Generating a Reliable Consistent Supplemental Retirement Income Stream - Even in a Down Market *

As I am writing this article, our nation is in the middle of the Corona Virus pandemic. We’re all dealing with various levels of stress: health concerns, financial concerns, and more.

As stressful as this time is for everyone, it certainly is more stressful for some than others. Imagine though, that you lost your job, but you’re still getting paid. 

Imagine, you have retired and you're still getting paid. Those with a decent pension know how good that feels. Some though, have retired and have been counting on and trying to live off stock market gains to fund their retirement. Ouch!

Prior to COVID-19 quite a few people had grown accustomed to great markets and had lulled themselves into an almost entitled sense of double-digit return expectations and complacency. 

Hence, some went the “DIY” route (Do it Yourself). “I have been doing great. I don’t need an advisor.  I have been making 20-30%. I’ll just do it myself. My buddy tells me this and that -- I’ll just put in ABC and XYZ index funds.”  

If you are right 100% of the time then by all means. However, folks trying to create retirement income based almost entirely on gains in the market may not find that to be the best way to sleep well at night and actually enjoy your retirement. I know your spouse won't like it.

Other folks have been advised to use the old “just pull 4% from your portfolio every year…” strategy. "IF this and IF that" it may work (in runaway up markets), but that strategy could have also put you in the poor house.  It all depended upon:

1) what investment strategy you used and

2) when you retired which I call "Retirement Date Risk"

What if you retired right before the “tech bubble” (2000-2003)?, the “financial crisis” (2007-2009), or what if you retired this January 2020? 

Maybe you made it or maybe you didn’t? It greatly depended on what kind of investment strategy you were in.  Pretty pie charts of index funds and Target 2020 Funds won't cut it. 

Well, hello COVID-19 and havoc in the financial markets. So how are our clients still getting paid even in a down market?  How are they generating cash flow which will get them through this down market and into better times? How are you going to do it?

Do It Yourself (DIY)?

First, to the DIY-ers out there. More power to you, however three points to consider:

1) it is not always about being "right"; it is more about being "less wrong". A great 10-year bull market can make far too many people overly confident in their money management ability (including your know it all work buddy) and with enough information (and over-confidence to be dangerous).   Sure it's fun in a great market, but how has this last month been?

2) It doesn't have to be "all or nothing". You can DIY it with a small percentage of your money and have your serious money prudently managed by seasoned professionals.

3) DIY-ing can be extremely time consuming – and almost like a second job. Do you want to enjoy your cruise or be worried about the markets and making trades etc?  Enjoy your cruise! Enjoy your retirement! Where are you in this picture?

4) And what about generating consistent cash flow for your supplemental retirement income? Relying on gains and up markets to fund your retirement is no way to go through the "second half of your life" aka retirement.  Your career was stressful enough – enjoy your retirement.  Talk to us at The Second Half Team...

5) If there were a way to consistently generate cash flow in UP, DOWN, and SIDEWAYS markets, you'd want to know how, wouldn't you? Read on...

Most people think of investment returns as strictly generating capital gains. Buy low sell high etc. For example:

Up Market

“I put in $1000 and now it’s worth $1100 (a 10% gain).” Your supplemental retirement income strategy was to "simply" pull from some of that 10% each year(or your gains).  Simple? What if the market was down that year? What if the market was flat?  

Down Market

If you put in $1000 and now it’s worth $900 -- well you now have a -10% loss.  Where do you pull moneys from to fund your retirement? If you pull from the $900 you are depleting your principal and compounding the issue.  This is a scary proposition and in my experience, a needlessly stressful way to fund your retirement. 

However, and as you guessed, we do it differently. Total Return is what we like to focus one for our clients. Total Return = Income + Gains. This gives us two ways to generate return for our clients. Gains you understand, but income? Income from owning stocks?

Dividend Income

Dividends are essentially a piece of the profits and cash flow of a company that they pay out to shareholders as a reward for owning shares of their company.  Income! *  

The trouble is some company stocks pay dividends -- and some don’t.  In our Second Half Team’s “Wealth With Dividends” Strategy we only own ones which do. What kinds of companies? An example of some of them is below:

Examples: Up, Down, Flat

·        One of our companies we own, for example, is Johnson & Johnson and let's say it pays a 3% dividend. It only has to only grow 7% to give you a total return of 10% (7% gain + 3% dividend income = +10% -- matching the 10% what you earned above). 

Up Market        

If JNJ was up 10% and you were getting 3% in dividends now your Total Return is +13% (10% + 3%).

Down Market       

 Conversely, if JNJ was down -10%, your $1000 is now $900 (-10%). Here is the beauty; you were still earning 3% dividends ($300) -- kind of like rental income cash flow on real estate. JNJ was down, but you still got paid your dividend (cash flow). 

