Investing in retirement or investing to fund your future retirement can get very complicated. But it doesn't have to.
That's because at its core, retirement investing is actually very simple.
In retirement, you no longer have your primary job related income stream. It's not retirement if you are still working 40+ hours a week, after all.
That means you must replace your income stream from working without actually working.
And the sad reality is that in many cases social security will not cover the normal retirement expenses and standard of living of most retirees. Getting bogged down into why or how that is doesn't change economic reality.
Retirement is when your savings and investments get to shine. The purpose of a retirement portfolio is to replace your income stream from your job.
That's where income producing securities come into play...
Perhaps the most straightforward way to generate income - without trading your time for money - is to invest your savings into income producing securities.
At Sure Dividend, we believe dividend paying stocks (and closely related REITs and MLPs) are the best way to invest your assets to create a growing income stream.
That's because publicly traded equities have the following favorable characteristics:
• Stocks have generated the strongest returns of any major asset class over the long run - and it isn't close. I cannot emphasize this point enough - you want as much of your money as possible in the stock market over the long run so long as you understand and can tolerate the steep declines the market occasionally goes through.
• The cost of buying and selling individual securities is cheap now - and holding stocks after purchasing them is free (no management fees is a good thing). This means more money left in your account to compound and pay you income, instead of going to a financial institution.
• The stock market's combination of transparency (readily available financials) and liquidity reduce uncertainty relative to more opaque and illiquid investments (like hedge funds or your second cousin's 'brilliant' CBD for cows idea).
The big drawback of the stock market is volatility and market declines... But that isn't a real drawback with income investing.
That's because volatility affects prices, not dividends.
There's a difference between the stock price and the dividends the stock pays. One fluctuates based on market whims. The other is based on the earnings power of the actual business.
If stock prices fall by 10% or 50% your income doesn't (assuming you are invested in strong businesses likely to increase their dividend rather than reduce it). So price declines don't impact the reason of investing; income.
But price declines do mean that putting new money into the market from any source (like reinvested dividends) is invested at more attractive rates.
Example: A stocks costs $100 per share and pays $3 per share in dividends for a 3% yield. If a recession occurs (and this is a recession safe company), the stock price may go down to $50 per share, but the dividend stays at $3 per share. This brings the yield up to 6%. Putting money to work at 6% is better (twice as good in fact) as putting it to work at 3%.
When you invest for income you get to profit from market volatility by choosing when you buy and sell.
That's why we believe income investing makes sense for many retirees and those preparing for retirement.
But this hasn't touched on an important part of retirement and pre-retirement investing; what specific securities to invest in.
Individual securites have the advantage of not costing anything to hold, unlike ETFs and mutual funds, which charge annual fees. Again, the more money in your account to invest and grow your income stream, the better.
Picking exactly what to invest in can get complicated and time consuming) but it doesn't have to be time-intensive and uncertain.
The financial industry has a wide variety of options that range in cost from asset managers and active mutual funds which can cost more than 1% of your assets under management annually, to investing directly in individual securities which is free after paying nominal brokerage fees (usually ~$5 per trade).
Example: 1% of assets under management doesn't sound like a lot, but if you do the math, it adds up. If you had a $500,000 portfolio you would pay $5,000 every year. $5,000 over a 20+ year retirement comes to $100,000 or more. Maybe I'm 'too cheap', but there aren't a lot of services I'd like to pay 6 figures for.
And it actually gets worse than that because typically an advisor will put you in funds that also charge based on assets under management, so you may well be paying closer to 1.5% than 1%.
The less you pay in investing fees, the more money is left in your investment account to grow and produce income for you.
“The person that turns over the most rocks wins the game. And that’s always been my investing philosophy.”
- Peter Lynch