-- Scott Cook, founder of Intuit.
According to the 2011 Census Bureau the median income in the United States was $50,054. From about 1999 until 2007 it hovered between $53,000 and $54,000 and since 2007 it has steadily fallen to the level it is now. I think if you asked a thousand economists why this has occurred, you’d get a thousand reasons why, and none of the reasons would change the facts. What is important to me is knowing that half of the people in the US make more than this amount and half make less. It’s how the word median is defined and it’s the amount that would allow for a comfortable retirement.
The Census Bureau’s definition of poverty for 2012 was set at $23,050. This obviously is the point at which I would no longer make it on my own and would need government assistance just to make ends meet. What’s important to know here is that I have to expect to make more than this in retirement or I’ll keep working regardless of my age. I don’t think living in poverty is how I want to spend my Golden Years.
According to the World Health Organization the average life expectancy in the US for men is 76 years and for women it’s 81 years. I guess based on this it’s better to be a woman in the US. Depending on how old you are right now, those numbers may be good news or bad news. At my age those numbers are right around the corner.
The normal person would quickly come to the conclusion that if their income at retirement is expected to be at the poverty level, then they need to keep working. I can’t afford to retire if I can’t make more than that amount. However, if I calculate that my retirement income would be at least the same as the median income in the US, then maybe I can start making plans to retire. The logic would be that if I can make the same level of income during my retirement as the average (median) guy makes working his tail off, then why not start to at least think about retirement. It won’t be a lavish retirement at this income level but at least I could live as well as the average (median) guy walking the street. That wouldn’t be a bad retirement.
Here comes the hard questions. If I live to be 76 or beyond, will the money I project into retirement keep up with inflation? Will my purchasing power be the same as I get older? What about savings for emergencies? These are all hard questions and questions each one of us has to deal with individually.
The answer for me has always been investing in companies that increase their sales, earning, and dividends over time at a rate faster than inflation so that my purchasing power remains the same or increases over time. That hasn’t been a problem during the last 6 years because we’ve actually had deflation. But history tells us that inflation will occur again and if I don’t have increasing dividends, my purchasing power will decline.
So what size portfolio generates $50,000 in dividends each year? That’s a near impossible question to answer because there are so many variables to consider. If your stocks generate an average of 4% in dividends, you need a portfolio of $1.25M. If your stocks pay only 3% in dividends, you’ll need $1.67M. That’s a large portfolio. (If you’re lucky enough to have a company sponsored retirement or will receive Social Security Benefits to augment your dividends then your portfolio could be considerably smaller.)
This is why I like investing in the right stocks which fall into a group of stocks called dividend aristocrats. Great companies care about their shareholders as well as their customers. They take care of their shareholders because the shareholders are the owners of the company and expect to share in the profits of the company. This is the reason why individuals invest. And once you’re invested in the right companies all you have to do is monitor them to make sure they stay great companies and great investments.