Hot Water Heaters Are Boring
Discussing retirement income usually does not feel important until it is very important. It is similar to your hot water heater at home – you don’t spend much time thinking about it until it stops working and you are suddenly enduring a cold shower. After that cold shower, getting a new hot water heater is easily the most important item on your “to do” list.
A client of 10+ years retired at the end of 2019. She had a successful career at one of the integrated oil companies here in Houston. Earlier this spring, she reached out to us and asked if COVID-19 would derail her retirement.
To fully answer her question and give her comfort, clarity, and confidence about her financial future, we went back to her Live Well Plan and also discussed our income-oriented investment strategy. Our clients are familiar with our goal of producing income before and during retirement. Our income-oriented investing strategy is the foundation of our conservative investment philosophy. When done the correct way, the strategy is easy to understand and can be a powerful tool to produce consistent and hopefully increasing income even in the face of market adversity.
The bottom line is this… Not IF but WHEN turbulent markets come, a predictable income stream is essential to a successful retirement. In short, the goal is to get paid and have a higher degree of retirement enjoyment.
Tell Me More About Income Investing
Income investing is the process of creating a diversified portfolio of complementary assets which can include blue chip dividend stocks that generate income. We often reinvest dividends to help grow your savings. Overall, dividend income has generally remained stable, despite the COVID crisis. In fact, according to Ned Davis Research, the data shows that 88% of dividend-paying companies in the S&P 500 have kept or grown their dividends in the last twelve months.
To add additional perspective, 43% of the total return of the S&P 500 since 1930 has come from dividends.1
Dividends stocks and bond interest are two examples of how The Price Group helps to produce income for clients in retirement. That being said, there are some additional investments we periodically utilize in certain situations.
Growth Investing Vs. Income Investing
Income investing is different from growth investing. A growth strategy focuses on buying shares of companies that devote their resources to expansion in their respective industries and the market. Typically, they pay a low dividend (if any). The game plan with growth investing is to identify well run and successful companies. You want to hold on to those shares in hopes that the business soars higher and higher as the company grows. Growth investors make their money by eventually selling their stocks at a profit.
Comparative Example
Imagine you have $1 million in a growth investment that pays no dividends, and you require $40,000 every year from your portfolio for regular living expenses. Periodically, or at the end of every year, you will need to sell a portion of your portfolio. If your portfolio is up (or even), you sell shares from your existing growth investment. However, when the investment is down (let’s use a 10% market correction, representing a $100k drawdown in this example), you have to sell MORE shares to raise the same $40,000. And a lot more… you would have to sell 4.4% of the portfolio when your portfolio is down 10%. That represents over a 10% increase!
Bottom Line
As you get close to retirement, you need an income-oriented investment process to be a successful investor. To help our client achieve this, we use a diversified blend of income producing assets. We love stock dividends and bond interest. During working years, the income would be used to reinvest. Once you retire, the income stream from your portfolio is redirected to your bank account to finance the things you want to do and see in your post-career years.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. All investing involves risks, including the possible loss of principal amount invested. No investment strategy can guarantee your objectives will be met. Dividends are not guaranteed and must be authorized by the company's board of directors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Source: 1. Morningstar and Hartford Funds, 1/19