5 Steps to Financial Freedom

Dear Rich Lifer,

In 1913, John D. Rockefeller’s personal wealth was estimated to be $900 million, which was almost 3% of the US GDP of $39.1 billion that year.

Rockefeller became America’s first billionaire and was probably the richest man that ever lived.

And what was his “greatest joy?” Seeing dividends flowing into his bank accounts.

Dividend investing is a topic we haven’t talked much about lately, but hands down is one of the best ways to build wealth over time.

It allows you to kill two birds with one stone – save for retirement and receive income. Investing in dividend-paying stocks can be your ticket to early retirement if you build the right portfolio.

Imagine seeing deposits in your bank account four times a year that can cover all your living expenses without you having to work. This is the power of dividend investing. And today, we’re going to walk you through a five-step plan to achieve financial freedom through dividend investing.

Your Five-Step Plan

Your goals may vary based on your timeline and how much wealth you wish to accumulate.

But this plan aims to achieve two goals:

  1. Annual dividend yield of 3% on your portfolio.
  2. Stock appreciation of 6% per year.

You’ll see why these goals matter in a second but first, let’s go over the five-step plan:

Step 1: Contribute $200 per month to your dividend growth portfolio

Step 2: Increase your annual contributions by 25% each year

Step 3: Reinvest all dividend income back into your dividend growth portfolio

Step 4: Select high-quality stocks to invest in to achieve an annual 6% growth rate in your equity value

Step 5: Repeat steps 1-4 until you’ve achieved your end goal

Why Does This Plan Work?

In the first year, you should have $2,400 of contributions. Assuming you follow the five steps as outlined, your portfolio will hit the $1 Million mark by year 16. At a 3% annual dividend yield that works out to around $31,000 in dividend income.

If you continue to follow the plan, your nest egg grows to $3 Million by year 20. Your dividend income grows to over $99,000.

The secret to this growth is of course compound interest. You may be wondering if you have to increase your monthly contributions by 25% every year or start with a $200/month contribution. The answer is no. You can adjust these numbers to fit your unique financial goals. Play around with different values using a dividend calculator online.

What are the Drawbacks to this Plan?

When retirees see this plan for the first time, they think it’s too good to be true. We’re not going to sugarcoat this, the plan works but there are some drawbacks you should consider.

First, as your dividend income grows, you’ll likely have to pay more in taxes. If you compare your tax rate to a low-cost index fund, it can be quite significant. However, if your goal is to retire early, your annual income should be a lot lower than what it is today so you’ll reduce your tax rate anyway.

The second drawback to this plan is it’s contingent on you increasing your income to keep pace with the annual contribution increases. If you’re young, this can be achieved fairly easily through regular promotions and raises at work.

If you’re at the tail-end of your career, your income might already be capped. If that’s the case, your timeline to financial freedom will be extended assuming you can’t find other ways to maintain the 25% annual increase.

Lastly, choosing the right dividend stocks for your portfolio can prove challenging. We won’t cover how to build your dividend portfolio today but we’ll say that it’s important to diversify. Also, using a commission-free brokerage can go a long way in maximizing your returns.

Don’t Make This Mistake

We’ll leave you with a word of caution: The number one mistake investors make when starting to invest in dividend-paying stocks is they go all-in. Building a dividend portfolio should not be your only retirement strategy.

A better approach is to think of your dividend portfolio as an after-tax account. You should still be investing in your pre-tax retirement accounts, like your 401(k) and Roth IRA. By adding an after-tax dividend account to your retirement plan it means you don’t have to tap into your pre-tax retirement accounts early.

In future issues, we’ll explain how to build the perfect dividend portfolio with the ideal number of dividend stocks. For today, start writing down your retirement goals and figure out how much you can afford to invest to start building your dividend portfolio.

To a Richer Life,

The Rich Life Roadmap Team

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