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A Dividend Driven Retirement

Published August 17th, 2022
This is a guest contribution by David Rakes

I recently retired from a long career in engineering in the defense industry.  While we had contributed to 401k plans throughout my career, I was uneasy regarding withdrawal schemes, such as selling 4% of the savings.  I read about different buckets of funds, and how you could move funds around in order to keep aggressive, moderate, and conservative funds.  Then there was the mix of the investments; stocks, bonds, cash, etc.  It all seemed so uncertain.

My parents were completely risk-averse; Investing in the stock market was too risky, since you could lose your money.  Perhaps this was understandable, having grown up during the Depression of the 1920s and 30s.  This is my story of how I went from a fearful, fixed income-only investor, to what I think is a more reasoned approach using dividends.

Risk and the 401k

When the 401k was introduced in the 1980s, I was a typical young professional with a growing family.  I had little spare cash to invest, and the idea of risking it in the stock market was frightening.  Saving, on the other hand, was a virtue, and we did the best we could to contribute something to the 401k on a regular basis.  We had three options: a Fixed Income Fund, an Aggressive Mutual Fund, and a Moderate Fund.

Coming from my background, all of my savings went into the Fixed Income Fund.  After a short while, my tolerance for some risk modified.  One of the 401k information sheets gave the funds’ performance over one-, five-, and ten-year periods.  Obviously, for any given year, the Fixed Income Fund never lost money.  The Moderate Fund could lose money, but it could also have significant gains, and of course, the Aggressive Fund could lose even more, but the potential for larger gains was also there.  Then the chart switched to every five-year period in history.

The Fixed Income Fund still showed small gains with no losses, but surprisingly, while the Moderate and Aggressive Funds could still lose money, they did not lose nearly as much as you might think.  They didn’t have the large gains they might have earned in any single year, but they did post significant gains well above the Fixed Income Fund.

Finally, there was a chart for every ten-year period, and this is what blew me away.  The worst ten-year period for both the Moderate and Aggressive Funds was much higher than the Fixed Income Fund!  That’s when I realized that investing for the long run lowers risk.  It didn’t matter if it lost money in one year, since when I needed it in retirement, it would almost certainly be much higher than leaving it in the Fixed Income Fund.

A Spotty Pension Situation

If you remember anything about defense work in the 80’s and 90’s, you know it was marked by company buyouts and mergers.  Hence, even though I changed jobs essentially once in my 43+ year career, it seemed each time a new company bought us, they started us over in their retirement plan.

As I neared retirement, I could only count on one pension from my most recent employer covering the last 17 years or so, and a couple of smaller pensions that would be just enough to support a dinner out now and again.  My wife retired a year earlier, and she also received a small pension.  Altogether, these pensions, while we are grateful for them, would replace only about 20% of our pre-retirement income.  Even when adding Social Security, we would need to supplement this fixed income with our 401k savings.

First Attempt at Managing My Investments

Through some creative company buyouts and a job change, I had the opportunity to roll over my 401k into an IRA.  Initially, I stuck with Mutual Funds, and didn’t really know much about investing.  My resolve was tested in 2008 with the housing market crash.  At first, I was confident, knowing that if I just stuck it out, everything would be OK.  When my account plummeted by almost 50%, I decided I needed help.

I signed on with an investment advisor in perhaps the biggest mistake of my career.  He lopped off 2% of every transaction, and every month or so he’d call me up to recommend a move – and take another 2% of the transaction.  It seemed to me he only did that when he wanted more income for himself.  I decided that losing fees like that would destroy my profit, so I switched back to a self-directed account.  My account had gone up, but I felt used.

Now that I was on my own again, I started reading.  I read Bogle’s book on index funds, then a book by the Motley Fool.  I signed up for an investment recommendation service, and I was fully on board with choosing individual stocks.  I followed its advice for a while, and did fairly well.  As I continued to read and learn, I began to think about sector diversification.  I looked at my portfolio and saw that I was way overloaded in tech stocks.  It was then I realized that the stock service was looking for those big winners, and tech was hot.

Dividend Investing

Somehow in my investigations, I ran across Sure Dividend and the idea of dividend investing.  The risk in being invested in stocks as one nears retirement is that the market might be down when income is needed.  Hence, some funds have to be moved to more conservative investments such as bonds, and even cash.  In that way one could draw on the cash for income during a down market and not have to sell.  The down side is that many funds have to be out of the market, missing out on potential gains, as they may be needed for income.

Dividends intrigued me.  If we follow the 4% draw down rule, what if we made about 4% in dividends?  We could use the dividends for income and not have to sell the stocks!  This removes the risk of having to sell during a down market, yet still provides income.

In 2017 I began to move to dividend paying stocks.  About the same time, we received a small but significant inheritance.  We opened an investment account in addition to our IRA.  Of course, we were still contributing to the 401k at work.  I really focused on dividend-paying stocks in the investment account.  (I probably should have started this in the IRA in order to avoid taxes on the dividends, but live and learn.)

By the end of 2017 we were earning over 3% in dividends in the investment account.  Gradually my system evolved.  I ended my subscription and signed up for Sure Dividend.  I used the ratings they provided to select good, blue-chip stocks that paid dividends.  Eventually I signed up for the full service and got access to the Sure Dividend Database.  This allowed me to filter using my preferred criteria, and choose good, stable, companies that paid dividends.  I started migrating my IRA to dividend stocks, and by the end of 2018 I was receiving over 3% in dividends there in addition to the almost 3.5% dividends in the investment account.

