How Investing for Income is a âPermission Slipâ to Enjoy Retirement
Thereâs a question that sometimes comes up regarding my income-based approach to retirement planning that Iâd like to address in a couple of different ways. The question is basically this: what if I donât need more income? Thatâs simplifying it a bit, but there are instances in which Iâll help a couple assess their income needs, and it appears theyâll be able to meet those needs without changing their portfolio to focus more on protection and income.
I stress âappearsâ because obviously there are no guarantees when it comes to investing, and circumstances can change dramaticallyâespecially in todayâs unprecedented age of economic uncertainty. That, in fact, is the first point I make when addressing the original question: investing for income isnât just about protection; itâs about overprotection. Itâs about having an extra layer of security against the kinds of major market drops that have devastated investors twice so far this century, and against the risk of cannibalizing your portfolio when it comes time to take your required minimum distributions or pay for a major medical event.
That extra layer of security exists with the investing for income model because it shifts the focus of your total investment returns from growth (which comes in the form of capital appreciation) to income (which comes in the form of interest and dividends). While capital appreciation depends on market growth (which sometimes turns to shrinkage), the income portion of your total return is, with the right strategies, achievable at the same competitive rates regardless of market conditions.
In other words, overprotection is possible without sacrificing return. Investing for income is simply an alternative way to get a competitive return with less risk. Thus, my first response when faced with the question, âWhat if I donât need more income?â is to ask a question of my own: âIf you can achieve that same level of return with less risk, doesnât it make sense to do so now that youâre retired or near retirement?â
Some people see the practicality and common sense in that idea right away, and quickly take steps to lower their risk. Others may see the sense, but they donât feel emotionally driven to act. Change of any kind is daunting and a little scary, and itâs rarely motivated by logic alone. Emotion is what really drives the decision-making process. So, with that in mind, hereâs a little story I sometimes share with people who feel they âdonât need more incomeâ that helps motivate them emotionally to make a change.
âPermission Slipâ
Recently, I stumbled across a classic car auction where I saw many iconic models from the 1970s being sold for between $40,000 and $70,000. It occurred to me that these were the same cars many men my age probably dreamed about owning when they were in high school. Then I asked myself: how many of these same men would likely feel comfortable spending that much money on their dream car now, even if they had a sizeable portfolio? The answer, I realized, was not manyâand the reason was probably that most of them were invested in traditional financial strategies that didnât allow them to see their retirement income as a renewable resource.
Put yourself in the place of one of these men and think about it: if you had $500,000 in a mutual fund and it went up, you might feel happy; but would you be likely to sell shares to make an impulsive major purchase, like a restored â72 Mustang convertible? Probably not, because youâd realize that right after you sold those shares, the market might go up, and that withdrawal might never be recovered. Consequently, your wife might be a little upset with you! Youâd realize, in other words, that your mutual fund is not a renewable resource.
Now, by contrast, think about that same $500,000 invested in bonds and bond-like instruments, reliably generating $25,000 in income this year and every year for the life of the bond. Think about the fact that your $500,000 is guaranteed to be returned to you if you hold the bond to maturity and there is no default. Now think about this: in just two years, this investment could have generated enough income for you to buy your dream car in cash! In other words, it would be like having a permission slip from your wife to spend the money because youâd both know that, with this strategy, the income is a renewable resource, much like wind or solar power.
Now, if youâre the wife in this situation, you might get the same kind of permission slip from your husband to buy a new kitchen or take a big trip with your grandchildren. The point is, by making income a renewable resource, income-based strategies can give retirees permission to do what they want financially, not just what they think they need to do. For many people, that realization can be emotionally powerful.
Clear Conscience
By the same token, investing for income offers people a way to better enjoy their income with a clear conscience and peace of mind. Thatâs based on the psychological reality that most people wonât change their goals or plans when faced with good financial news, but they will change them when faced with bad news. For example, a $500,000 mutual fund increasing by $250,000 probably wouldnât change your life or motivate you to take a big trip; but that account dropping by the same amount mightâindeedâprompt you to curb your spending or even cancel an expensive trip or major purchase. Thatâs true even if the trip was already set to be paid for with income generated through Social Security or a pension, and really had nothing to do with the savings account. Itâs simply human nature: psychologically, you would still feel compelled to be cautious. Even if you did take the trip, you probably wouldnât enjoy it as much because youâd simply âfeel poorerâ as a result of the reverse wealth effect.
So, if you have friend or loved one who feels they âdonât need more incomeâ but may still be carrying too much risk in their portfolio, I encourage you to share some of this information. Explain that investing for income is not just a way to ensure youâll have the income you need to meet your retirement goals, it can also be a âpermission slipâ to enjoy that income with a clear conscience!
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm.