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How much do you need to comfortably live off dividends in retirement?

Living comfortably in retirement is something that we all should be aiming for. But how much do we need?

Well, according to the ASFA Retirement Standard benchmark, a couple that is aged around 65 will need just under $62,000 a year and a single person aged around 65 will need just under $44,000.

These are not small numbers. If you had a Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC) term deposit you’d need over $2 million in the bank as a single person. That doesn’t work for most people unless they’re able to save a lot throughout their lives.

These days I think it’s important to understand that it might be necessary to eat into your capital to fund your lifestyle. And that’s okay, putting your capital at risk of volatility may not be something that you want to do.

But there are some dividend shares that are quite defensive and diversified which mean that you can increase your income from your assets whilst keeping some cash or staying in defensive shares.

For example, WAM Research Limited (ASX: WAX) and Naos Emerging Opportunities Company Ltd (ASX: NCC) both have grossed-up dividend yields of more than 9%. This would seriously boost the income and it would mean you could still hold onto a bit of the cash. 

Some of the more defensive shares that still have good yields include Rural Funds Group (ASX: RFF) with a distribution yield of 5.5%, Future Generation Investment Company Ltd (ASX: FGX) with a grossed-up dividend yield of 5.9%, Brickworks Limited (ASX: BKW) with a grossed-up dividend yield of 4.5% and Arena REIT No 1 (ASX: ARF) with a distribution yield of 4.9%.

With these yields in mind, it would be quite easy to make enough money from $1 million to live as a single person.

Obviously $1 million is a lot of money. But (hopefully) you have a lifetime to build up that amount.

The share market has returned an average of 10% per annum over the decades. I think it would be wise to assume a bit less starting from the current high valuations and also account for inflation.

If you’re 40, meaning 25-ish years to retirement, and we use a return of 7.5% per annum then you need to invest around $1,225 per month to reach $1 million by 65. When you include your superannuation contributions and the superannuation returns from that then I think it’s quite manageable for the average Australian to have a $1 million share portfolio by 65 across their different funds. For a working couple I’d say that a $1.5 million portfolio combined is quite achievable.

Foolish takeaway

By having a diversified dividend portfolio it’s definitely possible to live off $1 million or less and actually see growing income over time. You just need to find the right shares that can do it.

I’d also want to have these top quality income stocks in my portfolio for dividends which have solid yields and growing earnings.

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Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended Brickworks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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