After outlining a few basics about retirement investing for income in my earlier articles, I will explain the 10 main advantages of investing for reliable retirement income. This will help set the foundation for all of the other steps that will follow in other articles.
I am periodically asked to explain why a retiree cannot manage a portfolio of reliable income that comes from total returns. The answer is easy: they can. In that approach, dividends and interest are reinvested and simply become part of the retirement portfolio’s total return. Periodically, a portion of the portfolio’s stocks or bonds is sold each year and the required income that is generated is held in symbolic “cash buckets” to provide the ongoing income required to meet household cash needs.
The retiree continues to sell increased amounts of equities in subsequent years to provide for income growth to adjust for inflation. The retirement portfolio’s total value continues to decline and hopefully lasts for the entire length of the retirement.
Traditional Method of Investing
The traditional approach is certainly one way to generate retirement cash flow. Most retirees will use this approach to produce retirement income from their life savings. However, that method is not a pure income but the traditional approach of seeking total return, using Modern Portfolio Theory, safe withdrawal rates, cash buckets and survivability probabilities for a retirement portfolio that is allocated to some percent of stocks and some percent of bonds.
Almost universally, the investment industry uses the traditional approach to provide retirement income and generally holds it as the only way to manage retirement savings for reliable income. It is a process-driven paradigm whose moving parts are arcane to most retirees and is subject to modifications, depending on what the unpredictable marketplace has done recently.
The traditional total return methodology can and does work for most retirees, despite its market risk. However, because the process must be managed with great discipline and a thorough understanding of its parts, it is not suitable for everyone to self-manage. The average new retirees do not know how this system works and very few are interested in trying to learn the system at this point in their lives. Therefore, many retirees who want to use the total return approach must seek out an investment advisor who hopefully will use an objective form of total return and will not use their marketing skills to direct them into an expensive and poor-performing investment arrangement that is really designed to benefit the “advisor” rather than the retired client.
Before I explain all the advantages of my pure income retirement strategy, I will explain what “Income Investing” means in this context.
Income Investing
Income investing is a method of selecting, purchasing and holding securities that pay reliable dividends, year after year and cumulatively will provide the household’s needed retirement income throughout the retirement years.
Please note that the pure income approach is not an investment method that the investment community uses, researches, publishes articles about or even admits its existence most of the time. Therefore, the following advantages – and disadvantages in the next article – are going to be only from my experience.
The Advantages
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I can ignore most of the market’s movements.
Most investors have been conditioned to constantly track the market movements of their investments and to “do something” when the market moves sharply up or sharply down. The pure income approach will require a significant adjustment that will require. “Unlearning” the traditional paradigm of total return and replace it with the new paradigm of a pure income approach. Eventually, the true income investor will learn that the reliability and sustainability of the income stream is the center of their investing attention – not the movement of the markets. Changing this ingrained behavior will not be easy and some investors will not succeed. The pure income approach will not work for those who are unable to make the transition.
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I do not have to try to time my transactions.
The portfolio generates necessary household income automatically. Therefore, I do not have to worry about whether share prices are up or down when selling for needed household income or selling/buying for portfolio rebalancing.
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I do not have to follow any market reports.
Because my income is somewhat insulated from the market movements, I never have to listen to a TV program, read a magazine, read an article, read just the right book, find the right on-line investment discussion forum or listen to a radio show to confirm that I am on the right investment path to reliable retirement income.
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My portfolio annual expense ratio is $0 (ZERO).
Most of the time, I will end the year with the same mix of income securities that I had at the beginning of that year. Therefore, I will not incur any transaction costs or any other expenses – direct and indirect – as there are no middlemen. If I do ‘fire’ (sell) any income stocks or wish to add any, I will incur a trading commission, or, if I use an income ETF, I will incur a fund fee as is the case with all mutual funds. But these fees will be minimal
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I am not required to deplete my retirement savings.
The portfolio generates income while leaving the principal assets mostly untouched.
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I feel no sense of urgency to “take profits.”
I do not have to sell when the market or the securities that I hold have risen to realize profit and get out of my positions due to fear that the market will drop.
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If something happens to me, the portfolio will continue to generate income.
The income portfolio does not need me sitting at the control panel to continue doing what it has been doing and was designed to do.
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Tax advantages.
In a taxable account, much of the income portfolio’s dividends are tax favored as qualifying dividends or return of capital for certain securities.
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Income portfolio maintenance is easy once learned.
Once the retiree learns how to manage the portfolio, the maintenance is minimal, easy and does not require professional assistance.
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Enjoy Inflation protection.
Most income securities grow their dividends over time and maintain purchasing power without the need for any additional management.
While the advantages of a retirement income portfolio are simple and easy to identify, there are disadvantages and risks unique to the pure income approach. I will explain these in an upcoming article.
Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.
