What Retirees Need To Unlearn To Retire Comfortably

Unlearning is more difficult than learning - What Retirees Need To Unlearn To Retire ComfortablyI was failing and didn’t understand why.

In 1970, I started my career as an adult educator. My classes were predominantly male. That quickly changed in 1972 with the passage of the Equal Rights Amendment; my clients rightfully complied with the law.

My historically excellent course critiques were tanking. The tipping point was when a young woman gave me a terrible score and asked me why I was so sexist? She said I always used the word salesman. Women are in sales today and the proper term is salespeople.

I called my daughter Dawn, in her 20’s, a department manager for a major Atlanta bank. She completed several “diversity training” classes. She said, “Dad, I don’t think it is what you need to learn, it’s more what you need to UNLEARN!”

The world is changing. Many things we took for granted, and never really thought about need to be UNLEARNED if we want to remain successful. Sage advice from a young woman, and I am forever grateful. When I rewrote our textbooks I began to understand.

50 years later, a conversation with Tim Plaehn, provided a flashback. When it comes to retirement investing, many things I just took for granted need to be UNLEARNED.

Tim is the editor of The Dividend Hunter and a true expert in income investing. We discussed friends who followed the old rule of withdrawing 4% from their IRA to pay their bills, who had to sell stock at the very worst time, to generate cash. Tim responded, “Dennis a true income investor never has to sell stock at the wrong time. The goal is to generate enough income so that doesn’t happen.”

As we talked, I realized that I had much to UNLEARN, or at least rethink; and suspect I am not alone. I asked Tim for help.

DENNIS: Tim, thanks again for your time for the benefit of our readers. Let’s get right to it.

Tim, please define Income Investing and the goals; particularly for those concerned about retirement.

TIM: I appreciate the opportunity to address your readers.

Income Investing is building a safe, diversified portfolio that focuses on income producing investments. The goal is to generate enough regular income to allow the retiree to pay their bills with some left over to continue to grow.

Dennis, an easy example is the one you use prior to the 2008 bank bailout. You had the bulk of your money in CDs, which you bought for income. You also had other investments to grow and offset inflation. Unfortunately, when your CDs got called in, you lost your primary source of income.

Today’s interest rates are ridiculous and likely to stay that way for a long time. The goal of building an Income Investing portfolio has not changed. The challenge of how to build a safe, diversified income portfolio is much different today than when you retired.

DENNIS: We talked about friends having to sell stocks when the market tanked. They worked with their brokers and thought they were doing well when it grew by 6-8% annually. You explained how many people equate income investing and value investing strategies when they are not the same.

Please define Value Investing and highlight those differences you explained to me.

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TIM: It starts with intent. When you bought CDs, your intention was to hold them and enjoy their regular income. It’s the same for other income investments like dividend-paying stocks. You buy them because they are providing safe, regular yield. Your goal is income. Ideally, you will hold them for a long time.

Value Investing is buying an asset hoping it will appreciate with the intent of selling it for a profit in the future. Many high-tech stocks are great examples. Some of them are unprofitable, but investors pour their money in, hoping the stock prices go up so they can sell it for a gain.

A good portfolio will contain both types of investments. They should be segregated and evaluated differently.

When the price of oil was down, you mentioned you bought some energy stocks, in anticipation of selling for a profit later. Achieving your goal requires the VALUE of the stock to go up and SELLING at the right time. Value investors look at dividends as a plus, but they generally don’t influence the buying decision.

An income investment is different. You buy the investment for regular income and any asset appreciation is a bonus. Selling the asset to hit your income target and market timing is not a factor.

DENNIS: Are you saying my friends who had to sell stocks at the wrong time didn’t allocate enough of their portfolio to Income Investing, or had too much in Value Investing assets?

TIM: Well, kinda… A good retirement portfolio is well-diversified, including metals and other assets to protect against inflation.

Many investors have been conditioned to look at their returns and no further. If a newsletter, broker, or money manager says their portfolio returned a certain percentage, investors need to understand where the return came from. Did it come from the assets generating income or price appreciation?

Hope is not a plan! If you hope that your stocks will grow so you can earn the necessary income you need to pay your bills, it may work…. but the time will come when you may have to sell something at the very worst time.

Realize that all the necessary income might not come from your investments. Social Security, other retirement benefits, or an annuity may give the retiree income. They need to make up the difference from their investment income.

It’s a challenge. Once you stop working you don’t want to run out of money late in your life; therefore, a larger percentage is devoted to income producers.

DENNIS: I couldn’t agree more about conditioning. Most investment newsletters, money managers, and brokers are focused on finding underpriced stocks and making a killing. I recall a money manager saying his goal was to beat the S&P 500. If it was up 8%, he wanted his clients up 10%. If it went down 8%, he was proud to be down only 6%.

