I Want To Grow My Money...Why Would I Need Any Income Investments?

But I’m looking to grow my money. Why would I want income investments in my account?”

This is a common question I get from Wela clients as we talk through the process of developing a retirement savings portfolio to meet their particular objectives. It’s a great question that makes sense. And here’s the answer.

When we think about saving for retirement, we often visual our efforts as growing something -- a “nest egg” that expands with every deposit we make in our retirement account.

But a well-crafted retirement strategy is actually more like a machine than an incubator. It has several moving parts that work together to leverage your contributions and move you towards your goal. The twin motors in that machine are growth and income investments, which work together, with each taking the lead at different times in the journey to and through retirement.

Income investments

Income investments

Growth stocks are shares in companies that currently prioritize expansion and increased market share. These businesses pour most of their profits back into operations, and thus don’t pay dividends. Netflix and Amazon are good examples. If/as a growth company expands, investors benefit from the steady, sometimes dramatic, rise in value of their shares. Growth stocks are what people talk about at the office coffee machine. “Yeah, I bought Acme Corp at $10 a share five years ago and just sold it for $71.”

Income stocks are boring by comparison. They tend to be established companies in mature industries – think Proctor & Gamble, Apple, Disney – that are unlikely to show dramatic growth in share price. Instead they just ton the revenue and pay their shareholders a regular dividend.

Related: Income Investing - Cut Through The Clutter

Bonds, which are essentially a loan to a business or government, are another source of income, as owners of the bond receive regular interest payments. Investors can also receive income from alternative investments, including real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

So, let’s assemble Wela’s version of the retirement investment machine. It consists of three buckets based on the above – stocks, bonds and alternative investments – designed to grow your money while providing diversity to protect you from market volatility.

Stocks – During most of your working career, your portfolio should contain mostly shares in growth companies. Ideally, these stocks will significantly appreciate in value over the years and decades, providing a nice profit when you liquidate them in retirement.

But you should also hold some income stocks to provide diversification and stability. The dividends these shares pay can be reinvested in your portfolio, turbo-charging your growth.

Related: How To Build Your Investment Portfolio To Meet Your Retirement Needs

When you retire, we recommend shifting your focus to income stocks. You can continue to reinvest their dividend income, or use it to help fund your lifestyle. Income stocks also tend to be less volatile than growth shares and thus offer the stability you want in retirement.

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend, “owning your age” in bonds. When you are in your 40’s, bonds should make up 40% of your portfolio. When you are 50, that percentage should be 50%.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

Alternative investments – This smallest bucket of non-stock or bond assets provides more income and some insulation from the gyrations of the stock market.

So, why should you hold income investment when you’re seeking growth? Because income investments – stocks, bonds and alternative investments – can both enhance and protect that growth. The dividends, interest and other payments generated by income assets can be reinvested, even as those assets themselves insulate you from volatility by providing diversity and stability.

Your investment machine isn’t hitting on all cylinders unless you have income assets in the fuel mix.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information 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. It 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.

ARE YOU FEELING LIKE JUST ANOTHER STATISTIC?

"If your savings account balance is looking sad, you're not alone.

According to a 2016 GOBankingRates survey, 69% of Americans have less than $1,000 in their savings accounts.

What's more, 34% have no savings at all:

While the numbers seem staggering, it shouldn't come as a huge surprise, consideringabout half of US families have zero retirement account savings .

GOBankingRates also broke down savings by age, so you can see how you stack up against your peers:

How much should you have in the bank?

Most financial advisors recommend having three to six months of living expenses in an emergency fund to pay for unexpected costs.

In addition to establishing a rainy day fund, it's smart to set savings goals for major purchases that you hope will be in your future, like a home, car or vacation. It may be helpful to set up multiple savings accounts in order to save for specific expenses."  

-YAHOO FINANCE

 

Does this all hit close to home? 

There's a darn good chance the answer is yes...but that doesn't mean you can't make a change.

You just need to find a roadmap that works for you...

