Last Updated on October 4, 2025 by Chin Yi Xuan
Like most dividend enthusiasts, I’ve always dreamt of living purely off my dividends when I retire one day.
However, as I studied the topic of retirement further, I’ve decided not to pursue this path.
In this week’s newsletter, let me show you why, and the better alternatives that I’ll be using:
Table of Contents
#1 The problem of retiring purely off dividends
Being able to live off dividends is attractive to many. This is because retirees are not required to sell their investments to fund their expenses – which can be difficult without proper rules in place.
But there’s a problem: To do this, you will need a huge capital.
Let me show you what I mean:
Scenario:
At 30, Adam’s yearly expenses is $24,000 ($2,000/m), and he expects his expenses to stay the same upon retirement, after adjusting for inflation. He plans to retire after 60, and expects to live until 90.
Let’s assume in the long run, inflation is 3%. And let’s also assume that he’ll receive a return of 6% (in the form of dividend yield) on his retirement fund upon retirement.
How much retirement does Adam need by the time he retires?
Here’s how to determine the retirement fund Adam will need:
Step 1: Find out how much his yearly expenses are when he retires ($60,001.93):
- Using this Future Value calculator, key in the following:
- N = 31 (Adam has 31 years before he retires: 60-30+1)
- PV = $24,000 (Adam’s expenses at present day)
- Interest Rate = 3% (inflation)
- PMT = $0
- PMT made at the ‘Beginning’ of each period
- Next, click ‘Calculate’, and we’ll find that $24,000 worth of yearly expenses today will be equivalent to $58,254.30 when Adam retires after 60.
Step 2: Find out the total retirement fund required by Adam by the time he retires.
- To do so, we will first need to adjust the rate of return of Adam’s retirement fund (6%) by the inflation rate (3%). This ensures that our calculation takes into account of the effect of rising prices over time.
Adjusted return by inflation
= [(1+Return)÷(1+Inflation)]-1
= [(1+0.06)÷(1+0.03)]-1
= 0.0291 (2.91%)
- Next, divide ‘Future Value’ from Step 1 ($60,001.93) by the adjusted return:
$60,001.93÷0.0291 = $2,061,922
- Finally, add Adam’s first year’s expenses to his total retirement fund ($60,001.93). This is to cover his Year 1 expenses when he retires before he receives the dividends from his retirement fund:
$2,061,922 + $60,001.93 = $2,121,923.93
In other words, if Adam would like to maintain his current lifestyle purely with dividends when he retires, he will need to accumulate $2,121,923.93 by the time he starts his retirement at 61 years old.
By purely living off dividends, Adam would be left with $5,156,620 at the end of age 90:
The downside of retiring off dividends:
- A relatively large amount of capital is required, compared to the methods that I’ll be showing in the next section
- Does not take into account of a difficult market where dividend cuts are possible.
- Retirement capital saved isn’t fully used to enjoy life after retirement.
#2 The rule of 25
On the other hand, the Rule of 25 is a rule of thumb that suggests you need to save 25x your expected annual expenses to retire.
This rule is a practical application of the 4% withdrawal rule, implying that if you save 25x your annual expenses, you can withdraw 4% of your savings each year to cover those expenses, without depleting your retirement fund.
In my opinion, while not perfect, the rule of 25 is decent to estimate how much you need to retire.
Scenario:
Jane is 30 this year and her expenses at present day is $24,000 per year ($2,000/month). She foresees her expenses to remain the same after she retires in 30 years, after 3% inflation. As her retirement fund, Jane is building a dividend portfolio that will pay her an average of 6% dividend per year.
Using the rule of 25, how much does she need in her retirement fund when she retires?
Here’s how to determine the retirement fund Jane will need:
Step 1: Find out how much his yearly expenses are when she retires ($60,001.93):
- Using this Future Value calculator, key in the following:
- N = 31 (Jane has 31 years before she retires)
- PV = $24,000 (Jane’s expenses at present day)
- Interest Rate = 3% (inflation)
- PMT = $0
- PMT made at the ‘Beginning’ of each period
- Next, click ‘Calculate’, and we’ll find that $24,000 worth of yearly expenses today will be equivalent to $60,001.93 when Jane retires after 60.
Step 2: Multiply yearly expenses upon retirement by 25
$60,001.93 x 25 = $1,500,048
$1,500,048 is how much Jane would need to fund a 30-year retirement without depleting her capital, assuming a 4% annual withdrawal rate from her retirement fund.
