Overcoming the biggest fear of retirement

Co-author with Treading Softly.

It has been said that human beings have the best ability to solve problems only when they are on the brink or precipice of calamity. However, in some cases, fixing the problem first is much easier than trying to fix it right on the verge of failure.

For many, retirement seems such a remote idea that for all their working years, they hardly consider it. Yes, it looks like a mecca at the end of a busy life, yet they don’t prepare for it. According to a recent survey, 58% of retirees across all generations of retirees said their biggest fear was running out of money. That’s a great fear to live under! If you’re worried about running out of money before you die, it will limit how you spend, possibly causing you have a less pleasant retirement simply because you will be inclined to have a Scrooge attitude and pinch every single penny, potentially to no avail. The same study also showed that even among the wealthiest of us, retirement savings were at a frighteningly low level, most people having only $500,000 or less saved for retirement, which, if you follow a the standard 4% withdrawal rule provides either a terribly low retirement income or a potentially unsustainable level of income, even after only a decade.

“We have nothing to fear but fear itself.” Franklin D Roosevelt, a former US president.

When it comes to retirement planning, this is exceptionally true. So many retirees have sacrificed solid income from their wallets out of fear of running out of money and trying to preserve their capital. I have warned new members of High Dividend Opportunities that more capital is being lost on the altar of perceived security than has ever been lost holding investment income. According to Peter Lynch, a well-known investor, more money has been lost trying to avoid the fixes than in the fixes themselves. He goes back to the fact that fear is a terrible motivator for finding financial success.

Let’s talk about how we can overcome this fear and set you up for success.

Retirement is a continuation of regular life

While we encounter only a few paradigm shifts in our lifetime, they do happen. For example, when you go from being a child to an adult, there is a major change. Unfortunately, so many people think that the transition from working life to retirement is another paradigm shift. When in reality, it’s simply a change of where your income comes from. You still need the money to pay your monthly bills because you still have them. You still need to eat, sleep and decide what you want to do yourself, even file your taxes! In the transition from child to adult, there is a major shift in responsibilities and a change of ownership of your life outcomes. Going from work to retirement simply means changing where your income comes from.

Realizing this fact is critical to understanding how to build a portfolio to best support your retirement. While I love a good total return on an investment, so many people get stuck on mathematical returns as an absolute source for determining the best investment instead of understanding that the best tool for your goals may not always be the best tool mathematically.

For example, if you’re changing a tire, having plumbing tools will save you time. That’s why every tire place has them. These tools are superior to a hand wrench in almost every way. Except for one: If my goal is to have a tool I can use in an emergency to install my spare tire, I probably won’t be in a place with an air compressor or electricity. I don’t need the best fanciest tools, I just need a sturdy wrench that won’t fail, fits easily in my trunk, and can be forgotten about until I need it.

Your pension is not paid out of total return. Your pension is paid out of your income. It’s far more important that that income be reliable and available when you need it than it is to have “the best” theoretical total return. Your bills need to be paid every month, the power company is unlikely to agree “Hey, the market is down this month, so I’d rather not sell. I’ll only pay you back when it recovers!”

Everyone wants more money. Even billionaires will no longer refuse money. Yet when you think about it, what you need for your retirement isn’t the largest lump sum of money you can get at one time. In fact, you don’t really need a lump sum. What you Needit’s a constantly recurring income for the rest of your life, however long that may be.

Collect income. Stop selling.

One of the biggest arguments we see against investing in dividends is that other investors will simply say they can sell stock in a company they own to generate income and thus create their own dividends. This depends on two false assumptions: the first is that the market will always go up, and the second is that they will always be able to sell for more than what they paid. When I receive a dividend from the company, I get paid out of its cash flow. They are not giving back the value I paid them, but instead giving back the value they have created through the operation of their company.

Once investors are forced to sell stocks to make income, what they are doing is making capital gains. They are reducing their ownership of the business and, therefore, are getting paid for full houses. When I receive a dividend. I get paid for the company’s cash flow as a form of income and my ownership level doesn’t change. This is a crucial distinction between selling stock for profit and receiving dividends that is often overlooked. It would be like deciding to sell part of your house and claiming that you are receiving income instead of renting it out. You still own the house if you rent it out, but if you start selling it piecemeal, you no longer own that portion, never mind the rest of your home appreciates over time.

An income investor’s goal should be to receive sufficient income from their holdings so that they never have to sell a share. They can simply continue to collect dividends regardless of how the market decides to value their holdings. When the market goes up, down, or even sideways, as long as those dividends come in, they’re an irrevocable, irrevocable form of income. The company can’t come back in three months and decide you have to give them their money back.

The simple answer

Many retirees find themselves in the position of selling stock to fund their retirement. When the market is bullish, like in 2021, they are optimistic. So the market goes down more than 20% in 2022 and they get nervous. It is very likely that at some point in the future they will see their portfolio decrease by 30, 40 or even 50%+. As they are forced to sell lower priced stocks because they need income, doubt will creep into their minds: Do they have enough to live on?

Is there a simple answer to this problem?

Yes there is.

Luckily for you, there have been thousands of retirees who have used income investing to solve that fear. They no longer have to live with their constant fear. No longer do they have to stay up late at night worrying or worrying about pinching pennies when enjoying their retirement travel or visiting family. You’ll never have to set your budget and wonder where the money will come from. The answer is simply this: Invest to earn. Get that income. You enjoy that income without ever having to sell a share.

Find out how much income you have and plan your budget to spend less. Just like you did when you were making money from a job.

That’s the beauty of my income method. That’s the beauty of income investing.