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As we enter retirement I’ve been wondering if we should change our investing choices.
Our situation is that we will have enough income from two SS accounts and three pensions to cover our expenses. None of which have cola’s attached.
Do the majority of you HD readers in retirement invest in dividend paying stocks/ETFs//funds for additional income? Or do you stay invested in the overall stock market to accumulate more and then sell it to proceed income when needed?
As always I appreciate the diverse answers our questions receive
As usual, the answer to your question depends on a lot unknowns: How long will you both live? What will you future health care needs be? Do you have children that you would like to leave money to? And so on.
The simplest answer I can offer is this: If you are just entering retirement, there is a high probability that one of you may live to age 90 or more. And, if you have an IRA, or other similar retirement vehicle, it is possible that upon the death of the last of you, there could be money left that would be distributed over an additional 10 year period.
In other words, you have a potential 20-30 year investment time horizon to plan for, which will be affected both by how much you spend and the effects of inflation. Spending you have some control over, but not inflation which on average runs 2-3% per year. As a result, in order to fund your spending and overcome the effects of inflation, your investment portfolio should include some exposure to equities. How much depends on your risk tolerance, but a lot of other comments in response to your question will give you some idea in this regard.
I have been retired for 14 years, 65 to 79. I started out thinking going from a 60/40 to 50/50 split. After reading HD for many years, I have now come to a much different conclusion. At the beginning my SS and small pension covered expenses. I read a lot about Buffett and became a stockholder and went to a Stockholders meeting, kind of like going to a fair, lots of happy people. Then one day Buffett said if he died, he would have his wife invest 90% in the S&P and 10% in treasuries. At the time I had 40 stocks inducing a few mutual funds. So I decided to go with his idea, 85% S&P and 15% Cash, my wife’s influence. The cash is for the years the stock market is negative and would not want to sell stocks. I also decided to purchase the S&P in EFT’s. I am not there yet but getting close, 11 stocks, the rest mostly S&P and QQQ. The reason I am 85% in stocks is to insure to keep up with inflation in case I live to be 100! Currently live in Independent Living and use half of my RMD to pay taxes and the additional expenses SS and small pension do not cover. This is working for me.
I think it is worth noting that 10% of Buffett’s current estimated worth is $14 billion, which means that his heirs will live very comfortably no matter what happens to the market. I wouldn’t assume that he would give the same advice to someone with a portfolio like yours.
”The reason I am 85% in stocks is to insure to keep up with inflation in case I live to be 100!”
That is fine if you choose to use for a portfolio if you want, but that high of an equity position is not necessary just to keep pace with expected inflation.
But it is not necessary for most retirees. In a Morningstar report the 2023 retirement income research the highest safe (defined as assumes a 90% probability of having funds remaining at the end of a 30-year retirement period)withdrawal rates corresponded with portfolios with just 20% to 40% in equities.
David thanks for that Morningstar info, always interesting and very believable, at 40%. But as I said, I am a believer in Buffett, and by maximizing my portfolio, the added benefits will go to my Children. I like that. I have 21 years to go, and hoping for the best outcome, so far so good.
I interpret what you are asking as how else to reduce inflation risk in retirement. Your non-COLA pensions will lose considerable purchasing power over longer periods of time; if my math is right, if annual inflation is 3% for the next ten years, they’ll lose 30% of their purchasing power after just 10 years. How to reduce inflation risk is a complicated and uncertain topic; probably the most common method is investing in the stock market, but buying TIPS is another, some advocate owning rental real estate, etc. Even an annuity might be viewed as part of a solution, because even though it is not inflation adjusted (or maybe just a fixed 1 or 2% a year which you pay extra for), compared to ordinary bond investments because if you live past the median you get an additional financial benefit from those in your annuity pool who die before you. Perhaps a mix of methods would be good.
However demography affects what is going on too. We boomers have affected everything in each stage of life. More than half of the stock market is part of retirement accounts. When RMD’s start boomers will soon be required to take out more than is being invested/put into retirement funds due to the baby bust generation. That will case the stock market to drop independent of anything else. The bond market should follow about 3 years later (eg initially people will move to the bond market but RMD’s will still mean money is withdrawn from those accounts at a higher and higher % of all money in those accounts as well.
Not sure of the solution but the problem has been documented with economic demography/stock market future trends research more than once. Mostly people claim this won’t be a problem with more 3rd world buyers will make up the difference. Umm that hasn’t happened yet with respect to an uptick in 3rd world buyers. What will prompt that behavior starting in a few years (when we will start to hit the tipping point)?
You make the common but likely incorrect assumption that people will spend their RMDs. That is not a given. Aside from QCDs, I have yet to spend any of my RMDs, which I have been taking for at least five years. I simply reinvest in stock funds in my taxable account. Admittedly, I put more in an international fund in taxable to get the foreign tax deduction, but the overall allocation of my portfolio is not affected.
