In one word ‘SAFELY’ – you never put money you have set aside for retirement at risk. You invest it as safely as possible. Now is especially not the time to do anything dumb with your money. Investing is never without risk, therefore you should aim for the lowest risk possible. You want your money to be there when you need it the most. Think of it as your personal pension plan. This is especially important if you do not have a company or government sponsored pension plan. I have a company pension and also a veteran’s pension. In Canada you are also allowed to collect your CPP (Canada Pension Plan) starting at age 60 which I have also done. So what about the rest of my retirement savings and what is the best way to invest money for retirement?
Even though I’m Canadian I try and implement a lot of the strategies found in the book;
‘You Can Retire Sooner Than You Think’ – The 5 Money Secrets of the Happiest Retirees by Wes Moss. Wes is a US Financial Planner who was named by Barron’s as one of America’s top financal advisors. He is also the host of the highly successful radio show ‘Money Matters’. Read what others are saying about his book here.
Here are what he thinks are the secrets to living a happy and successful retirement. Start now and don’t put off planning for later. Adhere to these 5 practices:
- Determine what you want and need your retirement money for
- Figure out how much you need to save
- Create a plan to pay off your mortgage in as little as five years
- Develop an income stream from multiple sources
- Become an income investor
He says we can all do this, no need for special skills or a degree in mathematics. Follow his five steps and you will achieve retirement success with his proven effective method. I also have no special skills or magic ways to grow money other than reading and educating myself on how others and the really successful are doing it.
He thinks in today’s environment you should be able to generate portfolio returns of 5% a year to achieve a comfortable retirement. The money would come from a combination of interest and dividends and other distributions giving you income from a diversified balanced portfolo. This is where Moss gets a 5% target. I like his projected return numbers.
Can we achieve investment returns of 5% throughout our retirement?
Would be nice and it seems very doable because that is all I really shoot for now and have always tried to pick investments that pay out income between 3-5% either in the form of a dividend or a distribution. I wouldn’t settle for anything less than that truth be told. I don’t think suggesting a 5% portfolio return in retirement is even that risky considering today you would go broke very quickly leaving your money in savings accounts or just buying bonds.
What Is Income Investing
From page 140-141 ” Income Investing is a way to generate consistent cash flow from your liquid investments”. It comes from three places:
- Dividends from stocks
- Interest from various types of bonds
- Distributions that come from a variety of investments-investments that pay distributions but don’t fit neatly in the stock or bond category
How Do You Become An Income Investor
To understand his concept he tries to keep it very simple by using a bucket system, instead of complicated looking pie charts and colourful graphs. Wes is a big fan of income investing as a way to invest your money for retirement. He states you can achieve this by checking out the investing landscape and then start looking at where to put your money. Invest in high quality blue chip dividend paying companies like utilities, telecomms and banks. Combine that with some higher yielding stocks and REITs (Real Estate Investment Trusts) ad you’ll get pretty close to your 5% target.
The Bucket System
- Cash Bucket – CDs and Money Market Funds
- Income Bucket – Government and Municipal Bonds, Corporate Bonds, High Yield Bonds
- Growth Bucket – Dividend Paying Stocks (Staples, Healthcare, Utilities, Telecomm)
- Alternative Income Bucket – REITs, MLPs, Preferreds, Energy Royalty Trusts
How Much Income to Expect?
- the cash bucket should yield around 2% with high interest savings accounts
- the income bucket around 3.5% – 5%
- the growth bucket between 2-4%
- the alternate income bucket between 5-7%.
What’s The Right Mix?
Wes suggests 50% Growth 50% Income. So what would the balance in the buckets look like:
- 55% Income
- 30% Growth
- 15% Alternative Income
Yield Only per Bucket
- Income Bucket: 4%
- Growth Bucket 3%
- Alternative Bucket 6%
If you shift around the bucket percentages you can easily change the yield you will get (pg 183). This accounts just for yield, remember there is no calculation here for the amount of appreciation from your particular holdings. This will depend on what’s happening with the economy or the stock market in general.
I always try and keep a little of my savings in fixed income which today only yields 2-3%. I do this through Bond ETFs at the moment. I’m considering exiting this asset class as the returns are paltry and bonds right now are not really a safe place to invest. In fact in today’s rising interest rate environment their getting creamed. We’ll see no decisions right now I’m going to let things ride until the New Year and make a decision on whether to make changes then. For now I consider it a nice safety net during these volatile times post election.
The rest comes from growth or capital gains, which year by year will fluctuate or even be negative, but over the long haul can be another 1 to 3% on top of the more assured yield from income investing. At worst, it may involve cutting slowly into capital but as long as your income investments are generating by themselves 3 or 4%, Moss assesses that such a nest egg would easily outlast the average 30-year retirement time frame.
He further suggests that your nest egg if properly invested in these income generating investments will more than outlast anyone who has previously suggested a 4% withdrawal rule. What if something unexpected came up and you needed money in a lump sum right away? Sometimes the best laid plans can go sideways. If you need money you can always sell one of your investments and generate cash that way. You have to be flexible when it comes to your retirement. I would have no problem selling an investment if I had to buy a car because mine broke down. How else would you pay for it?
Pay Off That Mortgage
I enjoyed reading his advice on home ownership. Moss recommends you pay off your mortgage as soon as possible. This is what we did and so happy we tackled this early on. If not for my wife reminding me that this was an important debt to get rid of we wouldn’t have paid off our house in 11 years. It takes discipline and a bit of sacrifice but it will leave you with so much more cash flow in retirement. You don’t want to go into retirement with debt and especially a mortgage. Another big concern is that of annuities. He’s not a big fan and suggests that people not turn over their retirement savings to an insurance company.
I like his recommendations as an income investor because I’ve tried to steer my portfolio in this direction as a retiree.
This is a great book that should be on the shelves of everyone nearing retirement or planning their strategy very soon. I believe that the bucket system and percentage allocations that Wes Moss proposes in this book is the best way to invest money for retirement.
If you’d like a copy you can get one here.
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