Flat Market·        

If JNJ was flat/even for the year your $1000 would still be $1000 (0% return), but how do you fund your retirement? You still earned your $300. You still generated income and got paid in a flat market!

Retirement Income Stream

You are getting paid (generating cash flow) in up, down, and sideways/flat markets.  Believe me, this far less stressful for investors and our clients who wish to generate:

1)       A Supplemental Retirement Income Stream (FRS DROP Pensioners/City Plan DROP Pensioners) or a

2)      Primary Retirement Income Stream (FRS Investment Plan, 401k folks etc)

“Wealth With Dividends” from The Second Half Team

What are "Dividends'? Dividends are essentially a piece of the cash flow and profits of a company that they pay out to shareholders as a reward for owning shares of their company.    

Just like not all real estate properties pay you rental income -- not all companies pay dividends. 

On average, we own a diversified portfolio of roughly 30 of the highest quality "blue-chip" companies which not only pay dividends (collectively in the 3-4% area), but have a history of growing those dividends (collectively at 10%+). * Why? Costs go up, hence your income needs to go up as well. Below are some of the most recent dividend increases...

*

Bonds, CD's and money market type accounts don't pay much of anything -- nor do you want to have to count on the stock market being up every year. We are seeing Fixed Rate Accounts(457's) cutting their rates.

Our clients use their dividends to generate a nice supplemental (or primary) income in their retirement (now or in the future), regardless of the market being up, and without touching their principal (unless they need or want to).

On top of that, companies which consistently increase their dividends are typically confident in their ability to generate higher cash flow, revenues, and profitability so they can:

a) pay that dividend

b) maintain that dividend and

c) consistently grow that dividend

Companies that generate higher revenues, cash flows, and profitability tend to be worth more over time as well i.e. we are looking for growth of your principal in addition to just growth of your dividend income. *

Again, not all companies pay dividends. Not all companies that pay dividends consistently increase their dividends. Hence, we do not wish to own every company out there. While Index funds have been popular with DIY-ers, that is also why we don’t want to just own the S&P 500 Index – we want to own approximately 30+ companies(on average) that meet our criteria -- not all 500. And, did you know...

128 companies in the S&P 500 CUT their dividends during the 2008 Financial Crisis?

Again, that is one reason why we don’t want to just own the S&P 500 Index – we want to own the best 30+ companies(on average) that meet our criteria -- not all 500.

Behind The Scenes

Our team screens through tons of research to determine which companies we wish to own, how much of each, and we also will prudently diversify by owning 1-5 of the best companies in each of the 11 sectors of the S&P 500 -- not the whole S&P 500 index.

It’s the same thing right now. We own great high quality companies which are simply cheaper and more attractively valued today than they were one month or so ago.  We are not running away from them - we are running TO the ones we feel are the best of the best. 

    We own companies we feel will produce rising supplemental dividend income streams so our clients can retire comfortably and can enjoy their retirement for years to come. Maybe you?

In sum, we will all get through this together. Maybe it takes longer than we hoped, but we’ll get through it. Like, Warren Buffet, we hope to own great companies for a very long time - and we want to get paid while we own them (dividends). 

Costs go up – just look at healthcare. Your income in retirement needs to go up as well. You don’t have to DIY it and “go it alone”. Still want to DIY some of it? Do that with the dessert or the gravy, but not the main course.

Let’s talk…

The Second Half Team may be able to help you do just that. Call us any time.

* This article is intended to be an educational ABC's piece on the basics of our Wealth With Dividends Strategy and are not promises or guarantees of financial security. While The Second Half Team is working with 500+ First Responders (and more) at 200+ departments/agencies around Florida we are independent of and not affiliated in any way with the Florida Retirement System (FRS) and hence any/all information provided by the Second Half Team has not been approved or endorsed by FRS or any Chapter 175 pension plans/board members/or otherwise. Past performance is not a guarantee of future results. This article is for informational or client communication purposes only and is not a solicitation or recommendation to buy or invest in any product or service. Investment in any financial instrument can carry significant risks. Past performance is not a guarantee or indication of future results. Investors are reminded that investing involves risk, including the possible loss of the principal amount invested. You should carefully consider the investment objectives, risks, charges and expenses of Swaine & Leidel Wealth Services, LLC, dba the Second Half Team (the "Firm") before investing. Information on the Firm and its advisors can be found on SEC's website https://adviserinfo.sec.gov. The CRD number for the Firm is 163454. Investment advice is provided by Swaine & Leidel Wealth Services, LLC, dba the Second Half Team, and SEC Registered Investment Adviser. We are not CPAs or Tax Advisors – you should consult with your CPA or tax advisor regarding your particular tax situation. We are more than happy to discuss with them as well if you so desire.