Thursday, July 1, 2021

Early Retirement For Dividend Investors

There are a lot of stories about people who become financially independent these days in their 30s or 40s. While these are isolated instances in the grand scheme of things, they are part of a broader movement online, where people want to take ownership of their time and retire to something more meaningful in their lives. Some call it retirement, others call it financial independence, and a lot of them are calling it FIRE – Financial Independence Retire Early. I use the terms financial independence interchangeably with the term retirement in this article. I view both as simply points in time for a person’s life, which allow them more options of how to live their life. This is a point where you have enough money to never have to work again in your life. When you become financially independent, you typically receive dividends, capital gains, rent payments, royalty payments from investments, and you have the added benefit of not having not work even a day in your life from there. Depending on how things work out for you, this can be achieved as early as your 30s or as late as your 50s or 60s.

Retirement is typically viewed as the activity where someone stops working for an employer, after they receive a pension or a Social Security check. As long as those checks pay for the persons expenses, they have the option to not have to work another day in their lives. The main difference is that we associate traditional retirement with folks in their 50s or 60s, whereas financial independence is not something defined or limited by age. I view both as interchangeable, because in essence, in both cases folks are having the financial flexibility to live life to their own terms, not being chained to a desk or a job they may dislike. In both situations, you have the option to leave one endeavor and focus on another one.

I embrace the pursuit of financial independence. It shouldn’t be a big surprise that after discussing investments for over a decade, I am a big fan of pursuing financial independence at my own terms. To me, financial independence is the point at which your passive income meets or exceeds your expenses. This is the so called dividend crossover point. The point of learning about dividend investing and applying it with real money on the line has always been to help me reach my dividend crossover point.

The main ingredients that allow you to reach financial independence are focused around earning money, saving money and investing that money.

Earning money is the first step in pursuing financial independence. If you are able to earn a good income, it is much easier to manage expenses and save money. Getting to that income point may result in choosing a profession that pays well, while avoiding crippling student loans that may set you back. A good paying job in IT, professional services such as consulting or accounting, medicine ( doctor, nurse), law or engineering can provide the fuel to save enough money, while also maintaining a good standard of living. Other fields may offer good earnings such as being a plumber, electrician, HVAC technician, handy-person, without the need to go to an expensive college. In other words, if you spend $30,000/year, it is easier to save money if you earn $100,000/year than if you earn $40,000/year. Theoretically, the amount you can earn is unlimited. However, it is good to know that for a typical work week in your chosen profession you can expect a certain income range depending on your qualifications. Therefore, it makes sense to increase your worth to an employer and get recognition for it, in order to unlock your value and earn more. In many cases these days, this means moving from one employer to the next every 2 – 3 years or so, in order to obtain the market value for your skills. It also may mean getting more qualifications and taking on challenging projects that no one else wants to take. Income is relative however, and meaningless, without thinking about the expense side of the equation.

Saving money is the next step in pursuing financial independence. You may be earning all the money in the world, but if you spend everything, you will never be able to save any money to reach financial independence. You need to have a balance between spending and savings. It is easier to save more money if you earn a lot. However, the important link is the percentage of salary that you can save, rather than the maximum total dollar amount. For example, if you earn $100,000/year and save $10,000/year, you are not better off than someone who earns $30,000/year but saves $10,000/year. That's because the first person is spending $90,000/year and not saving enough to cover their expenses. The second person is spending $20,000/year, but saves enough to pay for half an year's worth of expenses.

If you are able to save half of your salary, you are theoretically able to work for one year and take an year off. If you work for 20 years, you will be able to save enough money to sustain you for 20 years without working ( assuming you keep the money in a savings account). Of course, if you invest the money, the power of compound interest would provide more than enough to sustain you for even longer than 20 years. If you are able to save a quarter of your salary, you can theoretically take one year off for every four years of work. After working for 40 years, you should be able to take a decade off. OF course, due to compound interest, the amount of time you can take off is going to be a little bit higher. If you cannot work for 40 years however, the amount of funds you can save will be lower as well.

