Avoid Trojan Horses In Planning For Retirement

January 02, 2009

 

Income Investing Works Better In Retirement

So, why does income investing work better for retirees than traditional growth investing? It's simple. If you never sell any shares of your stocks or mutual funds, then you will never have fewer shares than you started with. Your share prices may decline, of course, as they always do in a down market, but to an income investor, it doesn't really matter because your income checks won't drop if you don't sell any shares. 

Say for example, you buy 1,000 shares at $10.00 each. You receive 50 cents in dividends, or $500 yearly. Now suppose your investment drops 20% in a market downturn to $8,000 total. In spite of your 20% "paper loss," you still have your $500 spendable income every year. 

Simply stated, if you do not have to sell any of your 1,000 shares, you keep receiving your original $500 per year because each share still pays 50 cents annually regardless of your principal value.

Our example assumes, of course, that the issuer of your shares always keeps its dividend payment constant. Since dividend distribution payments aren't guaranteed (unlike interest payments on bonds and certificates of deposits), a careful analysis of the sustainability of dividends or interest payments is critical to your success as an income investor.

Based on historical patterns, the following list of dividend-paying asset classes are a good starting point for retired investors wishing to construct a well-diversified, retirement portfolio for income. (Included are some possible ETFs to tap into these categories): 

Asset

Symbol

Distribution Rate

Municipal Bonds

PZA

5.1%

Treasury Inflation Protected Bonds

TIP

9.5

Mortgage Backed Securities

MBB

4.5

Government/Corporate Mix

AGG

4.6

Corporates - Investment Grade

LQD

5.5

Corporates - High Yield

JNK

15.3

Global TIPS

WIP

5.7

Emerging Market Bonds                 

PCY, DEM

7.9, 6.1

US Equities

SDY, PEY

6.1, 8.1

Preferred Equities

PFF, PGF

10.9, 14.7

International Equities

IDV

9.3

Emerging Market Equities

VWO

5.1

Commodities - Gold Mining

GDX

9.2

Commodities - Energy

ENY, IPW

11.2, 4.4

Commodities - Real Estate

IYR, ICF

10.1, 9.6

 

By building your retirement nest egg into a dividend-paying, high-income powerhouse of carefully selected income ETFs, you just might find riding out this bear market a little easier. 

And remember: Don't buy into the Trojan Horse growth-fund trap. When you're retired or trying to live on a fixed income, it's not about the growth in your portfolio. Success is all about generating more income.


Chance Carson is president of Alpine Strategies in Colorado Springs, Colo. He also serves as editor of AboutETFs.com, an educational Web site for retired investors. He welcomes comments and suggestions for future columns at [email protected].

 

 

 

 

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