I tried but can’t find anything to substantiate your concern. An RMD is about 4% of an account balance and RMDs not needed for expenses may be reinvested after taxes. Plus even though there is about $22 trillion in the market in retirement accounts, a portion of that is in Roth accounts not subject to RMDs. Currently about 10% of IRA investments are Roth and growing. Do RMDs present a real problem for markets?
Similar to you we live off my pension and my SS plus the spousal benefit. Combined, they are more than sufficient to cover all of lifestyle spending.
However, we also have investments both qualified and not. They generate substantial interest and dividend income all currently reinvested each month. At some point we or my surviving spouse may tap that income to deal with inflation or supplement survivor benefits provided via SS and my pension.
i elected to stay invested when I retired. The majority of my portfolio was set up as 70% stocks via mutual funds and ETFs. This is a growth position with remainder in bonds, bond funds and 5% or so in cash. I had a smaller portfolio that was set up as strictly short term CDs such as 2 year CD ladders or tax free money market funds. This also included SS income. This met daily living expenses, property taxes and travel costs. No pensions and not required to take RMD yet. When added together it was a 60/40 portfolio and remains that way today and has been for nearly 6 years. RMD income is still a couple of years away so I anticipate some changes to an overall 50/50 portfolio to cover withdrawals.
Since the mid-1930s, the financial systems of this country have been relatively stable. We could argue about details the shift from gold, racial inequalities such as redlining, or wars, but the systems have been stable. We now have an incredibly high stock market, overpopulation and chaos in weather patterns, and a candidate for president who vows to topple much of our financial system (removing regulations from regulated capitalism, reducing or eliminating the income tax as a fundamental way to cover interest payments on federal issued debt, and ending SS.) Maybe we should wait a few months to discuss this. Things may change.
However demography affects what is going on too. We boomers have affected everything in each stage of life. More than half of the stock market is part of retirement accounts. When RMD’s start boomers will soon be required to take out more than is being invested/put into retirement funds due to the baby bust generation. That will case the stock market to drop independent of anything else. The bond market should follow about 3 years later (eg initially people will move to the bond market but RMD’s will still mean money is withdrawn from those accounts at a higher and higher % of all money in those accounts as well. Not sure of the solution but the problem has been documented with economic demography/stock market future trends research more than once. Mostly people claim this won’t be a problem with more 3rd world buyers will make up the difference. Umm that hasn’t happened yet with respect to an uptick in 3rd world buyers. What will prompt that behavior starting in a few years (when we will start to hit the tipping point)?
RMDs starting for me will have no effect on my asset allocation.
Our retirement strategy is based on preservation but it is achieved by a mix of stock (growth) and bond funds/ETFs (ballast/stability) and individual bonds (TIPs). When the stock and/or bond ETFs grow, they are occasionally sold for buying the individual TIPs which are liability-matched against the projected future gap between income and expenses which is a proactive, rather than reactive, approach to cash flow needs.
Not yet in retirement, won’t shift to dividend paying as a guiding principle. If you want to reduce the risk of capital depreciation it’s easier to increase fixed income allocations.
Just my way of thinking, but it’s too hard to have multiple ways of organizing your portfolio without accidentally adding risk and reducing returns. I’ve made that mistake in the past.
I remain puzzled why so many have an unrealistic view of what dividends are, and aren’t, such that they would structure their whole portfolio around it. The two following paragraphs come from the WCI (White Coat Investor) blog, which spells it out better than I could :
1) It’s important to understand what a dividend is. A company has a choice with what to do with earnings. It can retain them and reinvest them or it can give them to the owners. But either way, the owners own those earnings. It’s more tax-efficient not to give them to the owners until the owners actually need them. That’s what declaring your own dividend (by selling shares) does. An automatically paid dividend is just forcing you to pay taxes you wouldn’t otherwise have to pay. I currently pay 28.8% on dividends that I wouldn’t have to pay for decades (or maybe ever) if the company could find a good way to reinvest the money instead.
A tilt toward dividend paying stocks (or even an entire portfolio full of them) is really just a value tilt, and probably not the best way to do it.
2) I think a good portion of the population that invests does not seem to understand, dividends don’t make a stock worth more. What makes a stock worth more is better earnings. If a stock returns profits as a dividend, the price of the stock goes down by the same amount, therefore a net zero sum gain, except you get to pay the taxes now instead of latter (bolding by me).
You are totally correct. What can make this harder to understand for those of us who own index based ETFs, is that the market price of the ETF does not appear to deviate one cent when dividends are paid. Somehow, in the math of the index, these individual stock price changes disappear. So, like the tree falling in the forest, if no ones sees it, did it really fall.
