Investing for IncomeSubmitted by Mission Financial Planning on April 6th, 2019
Investing in retirement takes a different approach than investing to build wealth. In retirement, investing for income becomes much more important.
Stock and bond investments complement other sources of income in retirement including rental income, social security, and what some call “encore careers”. We often see dentists working a day or two a week after selling their practice. In the early years of retirement, this can be the best of both worlds. Any income from working is money that doesn't have to be pulled from investments, schedules are flexible enough for enjoying the retirement lifestyle, and the dentist is able to stay active in the profession without the headaches of ownership.
At some point, however, we usually see the investments become the primary source of income replacing the paycheck.
I strongly believe that investments with the goal of producing retirement income should be invested in individual stocks and bonds, not mutual funds or pooled accounts. By owning the individual securities, you own the income stream.
With stocks, the income stream is the dividend, which often increases over time. Dividends can be cut or eliminated, but that's not the norm, and dividends are paid based on how many shares you own, not what the stock price is, so the income doesn’t fluctuate with the stock market. It's nice to have that consistent income, and any growth in the stock provides inflation protection.
Owning individual bonds (issued by corporations or governments) provides consistent income through interest payments and the promise to be paid back what the bond is worth on a specific maturity date. While the price of the bond will go up and down with the market, if you hold the bond until it matures you know what you’ll get back. (Read our Bonds 101 post)
It may not provide everything you need to live off of, but a steady stream of dividends and bond interest from your investment portfolio can provide a base of income that doesn’t require you to sell investments to get income. This can have a protective effect on your portfolio in periods when the market is down.