Investing for income in retirement
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
I think many investors trying to make the transition into retirement… are making some key mistakes… right from the start…
And I think some of you are getting some bad advice… when it comes to finding income to spend in retirement…
Well, today… we’re going to start fixing some of those mistakes…
And we’re going to put to rest what I call the Great Retirement Income Myth…
That it’s no longer possible to live off the income your investments generate…
Have you bought that myth?
If so… you’re going to want to listen to what I have to say in this episode of the “Help Me Retire” podcast…
First… let me remind you of all the other resources you now have at your disposal…
Resources to help you make some of the important decisions you’re facing… whether your retirement is years away… or years ago…
Weekly ideas in our free e-letter: Wealth and Wisdom
Web site: brownfamilywealthadvisors.com or brownfwa.com…
If you’re looking for specific advice on how to retire… you’ll find a wealth of material on our educational website… helpmeretirepod.com…
You can also get back issues of our weekly e-letter… Wealth and Wisdom… on the site…
As well as the quarterly webinars we put on for our clients… those recordings are all there for the taking…
Brown Family Wealth Advisors is also on Facebook and LinkedIn…
So we’re out there talking about this… and I’m so glad to know you’re listening…
In today’s episode… we’re talking specifically about finding income to live on after you stop working…
It’s nice to have a lot of money…
But you pay for groceries with your brokerage statement… or your tax return…
You pay for groceries and other things… out of your income…
And where does that income come from?
When you’re working, it comes from your salary
And when you retire?
Social Security: will that be enough to live on?
Pensions: do people still get pensions?
Beyond Social Security and pensions, retirement income comes from your… investments… this money you’ve been putting away all these years…
In retirement… you invest that money… among other things… to generate money that you can spend…
But for some reason… I think a very self-interested reason… there are lots of people out there telling you… that it’s no longer possible to live off the income your investments generate… once you retire…
They want you to think you have to hand over your life’s savings… buy an annuity the promises a lifetime of guaranteed income… income that’s guaranteed never to increase, by the way… hold that thought…
Or they want you to follow the so-called “4 percent rule” that involves systematically liquidating your life’s savings… hoping you die before the money runs out…
What if I told you that it’s possible to have all the income you need to live the life you want in retirement… get a raise every year… and at the end of your life possibly have a lot more money than what you had when you retired?
What would you say? Would you believe me?
Would you like me to show you how to do that?
Let’s begin by acknowledging that success in retirement all comes down to income…
And when it comes to income… this is the essential question you face…
Will your income outlive you… will it always be there for as long as you need it?
And then continue on if you want it to?
Or will you outlive your income?
The number one fear of retirees, by the way…
Ask any retiree what they would rather do:
Rob a bank?
Ask their children for financial help?
I think you know how most people would answer that question… sadly…
And I don’t want you to ever face that decision…
But, outliving your income – how does that even happen?
By making one or more of the three big retirement income mistakes…
The first mistake… is underestimating how long you’ll live…
Let’s say you’re married… and you and your spouse are both around 65-years old…
Statistically… the odds are about 50-50 that one or both of you will reach age 92…
Those are the averages… but you’re not average… are you?
If you’re listening to this podcast… there’s a good chance you’ve had…
A better-than-average education…
A better-than-average job…
A better-than-average income…
And better-than-average healthcare…
For those reasons… you could have a longer-than-average life…
So you need to take that into consideration…
If you’re living longer than most folks… your money will need to last that much longer…
Second mistake… ignoring the impact of… inflation…
What did you spend more for: your last car… or your first house?
I’ve had new retirees tell me… I’m not buying cars all the time anymore… I’m even thinking about downsizing my home…
My expenses might even go down…
But then I tell them… sometime in your first year or two of retirement…
Your property tax will go up… or…
Condo association dues will increase… or…
Pay more for healthcare…
Retire in your 60s, live into your 90s – that’s 25 or 30 years
What do you think inflation will do to your cost-of-living?
What’s the lowest cost of a first-class stamp you can remember?
For me… it’s about 6-cents… how about you?
30 years ago… it cost 29 cents to mail a first-class letter…
What is it today? 73 cents
Let me ask you… do you think the cost-of-living has more than doubled over the last 30 years… like a postage stamp?
Yes… it has.
Do you think that could happen again over the next 30 years?
When people make one or both of those first two mistakes… underestimating how long they’ll live… and what impact inflation will have on them…
More likely to make the third big mistake…
And that’s thinking of “money”… as how many dollars they own…
What’s my principal… got to hang onto that… don’t want to run out of money…
And when they invest in retirement, they want to protect and preserve those dollars
They don’t want to invade their principal…
But the longer they hang onto those dollars… the more they try to protect their principal…
The less valuable those dollars become – money loses purchasing power over time.
Some people say I still have the first dollar I earned when I graduated from college in 1980.
It’s not true. I used it to impress the girl I was going out with at the time…
And it worked: We’ve been married almost 44-years now
But if I’d kept that dollar in my wallet all these years…
It would only buy 27-cents’ worth of goods and services today
Trust me, my wife wouldn’t fall for somebody that dumb
But by some strange logic, a lot of people think if they can just protect their principal – then everything will work out okay…
They figure they can never go broke…
And the mistake they make… is trying to invest that way…
Here’s an example – a hypothetical example, but a good one
Invest $1 million at 5% for 30 years
Annual income: $50,000 per year
Withdraw 4% of your initial principal in Year 1
Initial withdrawal: $40,000
Increase your withdrawal each year by 3% for inflation…
Hold the extra income aside for future years
You’re trying to keep your principal intact over the next 30 years… and earning more than you’re spending… so you’re off to a good start…
But with those annual cost-of-living increases… by Year 9… your spending has caught up to the income you’re receiving…
And that requires you to start spending those reserves you’ve been putting away each year…
Just 7-years later… in Year 16… you’ve exhausted those reserves… and now you start dipping into that principal to maintain your standard of living…
By Year 20… you really start to notice your principal eroding…
Less principal also means you don’t generate the same amount of income each year…
But your spending needs keep increasing… and you’re now caught in this downward spiral…
And by Year 27 of your 30-year retirement… your principal is depleted…
There’s no more money… no more income… and you’ve got 3-years left to live… at least…
So what happened here?
