4 Simple Retirement Income Strategies

you don't need an incredibly detailed multi-page retirement income plan to ensure that you can retire but you do need to know the different options and strategies available to you so if you're unsure exactly how you're going to create income throughout your retirement be sure to check out this video where I walk you through four different approaches you can take and provide context as which might be best for you hey everyone I'm James canole founder root financial and I'm here to teach you how to get the most out of life with your money when it comes to retirement the biggest priority you have is ensuring you have cash flow to support your needs throughout retirement so essentially you have a retirement income plan now that being said there's not one size fits-all approach to creating that cash flow there's many different ways you can do that in today's video I'm going to walk you through four of them and help you understand what might be best for you option number one the first strategy you can take is maximizing guaranteed income sources now what do I mean by this well most people when they go to retire they have various different things think of them as tools they can use to create income maybe one is social security maybe some is cash in the bank maybe some is Investments like a 401k or a Roth IRA or something like that and typically they pull a little bit from each of those things to meet their income needs well that's certainly one approach but what maximizing guaranteed income sources does is it fully focuses on maximizing that guaranteed income source as the name implies in order to create the entirety of their retirement income let's take a look at how this might work out in practice let's assume that you're 64 years old and you want to retire now to retire you need cash flow or you need income of thirty seven hundred dollars per month coming in and that will allow you to live comfortably and do everything that you want to do well you have two primary ways of supporting that or of generating that you have a social security benefit that your full retirement age amount is three thousand dollars so if you wait until 67 you get three thousand per month and you have three hundred thousand dollars in your portfolio so maybe it's a 401k or Roth IRA whatever it might be now one option is to collect your social security benefit at 64. and if your full retirement age benefit was 3 000 you'd receive about twenty four hundred dollars per month at age 64. so you have 2400 per month coming in which leaves a gap of Thirteen hundred dollars per month and that would fully come from your 300 000 of Investments now that's one way of doing it and that way it works but here's the other approach What If instead of living on Social Security and Investments you fully spent down your investments in order to let Social Security grow because in this example if your Social Security benefited full retirement age so 67 is three thousand dollars per month what that means is your benefit at 70 after three years of delayed retirement credits even if you're no longer working your benefit age 70 would be three thousand seven hundred and twenty dollars per month so another approach you can take is to say instead of spending some Social Security today and some Investments today I'm going to take that 300 000 Investments and spin that down over the course of the next six years so from age 64 until age of 70 knowing that age 70 all my income needs are met from Social Security to do that you need to make sure though you have enough money in your portfolio so with three hundred thousand dollars really do the trick here well 3 700 per month is what you need if you multiply that by 12 that's 44 400 per year that you need to live on to generate all your income needs well if you multiply that by six so that monthly benefit of thirty seven hundred dollars per month times twelve is forty four thousand four hundred if you multiply that by six so six years between 64 and 70 it's about two hundred and sixty six thousand dollars what that tells us is if you put your three hundred thousand dollars into something that's keeping up with inflation some conservative investment that's just outpacing inflation you would have enough to bridge the gap between 64-70 meet all of your income needs and then turn on your social security benefit which is your guaranteed income source and that's going to carry you on for the rest of your retirement now here's the downsides to that approach number one you could probably do a little bit better if you didn't spend down all of your Investments at the very beginning now there's no guarantee of that because there's no guarantees as to what the stock market will do or what you as an investor will do but you probably have potential to do a bit better if you don't spend down all your Investments over the first few years downside number two the future of Social Security may be a little bit uncertain now is it likely that social security benefits are going to be cut on people who are already collecting I wouldn't say it's likely but you can't guarantee anything and if everything is coming from Social Security it doesn't leave you much wiggle room if something happens that benefit another downside is social security is capped so once you've filled up your Social Security wage base each year there's a cap on how much Social Security you can earn so you have to look at that cap and today for age 70 that cap is four thousand five hundred and fifty five dollars per month so if that cap is sufficient for you to live on great but