How do you survive a stock market crash if you live off of dividends?

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Living off of dividends is a common strategy for retirees. Of course, for it to work, you need to amass a pretty sizable portfolio.

Let’s say your portfolio gives you a dividend yield of 4%. If you have $500,000 in dividend stocks, that’s only $20,000 a year.

Granted, if you’re retired, you may have other income at your disposal on top of that, like benefits from Social Security or a pension. But to live off of dividends in a comfortable manner, you may need a lot more money invested.

A $2 million portfolio generating a 4% dividend yield, for example, gives you $80,000 a year. That income gives you a lot more flexibility.

But what happens if the stock market declines during your retirement? Suddenly, your strategy to live off of dividends may not seem so solid.

It’s a question posed in this Reddit post that’s worth pondering. But ultimately, the answer is that you need to be prepared.

Dividends offer protection

A stock market crash can be a retiree’s worst nightmare — but it doesn’t have to be. If your dividend strategy is solid, you can potentially get through a market crash without really feeling the pain.

For one thing, dividends often serve as a hedge against market slumps. Your portfolio might lose value during a crash. But if you’re also receiving dividend income, it can offset other losses.

It’s also important to choose the right dividend stocks. If your portfolio consists of companies with a strong history of paying and increasing dividends, there’s a good chance those businesses will continue to do so even if the market is in poor shape.

As one Reddit user wrote, “Share price can dip all it wants as long as the payout is stable and growing.”

Another thing to remember is that some stock market crashes are fairly short-lived. If the market slumps but recovers three or four months later, and your dividend payments hold steady during that time, you may not even realize that a negative market event occurred (other than perhaps reading about it or seeing it in the news).

Don’t rely on dividends alone

You don’t necessarily need to panic if you’re living on dividends and the stock market takes a turn for the worse. But it’s also not a good idea to rely on dividends without having cash reserves available at all times.

As a general rule, it’s a good idea to have one to two years of living expenses in cash as a retiree. You can keep that cash in a high-yield savings account or a combination of savings and a CD ladder.

Based on today’s rates, you can earn a nice return on money you have sitting in cash. But even once rates fall, it’s important to maintain that cash reserve so you have ongoing protection against unfavorable stock market events.

But all told, if you have cash on hand as your backup plan, there’s no need to ditch your dividend strategy in retirement if it’s working for you. Stock market crashes are pretty common, but so are recoveries over the long haul.

That said, it’s a good idea to have a financial advisor review your portfolio with you and confirm that your investment mix is both appropriate for your circumstances and conducive to generating the income you want.  A financial advisor can also make sure your portfolio is well diversified and help you navigate stock market downturns so that you don’t get overly stressed each time things take a negative turn.

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