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Investing for Retirement Income May 19, 2009

Posted by shaferfinancial in Finance.
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One of the biggest mistakes most people make is their failure to build up an income portfolio.  Mainstream financial planners have gotten themselves into a tizzy over withdrawal rates.  That is the amount of stock you can safely sell each year in retirement and not run out of capital.  For years financial planners thought 4-5% was the number.  But, recent research has suggested it is much lower, 1.5%.  Why, because stock market losses during retirement hurt badly and when you look at the way the stock market actually behaves with losses every third year and major drawdowns averaging every 11 years you get a very different picture on safe withdrawal rates.

But I think this argument begs the point.  If your goal is retirement income, then why haven’t you planned to have that income?  For those willing to think outside the box a little, now is a great time to start your income investing.  Why?  Because you can buy all types of income producing items cheaply.  Real estate has dropped dramatically in most areas.  It is now possible to get cash flowing properties with a 10% down payment in many areas.  Stocks have dropped too.  You can buy stocks of solid companies at prices that give you a dividend yield in the 4-7% range.  REITs are cheap too.  My favorite, HCN, can be bought with a yield of over 8%.  Limited partnerships and Master Limited Partnerships can be found with yields in the 6-10% range.

Now it is important to pay attention to the fundamentals of whatever it is you are considering.  But, the bottom line is that there are great companies and real estate that can be bought with excellent yields.

And here is the exciting part, if you do your homework and buy into solid companies or real estate your income amounts will rise as inflation pushes prices higher and general economic factors improve.  Add in a company with good management that has a good return on equity and you have a winner.  Take my investment in HCN.  The quarterly dividend when I first starting purchasing it was $ .57.  It has risen to $ .68 a 19% rise.  But, I have reinvested those dividends into more shares.  Even though the dividend yield on each purchase ranged from 4% to 12%, because it has risen over time my overall yield on the total cost is now 11%.  Think about that for a while, taking away the price of the stock entirely, I have made a compounded 11% return on dividend alone.   My strategy going forward is to buy when the stock gets cheap and the yield goes above 7%, hold when it gets expensive, and build up the dividend income to live on in retirement.

By paying attention to income production now, I don’t have to worry about income production during retirement.  And even better, I track the amount of income quarterly so I know exactly where I am and how close to my income goal I am.  And the by-product of this strategy is that during retirement I will never be forced to sell my stocks when they are low.  I can wait out the bear market and sell in bull markets!



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