You wanted to protect your principal… so you invested conservatively…
Your income was fixed… but your expenses… were not…
The end result… you went broke… but at least you went broke “conservatively”…
So, how does this help us answer the essential retirement question… will you income outlive you… or will you outlive your income?
We realize now… that the answer is this…
For our income to outlive us… or it must increase at least as fast… as our cost of living increases…
We can’t invest everything in investments that pay a fixed-income… unless our expenses are fixed… and you already know that’s not going to happen once you retire…
Inflation doesn’t go away just because you stop working…
So where do we find that kind of rising income – at least by historical standards?
Not by lending to businesses – but by owning those businesses…
Publicly-traded companies pay dividends…
Not all companies, but many of them…
As a group – the S&P 500, for example – they have also increased those dividends…
About 3 years out of 4 over the last 30 years
Not only have S&P 500 dividends consistently increased… they’ve increased faster than inflation…
Consumer prices have more than doubled over the last 30 years…
But dividends are more than 5 times higher than they were 30 years ago…
That’s more than double the rate of inflation…
Something else we’ve seen with equities…
As a group, these companies have also increased in value over the years…
The S&P 500 is 10 times higher than it was three decades ago…
But conventional wisdom says you own bonds for income…
Government bonds, for example… pay guaranteed interest…
At maturity, the government also guarantees you’ll get your principal back…
So, imagine it’s 30 years ago, and you’re about to retire…
And of course, you need income to supplement Social Security, pension…
At that time… you could buy a 30-year Treasury bond yielding 6.35%...
Today, it’s about 4.50%...
Your other choice was to invest in equities…
But the S&P 500 was paying a yield of less than 3%...
And oddly enough… the S&P’s dividend yield is less than half of that today…
And remember, with equities… there’s no guarantee those dividends will increase in the future…
In fact, there’s no guarantee they’ll even be paid in the future…
And of course, if you invest in equities, your principal is never guaranteed…
So your choice is between $63,500 in government bond interest… guaranteed…
Versus less than half that amount from stock dividends…
For income investors, there would appear to be no contest…
But if you… for some strange reason… had chosen stocks instead of bonds for income… here’s what would have happened…
19 years into your retirement… the amount you’d have been earning in dividends… finally increased what bond investors are receiving each year…
But you’ve still got some work to do if you ever hope to overcome 18 years of earning less…
And your 30-year retirement only has 11 years to go…
At yet… by the end of this 30-year retirement… you might be surprised at how things turned out…
Bond investors would have received about 1-point-9 million dollars in income…
And let’s not forget… they get all their principal back…
Another million dollars to leave to the kids… your entire nest egg…
But because those stock dividends increased over time…
Equity investors wound up earning 2-point-1 million dollars in dividends over the last 30-years…
That’s even more total income than bond investors…
So now it’s… 2-point-1 million in dividends over 30 years… versus 1-point-9 million in bond interest… stocks paid more than bonds…
And what do you think happened to the million dollars you invested in equities?
After spending all the dividends that million dollars generated…
And with no guarantees of dividends or principal…
And 9/11… and the tech/telecom crash… and a global financial crisis… and a pandemic…
The last 30-years also saw four bear markets… two of which were among the worst we’ve ever seen…
Your million-dollar equity investment would have grown to more than 10-million dollars…
And you’ve got some very happy kids and grand-kids…
It’s possible you might have the book I wrote… maybe you even read it…
If not… it’s called Your Way to True Wealth… How to Make It Happen… Make It Last… and Make It Matter… and it’s available on Amazon and Barnes and Noble…
The reason for this shameless reminder… is that Chapter 7 of the book… explains The Dividend Method…
It’s our investment philosophy… and the book describes the four main reasons we like companies that pay dividends…
One… the income… the life’s blood of retirees… the money you’ll be spending in retirement…
Two… because historically we’ve seen dividends increase faster than the cost-of-living… these stocks are a natural inflation hedge…
You can’t say that about bonds… and most other fixed-income investments…
The third reason we like these companies… is that stocks that pay regular dividends… and increase them consistently… have historically been less volatile than other stocks… more predictable…
And four… research has shown that historically… rising-dividend companies as a group… have offered higher investment returns than the market at-large…
Rising-dividend companies are a great example of an investment that gives us what we need in retirement…
Income that has risen over time… which helps us pay the bills…
Returns that have allowed investors to maintain their purchasing power… and possibly even continue growing… even after spending all those dividends…
All with less volatility and uncertainty than the overall market…
In the next episode of the “Help Me Retire” podcast… we’re going to dig a little deeper…
I’ll share the 6 criteria… the 6 standards we want these companies to meet before we add them to our portfolio…
And if you have the book… you can even read ahead a little bit on The Dividend Method… it’s right there in Chapter 7…
I hope you’ll be able to join me for our next episode…
And until then… if someone tries to tell you that it’s no longer possible to live off the income your investments generate…
You tell them you know better…
It is possible… the ultra-wealthy have been doing it for generations…
Most of the clients we work with are doing it right now…
And once you understand how… so can you…
We’ll see you next time…
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
