Work for 15 more years instead of the 10 years I had initially planned
- This is not acceptable, but it seems like I have no choice.
Assume a dividend yield of 5% instead of 3%.
- This is acceptable because….
- Some of the funds I own distribute capital gains as well. This is also re-invested.
- Some of the funds I own and federally tax exempt and one of the them is state tax exempt also. So, dividend gain of 3% and add no taxes to it, makes it equivalent to a higher yield.
Case 3: Stick to the 10yr plan
Lets say I do not want to work an additional 5 years i.e. stick to the 10yr FI plan. If so, what numbers do I see?
- Starting Principal = $225000
- Dividend Distribution Frequency = Yearly/Annually
- DRIP = yes
- Dividend Tax Rate = 15% tax rate
- Investment Time Period = 10 years
- Average annual div = 5%
- Yearly Investment = $24000
- No increase in yearly investment every year.
When I put the above numbers into the Dividend calculator, I got the following results:
- New Annual Dividend Income = $31632
- New Principal = $632657
So, if I can adjust my need for money from $50000 per year to $31000 per year, then I can stick to the 10yr plan.
Conclusion
It is very hard to see 10-15 years ahead in life. Who knows what can happen in future? But, assuming that things go well (touch wood), I will continue to aim for $50000 dividend dollars per year and contribute money trying to reach it. If I reach somewhere in between $31000 to $50000 dividend dollars per year, I would be happy. If it is tending towards $31000, then I may think of increasing the yearly investment or reducing dollar requirements in future.
So, the plan is to do the following:
- Invest $24000 per year
- Work for the next 15 years (5 more years than my plan for FI)
- i.e. $360000 over the next 15 years
- Assume a 5% dividend yield instead of 3% (the safe number)
Wish me luck to finish in 10 years instead of 15!
Humble FI 