2 Dictums All Retirement Income Investors Must Understand

Why is it important that those who invest for retirement income see their holdings as something different than traditional investments and why did I spend an entire article describing the unique characteristics of Income Risk?

The reason is that it is crucial to note and understand that almost no investment is income-risk free. Regardless of whether the income comes from direct holding of income securities, a pension received from a former employer’s pension fund or a monthly annuity payment received from an insurance company, all income sources carry some level of income payment risk.

The prevalence of income risk is the core message, which also happens to be the first income dictum for individuals who invest for long-term reliable income using the pure income investing approach.

 Income Dictum #1: Income Risk

 With few exceptions, no source of long-term retirement income is free of Income Risk

The only two exceptions that come to mind are interest from U.S. Treasury bonds and interest from Certificates of Deposit that are insured by the Federal Deposit Insurance Corporation (FDIC). These two investment types are income-risk free because the U.S. government guarantees both.

A remote chance exists that the U.S. government might lose its ability to pay interest on the national debt or that the FDIC will pay out all its reserves and that the U.S. Congress will not provide back-up funding. However, should it ever come to that, it will make very little difference what type of investments you hold. At that point, we will likely all be out sitting on the curb!

Other than these government-backed forms of economic insurance, no investment will be free of income risk.

Income Dictum #2: Ignore the market

A true income investor must ignore the movements of the markets.

As I discussed in my previous article, ignoring the market fluctuations is most easily accomplished by thinking of your income investment portfolio like we all think of Social Security payments,  pension payments or Single Premium Immediate Annuity (SPIA) payments over one’s lifetime. Those who receive Social Security, pensions and/or monthly payments from an SPIA do not get concerned when the stock market declines. I will go as far to say that they do not even think about it. This is exactly how pure income investors must teach themselves to think of their income investment holdings.

Any individuals unable to teach themselves to think that way, any individuals who are unwilling to try learning this method or any individuals who simply will not accept this dictum, are people who should NOT take the pure income approach to investing for retirement income. Why is this so important? If one wishing to employ the pure income approach must endure an economic recession where the broad stock market declines by 15%, 20% or even 25% in value, may find themselves so distressed that the investor can no longer bear the paper losses and start selling their dividend paying stocks, even though the dividends are adequately covered and continuing as expected.

Now, I must reiterate that not accepting this discipline is not a negative sign. It is not a measure of some weakness or ineptitude. It is simply an inability or an unwillingness to accept another paradigm. In short, it is a matter of choice and there is absolutely NOTHING WRONG with not accepting this form of mental discipline of ignoring changes in market price of a dividend paying stock.

It comes down to personal preference and choice. I am sure some retirees will elect not to accept this core discipline of ignoring market fluctuations. Those who cannot or will not accept this approach, are individuals who have spent many years accepting the paradigm of total return as an unalterable truism and have no interest in deviating from it, and there is nothing wrong with that.

Regardless of how logical the alternative might be, expecting individuals to unlearn something late in life for a different approach may well be unrealistic for some. But if the income approach to investing retirement savings is what the retiree wants to do, then he or she must teach themselves to ignore the movement of the markets.

Now that we understand advantages, disadvantages and risks of income investing, we will start discussing actual investing vehicles and specific tactics in upcoming articles.

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.