After the kids had graduated college and were out on their own, we really focused on paying off debt.  When we finished paying off the house, we found that in spite of the many deferred improvements to the house that we tackled, we still had some extra funds for investing.  We maxed out the 401k and then added to the investment account.  I should also note that my company offered a Roth 401k, so I switched my contributions over to it.  By the end of 2019, we were receiving about 4% in dividends on both accounts.  I was still gradually selling non-dividend, or lower rated stocks and buying based on my filters from the database.

Pulling the Trigger

My wife retired at the end of 2020, and we decided I would work part time in 2021, then retire at the end of the year.  This would serve two purposes: one, I could start to adapt to a lesser work schedule, and two, we would both be 65 by the end of the year, so we would qualify for Medicare.

Our plan was this: Use the several pensions as a basis for a fixed income.  As I said, this would replace about 20% of our pre-retirement income.  Then we would draw on the dividend earnings to supplement our income.  We are weighing our options regarding Social Security.  Whether we decide to wait until age 70 to get the maximum benefit, or file at our full retirement age, this will add to our pension base upon which we will add our dividend income.

I knew I wanted to roll the 401k into self-directed accounts.  I opened a Roth IRA for each of us in 2021, used funds from the investment account to make the $7,000 contribution to each, and plan to do it again for 2022.  (With some residual income from work in 2022, we’ll easily have enough earned income.)

Early in January I rolled over the traditional 401k funds into my IRA, and the Roth 401k amount into my Roth IRA.  This gave me a fairly large chunk of cash in these accounts.  I decided to buy weekly based on my preferred criteria from the Sure Dividend Database.  (As it turned out, I’ve had that large cash in my account during this year’s downturn, which turned out to be fortuitous.)  By the end of 2022 we should be fully invested.

Picking Dividend Stocks

I like the Sure Analysis Research Database, as it is a spreadsheet that contains pertinent criteria for selecting stocks.  The database includes two ratings – suitability for retirement, and dividend risk.  I like A rated stocks with either an A or B risk rating.  I also filter for good dividend coverage, less than 75% of earnings.  I don’t like overpaying for stocks, so I filter out any that are more than 5% above fair market value.

Dividend growth is important, so I look for stocks that are growing dividends at a reasonable rate, say more than 5%.  If the stock pays a higher dividend, I’ll accept a lower growth rate.

Finally, I rule out dividends below 3% and sort by total return.  I generally focus on US stocks, and this usually leaves me with about ten stocks from which to choose.  Other information available includes PE ratio, years of increasing dividends, and several other metrics.  I use this process each week and invest new money, such as from the roll over, as well as excess dividend earnings.

Withdrawal Plan

My idea is that we will not have to touch the principal, but will only use the dividends for income.  However, with the new tax laws regarding inherited IRAs, I’d like to minimize the traditional IRA that we pass to our children.  Thus, I withdraw from that account an amount equal to the total dividend earnings in all of the accounts.  This in essence draws down the traditional IRA, and increases the Roth funds, as I will re-invest those earnings.

Once I exhaust the rolled over funds, I can start selectively selling stocks from the traditional IRA to meet my income needs.  I have some flexibility there, so I won’t sell if it’s a bad time in the market.

I will evaluate my income each year to see if a Roth conversion makes sense.  I’m looking at tax brackets and Medicare limits to decide how much, if any, to convert.  I could use funds from the non-IRA investment account to cover the taxes if need be.


I thought the traditional stock recommendation approach was good during the accumulation phase, but as I neared retirement, I evolved into dividend investing.  The jury is out on whether it’s better to do it that way or to start dividends early on so they can build up.  I’d love to do more research on that, but in my case, I’m a late-comer to dividend investing, so that’s how I did it.  If I were younger, I’d have to consider which approach might be preferred and do more research.

Everyone talks about moving to bonds at or near retirement to minimize the risk of having to sell at a low point in the market for income.  Using the dividend approach, I’m not looking to sell, so this doesn’t seem to be a concern.  Obviously, a company may cut dividends, especially during a downturn, and that is a risk, but that can be minimized by choosing good, established, blue chip stocks with a good history of maintaining and growing dividends.  To be a little more conservative, I don’t use all of the earned dividends.

I use Excel spreadsheets to track my investments and dividend payments.  I record each dividend payment, and calculate six, 12, and 18-month averages for each account and for the overall total.  (I’ve played around with different averages, such as 3, 6, and 12 months, but I finally settled on 6, 12, and 18 since it seems more symmetric.)  The amount I allow myself to withdraw is based on the 18-month average.

This means there will be excess dividends that I can use to buy more stocks, even during retirement, which gives me a little cushion in case a company does cut its dividend.  So far, I’m still seeing substantial increases year over year on the order of 30% per year.  Of course, this is inflated because I’m still buying at a fairly high clip because of the rollover funds, but I still expect solid increases even after I get back to full investment.  Prior to the rollover, I was seeing around 10% increases.

The bottom line is that dividend investing is providing me the supplemental income we need over a base of several smaller pensions.  We can do this without worrying about selling in a down market.  To emphasize this point, I retired just prior to the 2022 downturn, yet while the major market indices were plunging by 25-30%, my average dividend income was the highest I had seen, and has continued to rise since then!

The Sure Dividend Database provides me with the information I need to select solid, blue-chip stocks that are growing their dividends.

Additional Reading

Sure Dividend has many lists of quality dividend stocks:

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