Investors in or near retirement should invest differently than they did in their 30’s or 40’s.That’s because retirement creates different portfolio needs (accumulation vs distribution). In the accumulation phase (pre-retirement), building up your portfolio’s value is what matters. In retirement (or in preparation for retirement), there are four keys to investing success:

  1. Income from your portfolio, the higher the better
  2. Growth in your portfolio’s income at least exceeding inflation(including any potential dividend reductions; safety is the other side of growth)
  3. Low price volatility from your holdings
  4. Managing the impact of your retirement income on your taxes

Most retirees get the need for income in their portfolio, but it’s how all three of these factors interact that make retirement investing successful and sustainable.There are two ways to get money out of your portfolio:

  1. Through getting paid dividends / interest / distributions
  2. Through liquidating a portion of your holdings

Add to this one simple, but very important fact… Stock market prices fluctuation. Sometimes, they ‘fluctuate’ down, and by a lot (see 2008 as an example).If you rely on dividends price fluctuations don’t matter. I’ll say it again for dramatic effect, IF YOU RELY ON DIVIDENDS PRICE FLUCTUATIONS DON’T MATTER. Who cares if Kimberly-Clark’s (KMB) share price was down in 2008 if the dividends kept rolling in (which they did, with increases every year during the Great Recession)? Now if you were relying on liquidating holdings in your portfolio, you’d care a great deal about Kimberly-Clark’s stock price declining – because you’d be ‘forced’ to sell shares when they are down; you’d have to sell more shares (and use up your savings quicker) because each share is worth less.The more you rely on portfolio income in retirement, and the less you rely on liquidating holdings, the better. Portfolio income is a great way to take part in market growth, but not be forced to sell when markets decline.On top of seeking out higher yields in retirement, the growth and safety of your portfolio’s income is extremely important. What matters is that as a whole, your portfolio generates rising income over time. This means your holdings that increase their dividends have to offset any (and hopefully none) stocks that reduce their dividends. Both growth and safety matter a great deal. Finally, volatility matters in the event you do have to liquidate some of your holdings. It’s better to be prepared for market volatility with lower volatility investments that don’t bounce like a kid on a trampoline when markets go crazy. When you think of your investments at the portfolio level instead of at the individual security level it becomes easier to imagine a portfolio that has a nice combination of yield, growth, and safety.

The other thing that we have to consider with income of course is taxes. This is where I typically see portfolio strategies get weaker because advisors aren’t qualified to consider tax impacts and beyond that they simply don’t have the advantage of stress testing the tax impact of their strategy in a live tax return like we do. Yes, I’m tooting our horn. Sorry, not sorry. I literally see hundreds of portfolios every tax season that have taxable dividends, but then the advisor is liquidating portions of the portfolio to distribute to the client for income. Sooooooo, the client is now paying tax on the dividends AND, AND the capital gains via the liquidations. That is INSANE from a tax perspective and from an investment perspective.

Not sure if you’re in this situation? Schedule a call with us by clicking the link below:

www.calendly.com/capcpa

Happy Investing!

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