Dear DTA,
I want to retire, but I only have a small amount to invest.
-Madeline P.
Hi, Madeline. Thank you so much for writing in to us. Your readership is very much appreciated. And so is your email.
Your goal is admirable, and it’s also common.
We all want to retire at some point. Some people want to retire very early in life. Some are more comfortable with a later retirement. One’s time frame partly depends on how much they enjoy what they do for a living.
But I do have great news for you.
There are a number of levers you can use to improve your odds at achieving a comfortable retirement.
So let’s go over two of those levers.
While not an exhaustive list, these ideas should provide food for thought and value.
The first lever would be frugality.
This means, in its simplest form, you spend no more than you absolutely have to. You should aim to achieve the perfect balance between money spent and value achieved, with no superfluous waste in your life.
Living (significantly) below your means is a great way to boost your odds at achieving long-term financial goals due to the way you can “attack” money from two angles.
The first angle is this: spending less means you need less eventual income to live off of.
That means your SS income goes further. And it also means that any passive income you develop between now and retirement also goes further.
The person who generates $50,000/year in passive income but spends $60,000/year is not in as good a position as the person who generates $40,000/year in passive income but spends $30,000.
The second angle is this: spending less means you have more excess capital to invest.
The more you can invest, the more passive income you can eventually generate. And the more passive income you can generate, the faster and more comfortably you can retire.
While that passive income is building faster due to more excess capital, it’s also going further because of the reduced expenses.
As such, you should really be thinking about your budget and how to better manage the spending portion of it.
Automate your finances, cut out the unnecessary, and track every single penny.
Only then will you start to see some positive benefits.
A second lever you have at your disposal is investing.
There are a number of investment strategies out there.
But my personal favorite is dividend growth investing.
This investment strategy basically involves buying shares in high-quality companies that reward their shareholders with growing dividends.
You can see more than 800 US-listed examples by checking out David Fish’s Dividend Champions, Contenders, and Challengers list.
Every stock on that list has paid an increasing dividend for at least the last five consecutive years.
But many have paid an increasing dividend for decades.
You’ll notice many household names if you peruse Mr. Fish’s fabulous compilation.
Companies like Apple Inc. (AAPL), McDonald’s Corporation (MCD), and Johnson & Johnson (JNJ) will pop up.
I think this is a great long-term investment strategy for a number of reasons.
But for the sake of brevity, I’ll talk about one reason that is most germane to our discussion today: growing income that is totally passive.
See, once you buy a high-quality dividend growth stock, the growing dividends get pumped into your brokerage account (assuming the dividend continues to be paid and increased) without any further work or input on your part.
I mean, there are a lot of ways to generate passive income.
One popular method is acquiring rental properties.
But if you think you just buy a property, sit back, and collect, you’re going to be in a for a big surprise.
However, sitting back and collecting is pretty much exactly how it works with dividend growth investing.
I own shares in more than 100 different businesses, almost all of which can be found on the aforementioned CCC list.
This portfolio was built on a middle-class income in about seven years, so I do know what I’m taking about when speaking on building real growing passive income on fairly modest means.
Better yet, this portfolio generates five-figure dividend income for me.
Guess what I have to do to collect?
Nothing.
In fact, I received eight dividends just the other day.
I woke up and the money was there. That was it. I didn’t even have to leave my bed, if I didn’t want to.
This investment strategy is great for so many reasons, but that tangible and growing passive cash flow that is incredibly easy to generate is one of many.
For even more reasons, I’d recommend checking out fellow contributor Dave Van Knapp’s dividend growth investing lessons.
That’s a series of articles that discusses what the strategy is, why it’s so great, and how to successfully implement it over the long run.
And then if/when you’re ready to actually put capital to work (after your frugality and budget are locked down), I publish a series each Sunday that highlights an undervalued high-quality dividend growth stock for that week.
Of course, these are just a couple levers.
And there are many other things you can do to improve your odds, like figuring out how to increase your income, lengthening your time frame, etc.
But if you’re able to get started immediately by pulling on these levers, Madeline, the odds are very high that you’ll start to see some success toward your retirement goal.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.