Here is the next installment in our Reader’s Questions Series, which highlight questions emailed to me by you, the readers of Money Q&A. This time we’re talking about income replacement with dividends when you retire.
Be sure to find out at the end of this article how you can receive a free copy of Dave Ramsey’s book, The Total Money Makeover. If you’re not familiar with Dave Ramsey’s book, you should run right out and get it. It is one of the best personal finance books that everyone should read. Now….on to our reader’s question. This week’s Reader Question is from Ralph who writes…
“I am 54 and planning on retiring in another 10 years. I recently read a book about income investing where you buy stocks that distribute income through dividends. And, you use that for any monthly shortfalls between what you receive in social security, 401k, etc. and what you need to live on. But, the book never said at what time to start doing this. Is it when you are retired, couple years before you retire?”
The short answer to Ralph’s question is that you should probably start investing in dividend paying stocks as early as you can in life. Like most investments, the best thing young investors have is time on their side.
I personally wouldn’t wait until you retire to start investing in dividend paying stocks, although you certainly can do that if you choose. It would take a lot of cash to buy enough shares of stock to generate the dividends needed for income replacement in one shot though. Buying a little along until retirement would be more feasible for most investors. Below are the details of what it would take.
Income Replacement with Dividend Stocks
For most people, it will take a lot of shares of stock to generate the replacement income needed in retirement from dividends. Assuming that most investors won’t have piles of cash available invest in a lot of stock when they hit retirement age, it’s best to start buying dividend paying stock as early as possible.
“Earlier is better than later to start moving money into dividend paying stocks,” says Blake, publisher and blogger at the popular personal finance site, The Dividend Pig. “Or, if you have a large amount of cash and want wait, you can purchase shares as you get closer to retirement age.”
In that case, Blake recommends at least starting to research which companies you’ll want to own, at what price per share, and exactly how much income you will need to replace with dividends.