LH, your situation is similar to my in-laws a few decades ago. They had several pensions and 2 Social Security payments, that covered their expenses. They each had rollover IRAs. They used a “bucket approach” and kept a few years of expenses in cash/short-term bonds and invested the rest in Vanguards S&P500 fund. They had enough income to save $500 each month in an after-tax Vanguard Balanced fund. After 17(father-in-law) & 23 (mother-in-law) years of retirement their portfolio had doubled. They lived a comfortable, but not extravagant, lifestyle. They traveled extensively in the first 5 -10 years of retirement, including a number of European trips. If you manage your expenses and structure a simple but effective portfolio, it seems like you can have a successful retirement. Best of luck.
Rick,
Thank you for commenting. Your in-laws situation as far as income, travel, and living comfortably but not extravagantly does describe us. Thanks again for sharing
You don’t use Income to pay your bills, you use cash. Income does not equal cash. Having pensions, and SS which in total, after having enough withheld to pay your state and federal income tax, are greater than your total non-income tax expenses is wonderful. At present you don’t need additional cash, however, as you note your pensions will not be adjusted for inflation. So, you will need more cash at some future date to pay your bills.
Dollars are fungible. The only difference between a dollar coming from a taxable account, a tax deferred account, or a tax free(Roth) account, is the effect on your tax bill. Assuming you have all three types of accounts, deciding from which account you will withdraw the cash you need depends on your goals, your age, your account balances and other factors.
For example, if one of your goals is to leave assets to your heirs, you will make different withdrawal choices than if you don’t have that goal.
Some people, like myself, do not have pensions. Every year, we have to figure out where to get the cash to pay our bills. To some, it seems simpler and more secure to invest your taxable account to generate dividends to create this cash. However, the total return on an account invested this way will likely be lower than if the account was invested to follow the broader market.
Either choice can work. The challenge is to find an investment style that matches your character. You have to be tough minded to follow the total return approach. In the 23 years I have been retired, there have been seven years when our investment assets declined compared to the prior year.
If you truly have enough to cover all your expenses then why do you need to worry about harvesting dividends? If this money is going to be left alone except for emergencies then I would suggest investment in a total US, or world stock ETF, with 10-20% in a short term TIPS fund as a backup for unexpected events.
If you truly are going to need some income from your portfolio I would go with mytimetotravel’s suggestion of 50/40/10, with the bond portion some combination of TIPS and intermediate term funds.
I guess you’re approaching this as I am from a perspective of “draw what I need” . I recognise that some people approach personal finance from the opposite “spend what I have” angle and thus struggle with the question of defining what they “have” at a point in time from a bigger pot.
There probably isn’t enough focus on these distinct personality types when working out what is the best strategy for an individual and even then we have those who are proud advocates for their personality who hedge somewhat e.g. automatically redirecting a proportion of monthly income back to savings. Or alternately pushing themselves to spend more to a theoretical “allowance” when they are naturally frugal.
You are correct. Even though we are withdrawing from our retirement accounts until we reach 70 we just withdraw what we need. No budget needed as we have always been frugal, and are not into possessions. We just spend what we do and then quarterly I calculate our net worth to make sure we are OK. As I have written before I have a portfolio amount that if reached would trigger my wife (the lower wage earner) claiming Social Security, but I don’t expect that to occur as we have a conservative portfolio because we have enough!
Ultimately it seems to me that the main criteria should be tax related. If you have capacity to use particular tax breaks in generating required cashflow then structure your portfolio accordingly.
Beyond that I think whether investments deliver in dividends and interest or in capital growth is largely a mind trick.
Possibly if you are tight on overall portfolio vs cashflow needs you are going to favour the greater security of dividend income at the possible expense of greater but more volatile capital growth over time.
As you move into tiers of having *more than enough” the question becomes more moot.
Thank you for your view. It’s one I’ve never heard or thought of before
I am a dividend investor, and do use dividends and interest for expenses. But I have enough money already, and my goal is not to increase my wealth, but to maintain it and enjoy life. As the number of years remaining dwindle, you should not worry much about how much money you will have many years in the future, because you probably won’t be around. This is the time to harvest income and spend it, and dividends and interest will provide a much more reliable income than the overall market.
I agree. Changing my investment outlook from a growth investor saving for retirement to a retiree spending it is a definite different mindset. I want to explore meant different choices such as individual Dividend stocks, dividend ETFs,etc
We live off my pension – no COLA, social security is set aside in an account for travel. Investments are in mutual funds. Different stock index funds plus two individual stocks and several different length municipal bond funds and other bond funds. Haven’t changed anything or made a trade in 16 years. All earnings reinvested.
With our IRA accounts only being around 340k I’m not sure that dividends would have much of a positive impact or be able to diversify different investments. I appreciate your “auto pilot” income investing
This year I expect my expenses to slightly exceed my income, and for that gap to increase going forward. However, I have a fairly large money market account plus a five year CD ladder. I also have a 50/40/10 stock/bond/fixed income allocation. I have not changed my stock investments and have no plans to do so.
Thank you for replying to my question. I always enjoy the differing views, thoughts, and input from HD readers such as you