Retirement presents a unique income problem: the cost to do the things you want to do will increase by a factor of two at a minimum and may well triple. Therefore, you will need an income stream in retirement that will at a minimum double and may need to triple to keep your standard of living.
But how are we going to do that?
Let me begin by telling you how you are not likely to do that. With a portfolio made up mostly with fixed income investments like bonds or CD’s. As fixed income investments, they cannot possibly hope to keep up with constantly rising costs over multiple decades of retirement.
Ownership of the great companies of the US of and the rest of world on the other hand, may be able to help.
I have always referred to stocks as the great companies of the US and the world. I also refer to them as “rising” income investments because of the history of increasing dividends. I wondered how those dividends alone might help us combat a lifetime of increasing costs.
I wanted to take a deeper dive, so I decided to pour through the historical S&P 500 index data from a wonderful database that Robert Shiller of Yale University makes available.¹
First, I wondered how long it typically takes for dividends to increase by 50%. Looking at the data since 1940, it turns out that half the time, it only takes 7.1 years. Three-fourths of the time it takes no longer than 9.1 years. I think that is impressive.
I also wanted to know how long it took (historically) for dividends to double. As it turns out, the median amount of time it took for dividends to double since 1940 was just a little over 12 years. Three-fourths of the time, dividend income had doubled roughly halfway (14.2 years) into a three-decade retirement
This is powerful stuff.
If the biggest challenge for investors is the need for a rising income stream, it would appear to me that the ownership of mainstream equities, or what I prefer to call the great companies of America and the world is certainly an asset class not to be overlooked.
I am not however, suggesting that retirees put all their money in the great companies of America and the world for income, or concentrate their portfolio in dividend producing stocks. I am simply suggesting this should be part of your discussion with your advisor.
Spread the word.
Paul A. Ruedi has been serving people as a financial advisor and retirement planner for over 35 years. In 2014, he founded Ruedi Wealth Management, and currently serves as CEO.
Paul has shared his knowledge on financial issues as the host of Paul Ruedi’s “On the Money” Radio show on Newstalk 1400 WDWS for over 25 years. He has provided his insight for publications such as the Wall Street Journal, US News and World Report, Investor’s Business Daily, and Investopedia.
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Past performance is not an indication of future results. This blog was written for educational purposes only. Talk to your own financial advisor before making any investment decisions.