How Retirees Are Using Dividend ETFs to Replace Paychecks

As soon as you start thinking about retiring, your relationship with and concern about money understandably change, and this begins as soon as the paychecks you have relied on for decades start to wind down and/or end altogether. This is a harsh reality after earning a steady paycheck for what feels like forever, and you now have to think beyond bi-weekly or monthly payments.

Quick Read

• The JP Morgan Equity Premium Income ETF (JEPI) pays $4.72 annually per share in monthly dividends and has grown over 5% this year.

• Falling interest rates are pushing retirees away from CDs and money markets toward dividend ETFs for higher income.

• Dividend growth ETFs focus on companies that raise payouts yearly to help retirees offset inflation over time.

• If you’re thinking about retiring or know someone who is, there are three quick questions causing many Americans to realize they can retire earlier than expected. take 5 minutes to learn more here

Turns out, you might not have to think this way at all, as dividend ETFs are quickly becoming a form of paycheck replacement, as retirees convert their hard-earned savings and 401(k)s to bridge the gap and turn these savings into a predictable, regular monthly (or quarterly) income.

This shift provides what every retiree needs with a sense of stability and freedom, allowing them to retire comfortably and live a well-deserved lifestyle after decades of hard work. When you consider the need to cover rising inflation and healthcare costs, shifting to a dividend ETF mindset can be a substantial benefit for retirees who don't want to worry about their future and instead want to focus on living their best life in their golden years.

Why Dividend ETFs Fit the Retirement Mindset

One of the biggest challenges in retirement, especially if you don't want to adhere to the 4% rule, is to generate a consistent cash flow while keeping risk levels under control. It's hard to pick individual dividend stocks if you don't know the market well, so retirees rightfully pivot to ETFs as a way to own dozens or hundreds of companies in one fund.

This level of diversification can help keep a steady income, even if one company reduces payouts. Many of the most popular dividends available today are going to focus on companies that have a solid and regular history of not just maintaining their dividend strategy, but increasing these dividends for shareholders.

If you invest in an ETF composed of stocks with a history of dividend increases, it can add confidence for retirees who want to know they have a steady retirement stream that will hold up even during market downturns. The best part is that ETFs trade exactly like stocks, so retirees can buy them without worrying about complicated strategies.

The New "Retirement Paycheck": Monthly or Quarterly Income

As a retiree, you have to think about how to structure your holdings with predictable payout schedules. This means building out a balance of ETFs that pay out monthly, so you have regular deposits on one day of the month, every month. However, you can also look at quarterly dividends, which often produce larger payments that are all delivered at once.

No matter which preference you have, retirees can easily and quickly map out income schedules ahead of time and know exactly how much money they will receive every single time. Knowing that cash will hit an account on the same day each month is a measure of predictability that adds to the level of confidence that you can regularly replace a paycheck.

What is easy to recommend for retirees is to have a blended approach to replace a paycheck with a mix of a monthly dividend ETF for consistent cash flow. Add to this a quarterly dividend ETF for a larger burst of income, and a broad-market ETF that can carry the weight of long-term growth in the portfolio.

Popular ETF Choices for Retirement Income

Included in these dividend choices are a few different options. You have high-yield dividend ETFs, which generate larger payouts that are especially useful for retirees who want or need more immediate income. These ETFs tend to focus on utilities, telecom, real estate, and energy companies. Alternatively, dividend growth ETFs focus on companies that raise their dividends each year. Retirees have favored these funds because they know that income grows over time, which is especially beneficial for offsetting inflation. Lastly, broad-market ETFs with dividends offer large-cap exposure while paying modest yields. The goal of these dividends, as noted earlier, is to balance passive income and long-term growth.

Among the most popular ETFs right now, the JP Morgan Equity Premium Income ETF (NYSE:JEPI) offers an annual dividend of $4.72 monthly for every share owned. This means that if you own 100 shares, over the course of the year, you would make $472 just for owning the ETF. Never mind it's 5% plus annual growth this year, so you'd earn money on both the growth and passive income side, which is what makes these kinds of ETS so attractive to invest in.

Why Retirees Are Making the Paycheck to Dividend Shift Right Now

A decade of rising interest rates made cash very attractive, and investing it directly in CDs was far less volatile. But as rate cuts are expected, savings accounts and money markets are going to pay less. For retirees who are reliant on passive income to replace a paycheck, preparing for these lower yields means a need to look at locking in long-term ETF income streams rather than waiting until the prices are even higher.

At the end of the day, dividend ETFs are going to help solve the longevity risk as well as the fear of outliving your money, which is where concerns come in with the 4% or Dave Ramsey retirement rule. Of course, there is also a psychological shift here to bring into the conversation, as receiving income rather than spending down savings feels very natural after a lifetime of earning paychecks.

The New Report Shaking Up Retirement Plans 

You may think retirement is about picking the best stocks or ETFs, but you’d be wrong. See even great investments can be a liability in retirement. The difference comes down to a simple: accumulation vs distribution. The difference is causing millions to rethink their plans.

The good news? After answering three quick questions many Americans are finding they can retire earlier than expected. If you’re thinking about retiring or know someone who is, take 5 minutes to learn more here.