Investors frequently ask what the secret is to building a retirement portfolio that can provide higher current income and inflation protection while sustaining capital. This paper is intended to help advisors provide not only better answers to their question, but also to understand the benefits dividend paying stocks offer as a retirement income investment solution.
Many investors approaching retirement face the unpleasant reality of never being able to retire on their own terms. Plus, a growing number of already retired investors find themselves without enough income to pay their bills and now need to return to work. As we examine the retirement income question, we will build upon an historical foundation by outlining what has and has not worked in the past.
Today's retirement planner is faced with a myriad of perplexing planning conundrums.
The lowest yields in 50 years on income-producing investments.
Extremely risk-averse investors who have experienced large capital losses?twice in the last decade.
An elevated probability of higher than average long-term inflation.
Increasing odds of running out of capital as investors live longer.
Investors who find themselves with severely diminished capital after years of saving to secure a comfortable retirement.
Other traditional retirement income sources including pensions and social security that may not be sufficient when needed, increasing the burden on portfolios to produce more income.
We believe now is a good time for advisors and investors to reconsider conventional approaches. What should be considered now are new or less commonly used investment approaches that may help retired investors capture a more consistent return, while also seeking to protect the capital invested in volatile securities. One of the first things we learn as advisors is the importance of the present value of a dollar, or having the largest capital base possible working for you at all times. Investors who get to retirement with the largest capital base with which to produce income have a good shot at enjoying a decent quality of life. Yet the passive "buy-and-hold" allocation approach with no active management component inherently disregards the capital destruction caused by negative market cycles. A significant loss of capital while investors are withdrawing income can cause compound liquidation to occur as investors sell a greater number of shares each month as prices decline just to meet income needs. The damage to capital can be difficult, if not impossible, to overcome.