This is significantly lower than the amount required to live off dividends ($2,061,922).
[Tips] To see the yearly withdrawal under the Rule of 25, use the calculator below:
Calculator: https://www.fourpercentrule.com/
Calculator Setting:
- Current age: 60, Retirement age: 60
- Current Assets: $1,500,048
- Retirement years: 30
- Leave all options under ‘Add’ section unticked
- Put 0 for all selections under ‘Contribution’ section
- Inflation: 3%
- Pre-retirement return 0%, Post-retirement return 6%
- Fixed % return: 0%
- % in equity: 100%. % in fixed income: 0%.
- Retirement spending: Using 4% rule
Result:
- Based on Jane’s retirement plan, she can afford to retire after age 60, withdraw 4% from her retirement fund every year (adjusted for inflation), and still have a remaining balance of $1.7 million at age 90.
Downsides of the Rule of 25:
- Assumes a Stable Portfolio: The rule assumes your portfolio will consistently generate enough returns to meet your withdrawals, which isn’t guaranteed.
Is there a way to adapt a retirement strategy to the ever-changing market conditions?
#3 Bucket Method
Personally, I am more inclined to use the Bucket Method for my retirement days. This is a more flexible way of adapting to fluctuating market conditions.
The Bucket Method is a simple adaptation of the Rule of 25. The good thing? It is adapted dynamically to market returns. Let me show you how it works:
Scenario:
Nick is 30 this year and his expenses for his basic needs at present day is $24,000 per year ($2,000/month). When he retires in 30 years, he expects the expenses for his basic needs to stay the same. However, he also wishes to go on occasional traveling to enjoy his retirement life.
Nick has a dividend portfolio that pays an average of 6% in dividend yield annually. But this may fluctuate depending on market conditions.
Using the rule of 25, how much does he need in his retirement fund when he retires? Assume a long-term inflation rate of 3%.
Here’s how to determine the retirement fund Nick will need:
Step 1: Find out how much his yearly expenses are when he retires ($60,001.93):
- Using this Future Value calculator, key in the following:
- N = 31 (Nick has 31 years before she retires)
- PV = $24,000 (Nick’s expenses at present day)
- Interest Rate = 3% (inflation)
- PMT = $0
- PMT made at the ‘Beginning’ of each period
- Next, click ‘Calculate’, and we’ll find that $24,000 worth of yearly expenses today will be equivalent to $60,001.93 when Nick retires after 60.
Step 2: Multiply yearly expenses upon retirement by 25 (Rule of 25)
$60,001.93 x 25 = $1,500,048
Step 3: On top of that, save up 2 years’ worth of expenses in cash to cater for market fluctuations
$60,001.93 x 2 = $120,003.86
Choices to save in Fixed Deposit (FD) or low-risk money market funds. Key consideration is to have easy access to funds, no lock-in period, and no penalty for withdrawal.
Total Retirement Fund Required: $1,500,048 (Step 2) + $120,003.86 (Step 3) = $1,620,051.86
Example of Bucket Method under different market conditions:
There are 2 buckets to Nick’s retirement fund:
- Bucket 1: 2 years’ worth of expenses in cash: $120,003.86
- Bucket 2: Invested Retirement fund: $1,500,048
Here is how the Bucket Method would work under different market conditions (Normal Year, Good Year, Bad Year):
Key principles for Bucket Method:
- In a normal year, reinvest all the surplus back to portfolio. Stick to the standard 4% withdrawal rule.
- In a good year where you have an outsized surplus (eg. 3% surplus instead of 2% from the example above), you are free to spend the extra surplus (1%) on enjoyment.
- In a bad year, use Cash Bucket to cover the shortfall in dividend income. Then, use future surplus during a good year to replenish Cash Bucket. The rule of thumb is to always replenish Cash Bucket back to 2 years’ worth of expenses.
Downsides of the Bucket Method:
- More hands-on effort is required to manage retirement fund.
Verdict: No perfect style – choose what fits for you
I hope this guide has been helpful!
At the end of the day, choose what style that fits best to your life circumstances!
If you have any questions, feel free to leave them at the comment section below!
Disclaimer:
Not financial advice. Please do your own due diligence and seek professional help before making important financial decisions in life.