you may find that it's not even if it's you and a spouse it might not be quite enough so if you're placing everything into this guaranteed income Source this guaranteed income Source doesn't meet your needs well then this probably isn't the best strategy for you that being said this is one approach that you can take to spend down cash and investments in order to increase your social security benefit and then live on that for the rest of your life the second retirement income strategy that you need to be aware of is living fully off portfolio dividends so your main goal in retirement is to create a consistent stream of income that you can live on your paycheck's gone away so you need some stability you need some certainty with regards to where income is going to come from so most people may look at dividends their first concern is well the stock market is very volatile you might be way up or way down and I don't want my dividends to be subject to that well here's the thing Dividends are typically pretty resilient they're pretty sticky meaning even as a stock market is fluctuating all over the place dividends remain fairly consistent at least relatively speaking for example between January of 1973 and October of 1974 the S P 500 dropped almost 50 percent dividends weren't cut at all so what you're receiving in dividends at the beginning of 1973 you continued to receive that income even as the stock market was cut in half from March of 2000 to October of 2002 the s p was cut in half again dividends did drop a little bit during that time period but only by two percent so while stocks dropped by 50 percent your dividend stream only cut by two percent and it quickly recovered after that recession was over now during the Great Recession from October of 2007 until March of 2009 this is where dividends actually were cut so the stock market lost about 56 percent of its value over that time now dividends that dropped by 56 percent but they did drop by about 23 percent however pretty consistent relatively speaking at least in regards to what the stock market did and then a more recent example in 2022 the S P 500 dropped by over 18 percent dividends increased by over 10 percent so even as the in value of your Investments was falling the cash payment that you're receiving actually Rose in 2022 if your money was fully invested in the S P 500 now is that a guarantee that that will continue going forward absolutely not but what it goes to show is that these companies are paying dividends typically remain pretty resilient in terms of their ability to pay that dividend to you as a shared owner so that's an income stream that you can relatively speaking count on going forward now here's a second benefit of dividends they tend to increase faster than inflation in 1960 the dividend on the S P 500 was 1.98 by the end of 2022 that dividend had increased to 66.92 so over that time period over that 62-year time period dividends had increased 34 times that's a compound growth rate on dividends alone of about 5.8 percent so how does that compare to inflation which is really what we need to compare anything to well 1960 the same time frame that we're measuring dividends from the Consumer Price Index was sitting at 30. at the end of 2022 it was sitting at 300. so it had increased by 10 times which is an annual growth rate of about 3.8 percent so when you look at this over the 62-year time period dividends have increased by 5.8 percent per year inflation had increased by about 3.8 percent per year so when you look at the combination of dividends remaining pretty resilient pretty consistent regardless what the stock market is doing and you combine that with the fact that on average Dividends are increased at faster rate than inflation that's a pretty good combination for you as an investor to live on those dividends to support your income needs the downside to the strategy is if you're only owning dividend-paying companies you're missing out on some of the best companies in the world or the last 10 to 20 years many of the companies that have performed the best or companies that didn't pay dividends so don't get so focused on that immediate current cash flow that you miss on the big bigger picture of also ensuring that your portfolio is growing by capturing some of the best companies in the world another downside at least as of this recording the dividend yield on the S P 500 is a little bit under two percent now granted you could own just dividend paying stocks and increase that dividend yield but if you're owning a diversified portfolio let's just say the S P 500 for the sake of example here that's only two percent of your portfolio that you're really living on what that means is you need to create a more substantial portfolio base to create a given level of income and there may be other ways to create a greater yield from your portfolio than just living on the dividends the third strategy that you can look at to create your retirement income needs is to purchase cash flowing real estate now notice I didn't just say real estate some people think oh real estate's a wonderful investment and while they can be true or that can be true in certain instances if you just go out to use an extreme example and buy three vacation homes that's not a benefit to you yes that's growing your net worth at least has the potential to grow your net worth over time but there's no cash flow to you in fact it's actually a cash flow away from you it's an expense it's a liability to pay those property taxes the maintenance maybe the mortgage on that going forward so when I'm talking about real estate in retirement it's all about cash flow doesn't matter if you have a hundred million dollars worth of real estate if it's not paying you any income you would need to sell it or refinance it or at least get some renters in there to turn that into an asset that you can actually live on so when we're looking at this from a retirement perspective keep in mind it's always about cash flow what's the income that you can generate from Real Estate so to put this in proper perspective you always need to compare it to something for example if you have a million dollar property let's assume there's no mortgage on it and after property taxes and maintenance and other expenses you're bringing in about fifteen thousand dollars of net cash flow each year you'd want to know is that good or not well what I would do just very basic this is not the most complex calculation you can do but if you're receiving fifteen thousand dollars of cash flow on a million dollar asset that's a 1.5 percent cash yield on that asset maybe not the best however if you have a million dollar property that's generating say sixty five thousand dollars and net cash flow each year well now what you're looking at is a 6.5 cash return on that asset that becomes a whole lot more attractive so you never want to look at any investment in a vacuum you want to compare it to what could you be getting with different types of assets with different types of strategies to ensure that cash flow is being maximized for your particular situation now one thing I'll say with real estate is real estate can be a wonderful long-term strategy if you have liquidity to get through the tough times so what are the tough times well it's recession it's the major repairs it's tenants not being able to pay or not being able to find tenants all those things don't have to be a disaster if you have liquidity to see it through so if you look at a time like 2008 for example real estate prices dropped substantially now they fully recovered but the only way you can get through that recovery is if you have liquidity to continue paying the mortgage or you have liquidity to continue meeting your personal expenses while that value is plummeting and then Rising again because if you don't have liquidity well now you're forced to sell that asset and being forced to sell that asset is not a recipe for long-term success so as your net worth grows in terms of how much real estate you have make sure there's a proportionate increase in your liquid reserves to ensure that you can remain resilient and hang on to that real estate even when things aren't so hot now a downside to this strategy is it takes work you can get Superior returns from Real Estate but it takes your time your energy your effort and maybe even your money if you're hiring a property manager to do this for you so this isn't typically something I'd recommend starting at retirement in fact a lot of people I know they have real estate they have rental properties and as they retire they start to divest of them because they want to spend their time traveling or with friends or with family or their time not having to think about managing something and sometimes real estate requires that so it can be a wonderful thing or it can be a terrible thing but it depends upon you personally so make sure you understand your needs and yourself personally to understand if this makes sense for you the fourth strategy that you can look at is to apply a dynamic withdrawal rate what do I mean by that a few minutes ago I talked about living on just dividends and depending on how your portfolio is structured that that might mean only taking two to three percent of your portfolio per year Well a dynamic withdrawal rate tries to answer the question what's the most amount I can draw from my portfolio whether it's from dividends or interest or cash or selling some principal whatever the case might be what's the most I can take from my portfolio to fully meet my income needs in retirement now Jonathan Guyton and William Klinger they wrote a white paper several years ago to address this and what they saw is that if you have the right portfolio construction you can take between 5.2 and 5.6 percent of your portfolio value that initial year of retirement and if you follow a series of rules that portfolio should last 40 years or more with 99 level of confidence now to make that happen there's rules that you need to follow they talk about the portfolio management rule they talk about the inflation rule they talk about different guard rails that you need to place around your portfolio so there's a lot to it and I'm not going to fully get into in today's video but this is a great way to say how do you take your liquid assets and maximize the income that you can draw from the so as you're looking at all this this is a high level overview of four different types of strategies a lot of people are really attracted to that concept of dividend income and they'll ask what's the least amount I need in my portfolio to fully live off just the dividends well if you're asking that I've made this video right here where I solve for what's the lowest portfolio value you need to create dividend income to support all of your retirement needs so check out that video if you want to see what the least amount you need in your portfolio is to live fully off the dividends once again I'm James Knoll founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com

Channel: James Conole, CFP®

Views: 25,815

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: bACANtbmGs4

Length: 15min 17sec (917 seconds)

Published: Sat Jul 22 2023