Investing In Income Solutions

Dividend Focused • Recession Resistant • Tax Efficient

Investing for retirement is all about cash flow. You need enough cash flow coming in to pay the bills and live your life for as long as you are going to live. It is our job to help you increase the income power of your portfolio through investing. There are two primary ways to accomplish this:

  1. Dividends – Dividend focused allocations accomplish income power through dividend reinvestment. Dividends are paid to clients based on how many shares they own, not what the shares are worth. As reinvestment occurs, more shares are purchased, as more shares are purchased, the dividend power of the portfolio increases. As reinvestment occurs, not only is the number of shares increasing, but the dividend per share is increasing as well.
  2. Annuities - Annuities have guaranteed “roll-ups” which pay income based on a withdrawal benefit rather than account value.

The majority of the companies we invest with have above average dividend growth. Across all of our models, we invest in 70 unique individual equity positions and 59 of those 70 positions have increased their dividend. None of them have decreased. Even when markets/investment allocations are down, the income power of their portfolio is up. By reinvesting a strong and ever increasing dividend, you always own more shares and those shares are always paying out more in dividends, whether the account value is up, down, or sideways.

No matter how the markets are performing, the income potential of your portfolio is increasing. When markets are volatile and you are nervous, the income potential of your portfolio is still increasing. We can’t control market fluctuation, but we can control the income potential of your portfolio. Regardless of market conditions, your income is increasing. This makes for happy clients.

Growth & Income Strategy

In order to address these challenges, let’s divide your nest egg into two buckets:

  1. Growth Bucket
  2. Income Bucket

The Income bucket represents the bucket of money to draw an income stream from during retirement. The Growth Bucket represents the money set aside to let grow. How much goes in the Income Bucket depends on how much income you need from your nest egg. The remaining money goes into the Growth Bucket.

You draw an income stream from the $750,000 Income Bucket to supplement your other income sources in retirement. The Income drawn from the Income Bucket is how you pay your bills and maintain your lifestyle. We recommend income from the Income Bucket be invested into a moderately conservative asset allocation. On a scale of one to ten with ten being very aggressive and one being ultra-safe, the Income Bucket is best allocated as a three or four on this scale. The Growth Bucket on the other hand, is out of sight and out of mind. It is still important to you but what the account is worth from day to day, month to month, or year to year, has minimal impact on how you live your life. What happens in the Growth Bucket has very little bearing on anything in the short term. Because of this, you should be willing to accept a little more fluctuation from the asset allocation you select for your Growth Bucket. On the same one to ten scale, the Growth Bucket is best allocated as a six or seven (moderately aggressive).

Dividing your nest egg in this manner accomplishes several very significant things.

  1. You have a place to go for money without affecting your income stream in retirement (unexpected expenses come from the Growth Bucket). 
  2. Your income increases over time as you use the gains from the Growth Bucket to feed the Income Bucket (this feeds the bottom line).
  3. By moving your gains from the more aggressive bucket to the more conservative bucket, they are protected.

To put this strategy into action for you Schedule a Complimentary Meeting.

Illustration seen below: Let’s assume you place 75% of your $1 million nest egg into the Income Bucket and the remaining money into the Growth Bucket.

Investing illustration for income growth.

Investment Strategy

Many retirees think of their nest egg as one lump sum of money and, they tend to manage it the same way. There are some fundamental pitfalls and challenges with investing, managing, and thinking about your money in this manner.

Before you crack open your nest egg, it’s important to remember you only get one chance to do it right. There are no second chances. You only retire once and there is no practice round. If you make a mistake, you likely won’t know you made a mistake until 10 or 15 years down the road. Then it’s too late to fix. A mistake can be made if you:

  • Choose the wrong investments and investing strategies
  • Take too much monthly income
  • Let your emotions overwhelm your rational thinking

Illustration below:  Think of yourself as having a $1,000,000 nest egg. To go along with your $1,000,000 nest egg, you have social security income and a pension. These income sources are not enough for you to enjoy the lifestyle you wish to live during retirement. As a result, you decide to withdraw a 4% income stream from your nest egg every year ($40,000 per year).

Investing illustration with stick figure and math.

By applying this scenario to your retirement you just gave yourself a pay cut in retirement! This is the last thing you want to do.

The money lumped together scenario as a single nest egg, managed the same way across the board, can allow for a reasonable income stream during retirement. But it does not allow much freedom when it comes to the need for additional cash, which in evidently comes up.

Investing in the same moderately conservative manner can also leave very little flexibility during your retirement life. Inflation over a 20 to 30-year retirement, can do some damage to the buying power of your income stream if you are too conservative with too much of your nest egg in your earlier retirement years.

Illustration on the left:  You have a large unexpected expense come up and need additional cash above and beyond your monthly retirement income. You take out $50,000 to cover the unexpected expense, bringing your relative value down to $950,000.

Investing illustration with stick figure and long equation about expense.

Balancing Risk

At it’s most fundamental level investing is all about getting as high of a return, for as little risk as possible. Finding that perfect balance of risk and reward (given your risk tolerance) is key. Capture ratio’s offer great insight into how an allocation performs in up markets and down markets.

Simply put, when markets are up, you want to capture as much upside as possible and when markets are down, you want to capture as little of the downside as possible. Conservative allocations are designed to protect the downside and often capture little upside. Conversely, aggressive allocations are designed to capture a lot of upside, but will often capture all the downside.

Our equity focused portfolios offer great upside capture ratios, when markets are strong. Our focus on recession resistant sectors, quality dividend, and quality dividend growth rates, allow our allocations to enjoy less downside capture, when markets are weak.