How much do individual investors make a year?
Individual investors will average about 10% return on investment every year if investing in the S&P 500. Some years investors earn more and other times less, but the average is 10%. Other assets exist that can make investors more, but the S&P 500 is the most common asset among investors.
Imagine, being able to live on your investments. You no longer have to go to work because you saved enough money.
Knowing how much investors make is an important step to retirement.
Luckily for you, I’ll show you how much an individual investor makes every year. I’ll show you if you can get rich with stocks and how you can make a living as an investor. You’ll be well on your way to retirement!
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How much do individual investors make a year?
Most individual investors make around 10% return on investment, which is the historic annualized average return of the S&P 500. Some years investors make more than 10% and other times they lose money, but returns average around 10%. Other investors invest in different assets, like real estate, which can earn a higher return on investment.
The S&P 500 is one of the most common investments held by most investors. It tracks the top 500 companies in the United States and has a long history of earning investors money. Therefore, the S&P 500 is considered a benchmark for investors.
The S&P 500 has returned:
- 10.5% average annualized returns from 1957 to 2021 (since inception)
- 10.72% average annualized returns from 1991 to 2020 (last 30 years)
- 7.45% average annualized returns from 2001 to 2020 (last 20 years)
- 13.6% average annualized returns from 2010 to 2020 (last 10 years)
So how much you make depends on how much money you have invested and your investment return for the year. A 10% return on investment on $10k is only $1,000, on $100k is $10k, and on $1,000,000 is $100k.
However, keep in mind that the stock market doesn’t normally return 10% return on investments. Some years it may be 20% or more and other years it trades at a loss. On average, the stock market makes about 10%.
Can I make a living as an investor?
It is possible to make a living as an investor once you have enough invested to cover your living expenses. Most investors use the 4% withdrawal rule or invest in dividend paying assets which provide an income.
Living on the 4% withdrawal rule
The 4% rule estimates that you can withdraw 4% of your initial investment principle in retirement and not run out of money. Each year you can adjust your withdrawal for inflation. The study was performed analyzing different stock market performances over a 30 year period.
For example, let’s assume you need $40,000 per year to live comfortably in retirement. A 4% withdrawal rate means you would need $1,000,000 invested.
The main challenge when using the 4% withdrawal rule is the first few years after you retire. Strong stock market performance after your retirement will significantly help your success in retirement. However, bad stock market performance immediately after retiring might mean your retirement doesn’t work out.
This article from Forbes goes into great detail about the challenges an investor could face using the 4% rule. The article analyzed a $1 million portfolio withdrawing $40k per year during the following situations:
- Strong stock market performance starting at retirement with a bad finish
- A flat 5.5% return every single year in retirement
- A poor performance at the start of retirement with a good finish
Retirement failed in the last scenario (poor start to retirement) because your initial investment principle dwindled. The key to a successful retirement is not withdrawing if your portfolio balance is under your initial investment principle.
In other words, don’t withdraw from your investment portfolio if you retire with $1 million and your balance drops below $1 million. This can be difficult if you retire and the stock market enters a bear market.
Living on dividend payments
Some investors decide to live on dividend payments, rather than withdraw from their portfolio. A dividend payout is when a company pays the shareholders from the company’s profits. How much money you need to live on dividends depends on your initial investment and dividend yield.
Dividend yield is a percentage of your investment that will be paid out annually. A stock with a 3% dividend yield will pay out $3 every year for every $100 invested.
Dividend yields will range anywhere from 0.5% all the way up to 12%. However, high yield dividend payments aren’t always safe to invest in. Therefore, dividend investing is all about getting a good and safe return.
VYM is a Vanguard high dividend yield exchange traded fund. The fund typically pays around 3% in dividend yield. There are plenty of other funds or stocks which pay around 3% yield.
A person wanting to live on $40k per year at a 3% yield would need to have $1,333,333 invested.
Covered call exchange traded funds are more of an income investment which don’t increase in price much. QYLD, XYLD, and RYLD are all examples of covered call ETFs which pay between 10% and 12% in yield.
Someone wanting to live on $40k per year at 11% yield would need to have about $364k invested.
Dividend investors will need to learn how to choose quality companies. Companies that go through tough times may cut or reduce their dividend payments. Obviously, losing your dividend payments wouldn’t be good if you’re trying to live on them!
Can you get rich as an investor?
Investing is one of the best ways to build wealth. Buying and holding profitable companies has been a proven means of getting rich. Investors who buy and hold diversified quality stocks or funds traditionally see positive returns over the long term.
Summary: How much do individual investors make a year?
As you can see, most investors make about 10% average annualized returns. Some years the stock market performs well and other years the market is at a loss. However, on average the stock market returns about 10%.
The majority of investors invest in the S&P 500, the United States top 500 companies. However, other investors might get better returns investing in other assets like real estate.
You can make a living as an investor once you have enough money invested. Investors can choose to use the 4% withdrawal rule or live on dividend payments. Each investment strategy comes with its own risks.
You should be investing if you want to get rich. Your money starts to make you money and makes it easier to save $1 million.