If you've been following our five-part money secrets series of the happiest retirees, you know that we're up to secret #5! Before we talk about how your money can make money, let's review the first four secrets:
The last money secret is an extension of money secret #4 and the importance of developing multiple streams of income when you are in your retirement years. We discussed four possible streams of income which include part-time work, pension income, Social Security income and rental properties. Each one of these streams can contribute significantly to your overall retirement income. But there's another critical income stream and a valuable way to generate consistent cash flow from your liquid investments. It's called income investing.
Money Secret #5: Become an Income Investor
Income investing means focusing on a strategy that's designed to generate income for the long-term. The idea is that you have multiple sources of income you can draw on to see you through your retirement years.
As a financial planner, I've talked to my clients for years about a particular method to income investing. I call it "The Bucket Approach." This is a way of thinking that might shift your whole investment paradigm. The Bucket Approach stems from the heart of my philosophy “Sleep Well at Night,” paired with the idea that you can retire early and retire happy. With this approach, you'll start thinking about your cash going into four different buckets: a cash bucket, income bucket, growth bucket, and alternative income bucket.
This is the money you invest in FDIC-insured accounts, such as certificates of deposit, savings accounts and money market accounts. The principal is 100% secure and you may earn interest, though not at the same rate of return you might see by investing in stocks or mutual funds. This money is your most stable and liquid asset. The cash in this bucket should be used for emergency funds and any extra cash you might need in the next year or two.
Consider the interest rate and fees associated with any cash savings accounts or CDs before parking your money in them. Opening a high-yield savings account at an online bank, for example, is likely to return a better interest rate and more growth for your money compared to a traditional savings account at a brick-and-mortar bank.
Contributions to this bucket are invested in various types of bonds. For example, that includes Treasury, corporate, municipal, high-yield, TIPS, international and floating-rate bond investments. They will provide you with interest income and they're generally less risky than investing in stocks. A well-diversified bond portfolio should also protect your principal. Diversification within this bucket is especially important for maximizing your return over time.
When including bonds in your income investing strategy, make sure you have an understanding of how interest rate movements can affect both bond prices and bond yields over the long-term.
This bucket includes your money that is invested in stocks. If you’re in the “accumulation” stage of life (25-55) consider owning growth stocks, which have the potential to grow in value over time, though they may not pay out dividends. Retirees should focus on dividend-paying stocks, which can provide reliable and consistent income.
If you're interested in learning more about the best dividend-paying stocks, consider the Dividend Aristocrats. These are dividend-paying stocks that have increased their dividend payout for 25 years or more consecutively.
Alternative Income Bucket
This last bucket includes any investment that doesn’t neatly fit into the income or growth bucket. For example, energy royalty trusts (publicly traded oil and gas trusts) and MLP stocks (pipeline and energy storage companies) that trade just like normal stocks on the NYSE or other major indices but don't pay traditional dividends or interest. In this example, these companies pay out a "distribution" which you could draw on for income in retirement.
Now that you know the five money secrets of the happiest retirees, it's time to put them to work! Remember, the vision you have of retiring early and happy is within your reach!
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.