Dividend Stocks for Retirement: Can You Live Off Dividends in Your Golden Years?

Dividend stocks for retirement? Yes, you can live off dividends in your golden years. You likely already know that you should put together a robust portfolio in order to have enough money to carry you through your golden years. 

But how much do you actually need to save? A number of factors can determine how much you need to save for retirement, including your current age, the age you will be when you plan to retire, how long you expect to live (you could determine this based on family history), the amount you plan to spend in retirement and where you'll pull retirement money.

Putting together a retirement portfolio that can help you live the life you want in your golden years includes considering the types of assets available to you, which can include dividend stocks. 

How to Choose Dividend Stocks for Retirement

If you know you want dividend stocks for retirement, take a look at a few steps you can take to make sure you're making the right decisions for your nest egg. 

Step 1: Research dividend stocks.

Look at a wide variety of company factors before you decide on the right dividend stocks for retirement. Take a look at dividend yield, a company's ability to consistently increase its dividend, look at companies that have a solid financial profile focused and those in growing industries. 

Learn more: 11 Dividend Stocks with High Yield

Step 2: Consider your goals and risk tolerance.

How much do you want to save? As mentioned before, there are several indicators that can guide your savings goals. Furthermore, are you comfortable with taking risks related to your money? Your risk tolerance may change as you age, so consider whether or not you'll feel differently about the investments you've selected later on.

You may have already heard that you need to save 15% of your household income to save for a long life expectancy, to combat inflation and to save for health care. However, your target retirement savings amount should tailor to your own specific situation. 

It's healthy to review how you want to invest as your life progresses. Once you have a plan in place, consider stress-testing your plan. A financial planner can help you determine how your retirement planning holds up under specific life events, such as the birth of a child, a health issue and more.

Step 3: Consider putting money into retirement vehicles.

Let's take a look at some of the vehicles that you can use to save for retirement. For example, you can take a look at individual retirement accounts (IRAs), employer-sponsored retirement plans and types of retirement plans for small businesses. These funds can contain dividend stocks.

Individual Retirement Account (IRA) Plans

Let's take a look at a few individual retirement account (IRA) plan options: 

• Traditional IRA: Anyone who earns income can make contributions to a traditional IRA which could be invested in a wide range of different assets, including mutual funds and ETFs. All investment earnings are tax-deferred until retirement, when you start making withdrawals after age 59 ½. You can contribute up to $6,000 per year into a traditional IRA but if you're 50 years of age or older, you can contribute up to $7,000 per year.
• Roth IRA: When you make contributions to a Roth IRA, you make after-tax contributions, which means you don't pay taxes when you take the money out in retirement, after age 59 ½. The annual contribution limits are the same as for traditional IRAs. However, there are income thresholds for Roth IRAs. For example, you can contribute as long as your income is below $129,000 in 2022 as a single taxpayer. Check the income limits for your particular tax situation to make sure you're eligible to contribute. 

Employer-Sponsored Retirement Accounts

Now, let's take a quick look at employer-sponsored retirement accounts as part of a retirement savings plan. 

• Traditional 401(k): A traditional 401(k) account allows you to make contributions to a retirement plan with pre-tax dollars through your employer. Your investments grow tax-deferred, which means you don't pay taxes on the money until you withdraw it in retirement. In 2022, the contribution limit is $20,500 per year 100% of your compensation, whichever is less. If you are 50 or older, you contribute an additional $6,500. Your employer may also offer a match — check on your employer's match options and make sure you get the match — it's free money!
• Roth 401(k): You make after-tax contributions rather than pre-tax contributions with a traditional 401(k). Roth 401(k) accounts have the same contribution limits as 401(k) accounts. You can still get your employer's match with a Roth 401(k) but it's deposited into a traditional 401(k) per federal regulations.
• 403(b) plan: If you work for a nonprofit organization or a public institution, your employer's retirement contribution plan may be a 403(b). You can make contributions from your paycheck on a pre-tax basis and your money grows tax-free until you take it out in retirement. You may be able to take advantage of a Roth 403(b) — just ask your employer about this type of account, which works like a Roth 401(k). The contributions are the same, but if you work for your employer for at least 15 years and they offer a 403(b), you can make even more catch-up contributions of $3,000 per year, up to a lifetime total of $15,000.
• 457(b) plan: State or local government agencies allow you to save for retirement in a 457(b) plan, where you invest pre-tax money from your paycheck. This type of tax-deferred account doesn't require you to pay taxes on your contributions or earnings until you make withdrawals in retirement. The contribution limits are the same as 403(b)s. In the three years before retirement, you can contribute up to double the annual limit or 100% of your salary, whichever is less.
• Thrift Savings Plan: Federal employees and members of the uniformed services can take advantage of a Thrift Savings Plan (TSP). You make contributions with pre-tax dollars and your money can grow tax-deferred until you withdraw it in retirement. The annual contribution limit is $20,500 in 2022. At age 50 or older? You can contribute an additional $6,500 per year.

Retirement Plans for Small Businesses and the Self-Employed

Now, what about retirement plans for small businesses and those who are self-employed? Let's take a quick look at SIMPLE IRAs, SEP IRAs, payroll deduction IRAs and Solo 401(k)s.

• Savings Incentive Match Plan for Employees (SIMPLE) IRA: As a small business owner with employees, you may want to consider a SIMPLE IRA, in which you make contributions for each of your employees. Employees are immediately vested and contributions you make can be deducted from the business' taxes. Employees may contribute up to $14,000 a year to a SIMPLE IRA and those 50 or older may make additional catch-up contributions of $3,000 in 2022.
• Simplified Employee Pension (SEP): A SEP IRA is a defined-contribution retirement plan. Employers must offer SEP IRAs to all employees who are 21, earn at least $600 per year from the business and who have worked for the company at least three out of the last five years. Employees cannot make contributions to the SEP IRA; only the employer can. In 2022, that limit is 25% of an employee’s compensation or $61,000, whichever is less.
• Payroll deduction IRA: A payroll deduction IRA means that employees open IRAs with a financial institution of their choice and authorize money to funnel toward an account. As the employer, you deduct the money and direct it to a chosen IRA account. It costs the employer nothing. Employees can contribute $6,000, or $7,000 for those 50 or older in 2022.
• Solo 401(k): As a self-employed individual with no employees, a Solo 401(k) or Roth Solo 401(k) might be the answer. You can make contributions as both the employer and employee, which means you can contribute up to $20,500 per year ($27,000 if you are 50 or older) as the employee in 2022. However, you can also contribute up to 25% of your compensation as the employer as well. The total amount cannot go over $61,000 in 2022, or $67,500 if you are 50 or older. 

Don't forget to take advantage of catch-up contributions if you're 50 or older. These can make a significant impact on your retirement savings. 

Employees younger than age 50 can contribute a maximum of $20,500 to a 401(k) or 403(b) in 2022, which is up from $1,000 from the $19,500 limit in 2021. You can add an extra $6,500 per year in catch-up contributions if you're age 50 and older, bringing your total 401(k) contributions in 2022 to $27,000. If you have a Solo 401(k) plan, you can save even more. 

Step 4: Get advice.

Don't take retirement planning lightly. Since it's complicated stuff, you may want to get a fiduciary financial advisor on your side. It's a great idea to work with a retirement professional at least every five to 10 years and right before you retire so you know exactly what you should do so you get what you want out of your retirement savings.

Retire Your Way

Can you live off dividend investments? Yes! One of the best ways to do so is to consider investing in a retirement vehicle that can help you get there. Just don't skip the advice, because the right combination of advice and action can help you retire your way.