How Much Would the Average Worker Need to Invest to Replace Their Salary With Dividends? Here's the Math.

Why do you invest? For most people, it's for retirement.

And this begs the question ... how much would someone need to save to replace the Bureau of Labor Statistics' estimate of the nation's median annual pay, around $62,000? The math isn't too tough. You just need to make a few basic assumptions.

Crunching the numbers

One of these assumptions is that you'll be replacing your salary with dividends. A stake in something simple like the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) may be the smartest solution.

To this end, with its current dividend yield of 3.2%, you'd need just under $2 million of this ETF to generate $62,000 in annual dividend income. That's not chump-change. But it's not out of reach either, depending on how much time you've got until you need it.

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For the purpose of this report, let's say you're not going to use Schwab's lower-growth dividend ETF as the vehicle to get you to the $2 million mark. Let's instead utilize something more growth-oriented like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) or the Vanguard S&P 500 ETF (NYSEMKT: VOO), both of which -- like the S&P 500 (SNPINDEX: ^GSPC) they're meant to mirror -- earn an average net return of about 10% per year. Investing $1,500 per month in one of these funds, according to numbers from Calculator.net, will get you to the $2 million mark in 25 years.

That $1,500 per month is admittedly a sizable chunk of change for anyone currently earning $62,000 per year, but there are other pathways. If you can save for 30 years, for instance, you'd only need to commit $900 per month to the effort, or just a little over $500 per month for 35 years.

Conversely, if you've only got 20 years to do it, you'll need to make monthly investments of a little over $2,500. Clearly, time is an investor's biggest ally!

Something else to consider

These calculations don't factor in Social Security retirement benefits that can begin as soon as you turn 62, but grow the longer you wait to claim them. While everyone's amount is a little different, for perspective, the entitlement program says the average monthly benefits payment right now is $2,071, or $24,582 per year. That's about 40% of the average U.S. worker's annual income, dramatically easing the monthly savings required now to replace your salary then. In fact, it will reduce your needed monthly contribution by about the same 40% in all of the aforementioned scenarios.

That's not necessarily income you can count on when the time comes, though. As you likely know, without any policy changes in the meantime, Social Security's Board of Trustees anticipates a 22% reduction in benefits payments by 2032. You'll still want to squirrel away as much of your own money as you can for retirement.

On that note, even if you can't come up with the monthly amounts connected to each of the timeframes discussed above, at least start with what you can. Time does much of the heavy lifting here. Besides, you'll likely be able to contribute bigger sums to the cause in the future.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.