In order to be able to save money, it means being mindful about your spending and cutting unnecessary costs. Not keeping up with the joneses is one strategy that can result in a higher savings rate. Learning some DIY skills can also result in better savings rates. Managing the largest expenses around housing, transportation, taxes and food can be the deal changer between saving enough and not saving enough.

The last piece is investing the money intelligently, to provide for your retirement needs when you no longer pursue active employment. Earning a decent income and saving enough is not sufficient to get to financial independence if all you do is keep the money in the bank. In order to reach financial independence, you need to have your money work hard for you, so that you don’t have to.
There are various schools of thought on the best investment techniques to preserve and grow wealth. I have followed a few, and stopped on dividend growth investing. It makes perfect sense that a business that generates excess cashflows while still growing is one I want to focus and analyze. If this business ends up sharing that growing cashflows with shareholders, they are essentially getting paid to hold on to their ownership stakes. This is the type of business that attracts long-term shareholders, and not the active trader types who are focused on share prices too much for their own good. If I can assemble a diversified selection of such businesses at attractive valuations, I know that I should do ok over time. Financial independence is also much easier to model with dividend income.

Other investors are putting their money to work in diversified index funds, rental real estate or some type of momentum or value companies. Each strategy has its pros and cons, and no strategy is perfect. However, if you find the right strategy for your temperament and your situation, you should embrace it and stick to it ( assuming it has a positive expectancy of a gain). By harnessing the power of compound interest through smart and regular investing, you will be able to grow your savings to a point where they can meet your expenses. In my case, this is the dividend crossover point, which is where dividend income covers personal expenses.

There are many reasons to pursue financial independence.

- Spend more time with family members
- Spend more time on hobbies which fulfill you
- Flexibility if you lose your job due to downsizing or illness
- Volunteer for causes that are dear to your heart
- Shape government policies
- Start a business
- Move to another industry or job type

I am sure that there are a lot of reasons to pursue financial independence, which I have left out. Please feel free to email me with your ideas, and I will add them to the article.

In my case, I have pursued investing as a way to provide financial stability for me, which is independent from having to report for 40 – 60 hours/week to an employer.

The typical corporate environment today is characterized by constant restructuring and reorganizations has left with many companies expecting to pay the least to their rank and file workers, while expecting them to do the jobs of two or three people. Doing a good job is not enough, because you also need to take on new responsibilities and find ways to work beyond what your job description requires from you. That doesn’t mean anything however, because your department or position may not be viewed as essential in the next round of layoffs and eliminated. While you build some skills at this job, you have no say in the management, because you are just a tool in the corporate machine that is expected to operate at peak capacity at all times. That tool is instantly replaceable however. Perhaps that's why it is better to own the tools of production, by buying and holding stock in the corporations, than work for them.

Companies also expect employees to dedicate their lives to them, and potentially sacrifice evenings and weekends for them, in order to finish projects with impossible timelines due to poor design. This doesn’t bode well for having an adequate work-life balance.

While some readers may be in careers they enjoy today, they should still be in the market for pursuing financial independence. You never know when things would change, and the great job may turn into a toxic work environment. A corporate restructuring, a new boss, office politics, companies pushing workers against each other, or increased scrutiny and unrealistic expectations could easily derail the enjoyment at the workplace. If you have reached out your dividend crossover point, you may be in a position to walk out of a bad situation, without worrying about how this decision could impact your finances.

I view the pursuit of financial independence as an endeavor that would allow readers to reclaim their own time, while also providing the flexibility to pursue what is truly important for them.

What about you? How far along your journey to financial independence are you? You can comment below or reach out at

Relevant Articles:

Financial Independence Is Easier to Model with Dividends
Dividend Investing for Financial Independence
Margin of Safety in Financial Independence
Achieve Financial Independence with Dividend Paying Stocks
The Simple Math Behind Early Retirement

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