There are millions of baby boomers in the U.S., and every day, thousands of them retire from the workforce. Most will rely on a mix of Social Security, company pensions and personal assets for income in their golden years.
However, fewer employers are offering traditional pensions these days, and the future of the Social Security system is not as sound as it once was. Depending on who you listen to, the Social Security system will either run out of money in 35 years or continue paying benefits at a deeply reduced rate. Therefore, retirement planning should start sooner rather than later.
Investors outside the baby-boomer generation may have to do more for their own retirement planning and not rely on employers or the government.
One strategy that can help retirement planning is investing in dividend stocks. Creating a portfolio full of dividend stocks allows you to receive regular income from those investments. Obviously, a stream of income through your brokerage account eases the burdens of budgeting, and living off dividends can certainly help in those retirement years.
Let’s say you invest a dollar in a dividend stock that yields 4%, whose stock price increases 6% every year, and that grows distributions by 6% every year to “keep up.” If you were to just collect the dividends, here’s how much your dollar would be generating over time:
Year 10: 07.16 cents
Year 20: 12.84 cents
Year 30: 22.96 cents
However, if you were to take those same dividends and reinvest them in the stock, here’s how much your dollar would be generating over time:
Year 10: 10.60 cents
Year 20: 28.12 cents
Year 30: 74.52 cents
If you keep adding dollars to your investment portfolio and let them compound through dividend reinvestment, you can generate enough income to retire. Investors’ portfolios should focus on dividend growth stocks, which are companies that have a history of regular dividend increases. A company that regularly increases dividends essentially provides investors with a stream of income that keeps its purchasing power over time. Compared to interest income, dividend income looks like a clear winner for preserving purchasing power from inflation.