I’m 45 with a $200K sum I want to invest so I can retire by 67 with $100K/year. Should I focus on dividends or growth?

Imagine getting a $200,000 windfall — maybe through an inheritance, lotto winnings or even a lawsuit ruled in your favor.

It’s a scenario Devon faces. At 45, she has found herself in a nice $200,000 shot in the arm, allowing her to contemplate a more comfortable retirement than she might have otherwise had. But it’s also filled her with some worry about the best next steps.

She doesn’t think she is especially financially savvy and hasn’t done much by way of retirement savings. In fact, she’s done nothing at all. But now, with the multi-hundred-thousand-dollar boost to her retirement fund, she is actually doing better than many Americans her age.

That’s because as of 2022, the median retirement savings account balance among Americans aged 45 to 54 was $115,000, according to the Federal Reserve (1).

Given that Devon is not looking to retire for another two decades, this also gives her the benefit of time with her investing.

Also, while a lot of people aim to retire at age 62 (because that’s the earliest age to sign up for Social Security), if Devon can postpone her retirement til 67 as she plans, she can see additional benefits come her way.

This is because filing at 62 will mean accepting a reduced monthly benefit for life, even as it means kick off retirement sooner, as a good number of seniors are willing to do.

Another disadvantage Devon avoids is that she won’t need to depend on her retirement savings for as long as someone who retires at 62 (experts suggest planning for anywhere from 25 to 30 years.

So this is where Devon’s portfolio comes in — especially if she’s set up to produce passive income.

But how realistic is it to turn $200,000 today into $100,000 a year in passive income in 22 years, assuming no additional contributions? Let’s find out.

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Since 1926, the stock market has produced about an average annual return of 10%, accounting for years of great performance as well as downturns. (2)

So let’s say you’ve got $200,000 to invest today at age 45, and you’re aiming to retire at 67. While it’s OK to go heavy on stocks for, say, the next 15 years, as retirement gets closer, it’s generally smart to scale back on stocks and shift over to assets that are more stable, like bonds.

Because of this, we can’t assume that a $200,000 investment today will generate a 10% return over the next 22 years. A smarter approach is to assume something more modest, say a 7% return, to be safe. If that $200,000 earns 7% in the coming 22 years, it will grow to about $886,000.

So now let’s get back to that goal of $100,000 a year in passive income. If that $886,000 portfolio is your only source of assets, then frankly, $100,000 may be difficult to get.

These days, you can expect a roughly 1.17% dividend yield out of an S&P 500 portfolio. (3) But let’s say that instead of investing in an S&P 500 ETF, you specifically assemble a portfolio that’s loaded with stocks paying notably high dividends.

Even so, an average 5% yield would be generous in that situation. And with $886,000, you’re then looking at about $44,000 in passive dividend income.

Of course, this all depends on what Devon’s definition is of passive income. If it includes Social Security, she might just be hitting her goal of $100,000.

Devon would be looking at a pretty generous monthly Social Security benefit (also because she would have dodged the reduction for filing early.

Here is how that math breaks down:

In 2025, the maximum Social Security benefit at full retirement age is $4,018 per month. (4)

If we assume that in 22 years from now, it will be $5,785 a month (this figure hingeing on inflation rising at a target 2% a year between now and then), then multiplying that by 12, Devon’s got about $69,430 a year from Social Security.

With another $44,000 in dividend income, she’d be getting just under $113,500 annually — just over her goal.

And of course, $113,500 a year is not a shabby retirement income. In 2023, U.S. consumers spent an average of $77,280, reports the Bureau of Labor Statistics. (5) But it’s common for retirees to spend less than the typical consumer, so Devon’s projected retirement income suggests a comfortable retirement, given what we know.

On the flipside, though, one of the biggest risks to your retirement income is inflation. In recent years, it’s been fairly rampant.

We don’t know what inflation will look like over the next few decades. But any passive income Devon’s portfolio generates could decline in value if living costs rise substantially.

Social Security benefits, thankfully, are eligible for an annual cost-of-living adjustment. You may still need to make changes to your portfolio during retirement to account for a faster pace of inflation should that scenario arise.

If you’re in the process of building a retirement portfolio, it’s best to give yourself a longer investment window, as Devon plans to do. But regardless of how far away retirement is, you’ll need to ask yourself what strategy you want to employ.

Some investors like to focus on value stocks, which tend to produce higher dividends. However, value stocks tend to see slow, stable growth, as opposed to explosive growth.

Other investors prefer growth stocks, which, as the name implies, focus on rapid growth. Growth stocks tend to pay minimal dividends or none at all. And the reason is that these companies prefer to invest their profits back into their businesses instead of sharing the wealth with stockholders so that their share prices can soar even more.

There’s really no right versus wrong strategy. You can grow your portfolio nicely with either value or growth stocks — or both at the same time. But you should know that while growth stocks may be a suitable investment during your wealth-building years, they can also be more volatile than value stocks.

As such, you may want to focus on value stocks during retirement — both for the relative stability as well as the income they tend to produce.

Of course, come retirement, it’s also important to hold stable assets like bonds in your portfolio to protect yourself against market volatility. But the nice thing about bonds is that they’re also great income-producers.

So if you’re focused on passive income, a combination of bonds and value stocks with strong dividends could set you up for a comfortable lifestyle, especially if combined with a fairly generous Social Security paycheck.

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Federal Reserve (1); Covenant Wealth Advisors ((2)[https://www.covenantwealthadvisors.com/post/how-average-stock-market-returns-can-fail-investor-expectations]); Y Charts (3); Social Security Administration (4); Bureau of Labor Statistics (5)

This article originally appeared on Moneywise.com under the title: I’m 45 with a $200K sum I want to invest so I can retire by 67 with $100K/year. Should I focus on dividends or growth?

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