SCHD Income Replacement Ratio Calculator
Calculate how much you need to invest in SCHD to replace your pre-retirement income
Your current pre-tax annual income
Percentage of pre-retirement income needed in retirement
Current annual dividend yield of SCHD (3.91% as of May 2025)
Expected annual dividend growth rate (historical: ~11.44%)
How many years until you need the income
Expected tax rate on dividend income
Expected annual inflation rate
Additional buffer for contingencies
Required Investment Today
$625,000
To achieve your income goal
Annual Dividend Income at Retirement
$64,000
Pre-tax projected income
Monthly Income at Retirement
$5,333
Pre-tax monthly income
After-Tax Annual Income
$54,400
Based on your tax rate
Income Replacement Ratio
80%
Of your current income
Future Yield on Cost
10.24%
Based on initial investment
Key Insight
With a $625,000 investment in SCHD today and 15 years of dividend growth, you can expect to replace 80% of your current income in retirement.
| Year | Dividend Yield on Cost | Annual Dividend | After-Tax Income | Real Income (Inflation-Adj.) |
|---|
Understanding Income Replacement Ratio
What is an Income Replacement Ratio?
An income replacement ratio (IRR) is the percentage of your pre-retirement income that you'll need to maintain your standard of living in retirement. Financial experts typically recommend aiming for a replacement ratio of 70-80% of pre-retirement income.
This ratio is lower than 100% because certain expenses typically decrease in retirement:
- No more retirement savings contributions
- Reduced payroll taxes
- Lower work-related expenses (commuting, professional clothing)
- Potentially lower housing costs (if mortgage is paid off)
Why Use SCHD for Income Replacement?
SCHD (Schwab U.S. Dividend Equity ETF) offers several advantages as a vehicle for income replacement:
- Strong dividend growth history (~11.44% annual growth over 5 years)
- Focus on quality dividend-paying companies with sustainable payout ratios
- Low expense ratio (0.06%)
- Diversification across sectors
- Qualified dividend treatment for tax efficiency
- Potential for capital appreciation alongside income
These features make SCHD particularly suitable for long-term income planning strategies.
Factors Affecting Your Income Replacement Strategy
Time Horizon
The longer your time horizon before needing the income, the more you can benefit from dividend growth compounding. SCHD's dividend growth can significantly increase your yield on cost over time.
Tax Considerations
SCHD distributions are generally qualified dividends, taxed at lower rates than ordinary income. Consider using tax-advantaged accounts for maximum income efficiency.
Inflation Impact
Dividend growth from SCHD has historically outpaced inflation, helping preserve purchasing power over time, unlike fixed-income investments.
Risk Assessment
While SCHD has less volatility than growth-focused ETFs, it still carries market risk. The safety margin setting helps account for potential fluctuations in dividend growth or payout.
Lump Sum Investment
Invest the calculated required amount as a lump sum. This approach maximizes time in the market but requires significant upfront capital.
Best for: Those with available capital from windfalls, inheritance, or existing investments.
Dollar-Cost Averaging
Divide your required investment into equal monthly contributions over several years. Reduces market timing risk and makes large investments more manageable.
Best for: Those who need to build their position gradually from income.
Hybrid Approach
Start with a partial lump sum investment (e.g., 50% of target) and dollar-cost average the remainder. Balances market timing risk and opportunity cost.
Best for: Those with some capital available who want to mitigate market timing risk.
Frequently Asked Questions
The calculator provides estimates based on the inputs you provide, but actual results may vary due to several factors:
- Future dividend growth rates may differ from historical averages
- Market volatility can affect SCHD's price and yield
- Tax laws may change, affecting after-tax income
- Inflation may be higher or lower than projected
The safety margin setting helps account for these uncertainties, but it's advisable to periodically review and adjust your strategy as needed.
The ideal replacement ratio varies based on your personal circumstances:
- 70-75%: If you expect significantly lower expenses in retirement (paid-off mortgage, lower tax bracket, minimal travel)
- 75-85%: For most retirees with typical expense reductions
- 85-100%: If you plan an active retirement with extensive travel, hobbies, or have ongoing major expenses
Consider your specific lifestyle plans, healthcare needs, and whether you'll have other income sources like Social Security or pensions when determining your target ratio.
Yes, reinvesting dividends during your accumulation phase is highly recommended for several reasons:
- Accelerates compound growth through purchasing additional shares
- Increases your share count without requiring additional capital
- Automatically buys more shares when prices are lower
- Creates a larger base from which to generate retirement income
Most brokerages offer dividend reinvestment plans (DRIPs) at no additional cost. Once you reach retirement and need the income, you can switch from reinvestment to income distribution.
Inflation erodes purchasing power over time, making it a critical consideration for retirement planning:
- At 2.5% annual inflation, purchasing power is reduced by roughly 50% over 30 years
- Higher inflation rates can dramatically increase the amount needed for income replacement
- Fixed income sources become less valuable over time due to inflation
SCHD helps combat inflation through dividend growth, which has historically exceeded inflation rates. The calculator accounts for inflation when you check the "Show inflation-adjusted values" option.
For additional inflation protection, some investors pair SCHD with assets that have traditionally performed well during inflation, such as TIPS (Treasury Inflation-Protected Securities) or real estate investments.
While SCHD can be an excellent foundation for retirement income, most financial experts recommend diversification across multiple income sources:
- Social Security: A guaranteed, inflation-adjusted income base
- Multiple dividend ETFs: Different focuses (international, REITs, utilities) for sector diversification
- Bonds or Bond ETFs: For income stability and lower correlation to equity markets
- Other sources: Rental property income, part-time work, pensions, etc.
A diversified income approach helps protect against sector-specific risks, dividend cuts, and provides more flexibility in tax planning. Consider using this calculator as part of a broader retirement planning strategy.
Related Calculators
Calculate the impact of dividend reinvestment (DRIP) for SCHD with our easy-to-use calculator.
Compare long-term returns between SCHD investment and high-yield savings accounts.
Analyze SCHD's sector allocation and compare it with other major ETFs and indices.