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The Financial Independent, Retire Early (FIRE) movement has become popular in the last few years, with more people looking to escape the 9-to-5 job and achieve financial freedom through investing.
For many, the concept of passive income, mainly earned through dividend-paying stocks and ETFs, is a foundation for their FIRE plans.
This is the case of a 25-year-old who recently sold his successful business and ended up with $5 million after taxes. His goal is to retire immediately and live off dividends produced by his investments.
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He doesn’t want to micromanage his portfolio or chase high-risk, high-reward players but wants to invest in low-volatility stocks that generate consistent dividend income. To achieve this, he is considering a three-ETF portfolio made of Invesco High Yield Equity Dividend Achievers ETF (NASDAQ: PEY ), Schwab U.S. Dividend Equity ETF (NASDAQ: SCHD ) and iShares Core Dividend Growth ETF (NASDAQ: DGRO ).
According to the poster’s notes, these three ETFs combined offer a yield of 3.45%, potentially generating $175,000 in dividends annually. As the poster explains, “Total return/growth is not as important as consistent income and low volatility. As long as the principal grows a little each year but lags the total growth of the S&P 500, that’s ok.”
However, is this approach realistic? Can he retire on $5 million if he implements this strategy? Let’s dive into the comments to see Reddit’s advice.
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Investor With $5 Million Has a 3-ETF FIRE Plan – Is Reddit Suggesting He Follow It?
Balance Income and Growth and Consider Inflation
While the poster specifically wrote he prioritizes income over growth, some Redditors advised maintaining a balance between the two types of investments to ensure portfolio longevity.
“Personally, I’d just go with any broad market index and try to live off of like 80% or 90% of the dividends, so you’re still growing the principle,” a comment reads.
“Add a growth fund such as Schwab U.S. Large-Cap Growth ETF (NYSE: SCHG ), which produces almost no dividend but has a capital gain of about 10% a year on average. Every few years, sell some of the growth fund shares to boost the dividend income to cancel out inflation,” another Reddit member suggested.
A recurring theme in the comments was the need to account for inflation and taxes, which can substantially eat away at the real value of the dividend income in the long run.
“The proposed portfolio is a good start. But keep in mind: in the U.S. the long-term average inflation rate is about 3%, so this portfolio is barely going faster than inflation. So, after inflation adjustment and taxes, you are left with about $180,00 to cover living expenses,” one Redditor’s comment reads.
One Reddit member suggested the poster reinvest all special dividends to ensure he doesn’t lose the money.
“Reinvest all special dividends and call premium to make sure you are inflation-proof for life,” he said.
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Diversify Beyond ETFs
While the three-ETF portfolio, PEY, SCHD and DGRO, is a good start, many commenters advised the 25-year-old to add other asset classes or funds to strengthen diversification and income power.
“With $5 million, why not put $1.5 million into [Vanguard S&P 500 ETF (NYSE Arca: VOO)] or [Vanguard Total Stock Market ETF (NYSE Arca: VTI]), $1 million into [Invesco NASDAQ 100 ETF (NASDAQ: QQQM]), $1 million into [Schwab U.S. Dividend Equity ETF ([NYSE Arca: SCHD)], $0.75 million into [NEOS S&P 500 High Income ETF (NYSE Arca: SPYI)] or [JPMorgan Equity Premium Income ETF (NYSE Arca: JEPI)] and $0.75 million into [Invesco NASDAQ 100 ETF (NASDAQ: QQQI )] or [JPMorgan Nasdaq Equity Premium Income ETF (NYSE Arca: JEPQ)]. So that you will have $3.5 million (VOO or VTI, QQQM and SCHD) keep growing your pot and $1.5 million producing cash flow,” a suggestion says.
Another Redditor advised the poster to invest in real estate investment trusts because they generate higher dividends.
“Mix in 20% REITs for their slightly higher dividends and similar tax benefits, shooting for 5% here. Then add in some [business development companies] and [master limited partnerships] to juice total returns, shooting for 8%,” the comment reads.
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This article Sold Business, Made $5 Million, Wants To Live Off Dividends – Is His 3-ETF FIRE Plan – The Ultimate Passive Income Strategy? originally appeared on Benzinga.com