I encourage everyone to save and invest as much as they can, but finding extra dollars is tough these days.

Saving isn’t just about creating a big pool of money. It’s also about ensuring our investments can provide the lifestyle we desire.

[ad#Google Adsense 336×280-IA]That can mean different things.

For example, if someone wants to spend $75,000 per year in retirement for 20 years, they could decide they need $1.5 million and draw down that $75,000 each year.

That’s not a great plan, though because that person could live more than 20 years and then they’d be broke.

However, I approach it a different way.

I assume that if I need $75,000 this year, I’m going to need about 5% more each year. Life gets more expensive as the years go on, particularly healthcare costs. So the person in the above example drawing down $75,000 a year is going to have a very different lifestyle in year 20 then they will in year one.

My goal is to have enough investment capital that I never need to touch it – that it generates enough income each year to pay my expenses and just as importantly, spins off more income each year.

That’s not an easy thing to accomplish.

Let’s look at a chart, assuming a $1.5 million nest egg that generates 5% income per year. The investor needs $75,000 in year one and 5% more each year to keep up with rising costs.

In Retirement Scenario #1, because prices are going up each year and the return is staying the same, the investor has to use the investment capital to fund his or her lifestyle. Using that capital means there will be even less income each year because that money is being spent instead of generating income.

After 22 years, the entire $1.5 million is gone.

Scary stuff.

But there is a way you can solve this problem. Invest in Perpetual Dividend Raisers – stocks that raise the dividend every year. When you do, you need less starting capital to fund your retirement. It will generate more income in retirement and you will have a larger nest egg than when you started.

Here’s what I mean. For five years before retirement you invest in a portfolio of Perpetual Dividend Raisers with a starting yield of 4% and that raise the dividend by 10% per year. You reinvest the dividends.

After five years, you have a nest egg of $875,000, only 58% of what you started with in the first example. Then, just your luck, as you begin your retirement the dividend growth slows down to 8% from 10%.

For the first 12 years, you need to dip into your capital in order to fund the retirement. But unlike our first example, your income is rising every year and eventually it increases so much that it starts generating more than you need. This allows you to replenish the nest egg – just a little at first, but by year 20, you’re adding $100,000 a year to your capital, which is used to generate even more cash.

If you only take out the income you need, at the end of 22 years, you have $1.2 million. In our first example, after 22 years you’re broke.

Look at how your income takes off towards the end. And you may need that money because for many people, their healthcare costs go through the roof in their last few years.

So you can see that you can live the retirement you want and start with nearly half the money you might otherwise need, if you do it the right way – by investing in stocks that raise the dividend every year.

Good investing,

Marc

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Source: Wealthy Retirement