I look at my Quicken spreadsheet regularly. It shows each asset, cost, current market price, and the gain or loss. The red jumps out for sure.

Education consists mainly of what we have unlearned - famous American writer Mark Twain quote printed on grunge vintage cardboardI intuitively look at your recommendations and immediately focus on the gain or loss. Some are up nicely, while others are down a bit. I had to rethink about your comment, “what was the intention when I bought the stock?” Am I happy with the regular income? I’m working on UNLEARNING how I look at the Income Investing assets in my portfolio.

For the record, when you say the Dividend Hunter portfolio yields on average around 8%, what does that consist of?

TIM: I am talking cash money provided by the holdings. If the company can continue to pay their dividends, I am happy. Any stock price appreciation is a bonus.

DENNIS: I’d like to quickly touch on inflation. While CDs and preferred stocks generally have a constant yield, common stocks can increase or decrease their dividend, affecting the income return. How much of a factor is that?

TIM: Good question. The goal is safe, reliable, and predictable income with an eye on income growth.

When researching, I look at a candidate and their dividend history. A history of increasing dividends is a plus. As you said, that helps to offset inflation.

When I make a recommendation, I also buy the stock. I monitor all the holdings in our portfolio, communicate with them regularly and participate in the earnings calls. If I feel their dividend could be in jeopardy, I immediately tell readers to sell. I’ve been surprised a couple of times; particularly when companies cut their dividends for the wrong reason – but most of the time we sold ahead of the crowd.

I also recommend setting up automatic dividend reinvesting. That is one sure way to keep the income stream growing.

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The Dividend Hunter – Tim PlaehnOur friend Tim Plaehn at The Dividend Hunter has set up a unique Monthly Dividend Paycheck Calendar system that can provide you with an average of $4,000 a month in extra income based on a model portfolio of $500,000.

For a limited time, he’s offering us a 50% discount on the first year of a subscription: just $49.

CLICK HERE for more information.

DENNIS: Last year you added some great preferred stocks to your portfolio. This year you added another type of investment to the income stream, one that is a bit different. Can you tell our readers about it?

TIM: Income investment is looking for reliable income that will arrive regardless of what is going on.

Another way to supplement your income is to own a stock and write a covered call, which is instant income. It is fun, but time-consuming and can get a little technical.

I found some Exchange Traded Funds (ETF) that are run by experts. They do the research, place the trades and distribute income to their shareholders. Their fees are reasonable, and their yields are historically particularly good.

Like all our recommendations, I advise moderation, but adding these ETFs to the portfolio is not only providing more diversification, but also generating some nice returns.

DENNIS: Tim, thanks again for your time.

TIM: My pleasure.

new mindset and new results concept - colorful sticky notes on a background of crumpled white notesDennis here. What did I need to UNLEARN? Like many, I was not differentiating between income investing and value investing.

As a retiree, I need income. I rebalanced my portfolio and must judge the income investments differently. When the next market downturn happens, a lot of solid dividend payers will go on sale.

Tim and I hosted a FREE webinar for our readers which got great feedback. Tim told viewers the ETFs he added to the Dividend Hunter Portfolio. A replay is available HERE.

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On The Lighter Side

I hope everyone had a terrific holiday weekend. Jo and I celebrated our wedding anniversary and had a great time. This probably sounds corny, but I found myself looking at our wedding picture, then looking at her, and grinning from ear to ear. I’m a lucky man.

I went to the cancer center for my test results and regular infusion. Tests show no signs of cancer which is terrific. Jo and I are growing old together enjoying a wonderful time in life. Our summer place in Indiana is progressing and we are looking forward to being able to spend more time there watching our youngest grandchildren grow.

Quote Of The Week…

Smiling child celebrating 4th july - Independence DayWhile we celebrated our nation’s birthday this week, we sometimes need to be reminded of the values of our founding fathers.

“I hope I shall possess firmness and virtue enough to maintain what I consider the most enviable of all titles, the character of an honest man.”

— George Washington

And finally…

Readers Digest provides some patriotic humor for our pleasure this week:

  • What do you call an American drawing?
    Yankee doodle!
  • What’s the difference between a duck and George Washington?
    One has a bill on his face, and the other has his face on a bill.
  • What was George Washington’s favorite tree?
    The infantry.
  • Who was the biggest jokester in George Washington’s army?
  • What did Polly the parrot want for the 4th of July?
    A fire-cracker.

And my favorite:

  • What did one flag say to the other flag?
    Nothing. It just waved.

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken


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