My approach to retirement is a combination of both:
- Live off passive income in retirement via interest income, dividend income, and rental income.
- Live off distributions from my 401(k) plan.
I am not going to place my faith in collecting social security to fund my retirement. If it's still around by the time I'm ready to retire, great. And if they don't push the retirement age further back, even better. Hopefully, Congress will not tamper with our social security benefits, but considering the state of our national economy and debt, I wouldn't be surprised.
I've stated from the beginning of this blog that the plan is to retire in 2041 when I turn 56 years old. Maybe I'll document when I could have been able to retire if I didn't have children (just for kicks and giggles). But with the cost of raising children and putting them through school, I think 2041 is a realistic and achievable goal.
At the current rate that my 401(k) is progressing, I should be in a decent position assuming contributions do not drastically change and the rate of return is decent (6-7%). However, drawing down from your 401(k) plan carries two big risks: you can outlive it, or it might drop significantly in value if the market doesn't do well and therefore cause you to take out greater distributions when it's at a loss.
Therefore, a safer and more conservative approach is to invest in income producing assets that you can live off of. The crossing point for me in which I know I can retire is when the passive income I receive exceeds my expenses.
Based on a review of my expenses in the past, I believe that $3,000 per month in passive income should be enough to cover my expenses in retirement. Therefore, my goal is to receive $36,000 in dividends in 2041. Technically, I probably don't need $36,000 in dividends since interest income and rental income should be factored into the $3,000 per month calculation. Just to be on the safe side though, I will still aim to receive $36,000 in dividends.
You can see a schedule of my projected dividend goals from 2015-2041 here. Since we still have 26 years to go, this will most likely be subject to change. In the meantime, this is just a preliminary draft.
Let's do it.