1. 5 STEPS TO BUILDING A SOLID FINANCIAL FOUNDATION
2. TOP 5 WAYS TECHNOLOGY CAN SAVE YOU MONEY
3.  THE BASICS OF INCOME INVESTING

AND

Don't forget that we are always here to provide feedback and solutions to reach whatever goal you have. 

the basics of income investing

As an investment advisor, I’m constantly answering the question, “How do I cut through the clutter of bad investment strategies?” Everyone wants a strategy that makes them feel confident about investing in the future, especially in times of distress when everyone seems to be holding their breath.

Although there are many strategies investors believe in such as pure growth and value investing-with each having their own set of benefits and set-backs-my answer to this is a strategy that I preach to pretty much anyone who will listen, income investing. I even dedicated a whole chapter to it in my book, You Can Retire Sooner Than You Think.

Related: Warren Buffett’s Take On Value vs. Growth Investing

Let's get into what Income Investing is and why I believe it's the correct approach for long-term financial success.

What is income investing?

Income investing is a way to generate consistent cash flow from your liquid investments.

What this really means is that you are collecting the cash flow from dividends from stocks, interest from various types of bonds and distributions that come from a variety of investments (investments that pay distributions but don’t fit neatly in the stock or bond category). Adding the three of these together gives you a personal portfolio yield.

Income investing focuses on the production of a steady cash flow from the yield of your stocks, bonds and other investments, which can be reinvested in your portfolio or used to fund your spending needs if you need the cash flow.

Related: How The World Of Personal Investing Has Changed Over The Past 30 Years

This is different from pure growth investing in that pure growth investing relies on a rising stock market to build value. Income investing allows you to diversify your investments and collect a steady stream of income along the way. If this still seems confusing, let me explain this approach using a system I believe to be effective and easy to implement, if you take the time and energy to research and plan. I’ve named it the “bucket system.” (They’re buckets because you put your liquid net worth into them. Get it!?) All of the money you invest will fall into one of these four buckets and these groups work together towards your financial goals.

Cash Bucket – This bucket is your emergency fund; the money that lets you sleep well at night. To be safe, you should have about six months of living expenses stashed in money markets, CDs or savings.

Income Bucket – Contributions to this bucket are invested in various types of bonds — Treasury, corporate, municipal, high yield, TIPS, international, and floating rate. They will provide you with a steady interest income. A well-diversified bond portfolio should protect your principal, as well. To maximize your return over time you have to diversify within this bucket.

Growth Bucket – This bucket will hold different stocks for people in different stages in life. Younger investors who are still working typically invest in more growth-oriented stocks. These are shares in companies that have large growth rates, but usually they don’t pay much of a dividend. Their focus is on capital appreciation through growth in their revenue and earnings.
On the flip side, retirees typically focus more on dividend-paying stocks. These are companies that aim to give you some capital appreciation and pay you a nice dividend along the way.
Dividends accounted for 44 percent of the total return of the S&P 500 over the last 80 years. This is one reason I’m such a believer in income investing.

Alternative Bucket – This will be your smallest bucket. It holds investments that don’t fit neatly into either of the above buckets. For example, this bucket holds investments in energy royalty trusts (publicly traded oil and gas trusts), real estate investment trusts, preferred stocks, and MLP stocks (pipeline and energy storage companies). These are traded like normal stocks on the open exchanges, but they don’t pay traditional dividends or interest…they pay distributions. This type of investment is often considered riskier, hence why it is the smallest bucket.

The idea of using the bucket approach to income investing is that you can diversify your liquid savings and use them to either supplement your income in retirement or reinvest the portfolio’s income to accumulate more wealth over time.

All that being said, this is obviously not the only functional investment method in the world. However, I’ve found it to be effective for those who are looking for a low cost, transparent, and consistent investment strategy built for the long-run. Keep in mind it is important to check up on your bucket performance and make necessary adjustments as needed.

You can learn more about this method by reading my Wall Street Journal article on it here, or by picking up a copy of my book, You Can Retire Sooner Than You Think.

Related: TSL: How To Budget For Taxes, Savings & Life

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.

Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for AJC.com. You can find his original article here.

Editor’s Note: This post was originally published in July 2014 and has been completely updated for accuracy and comprehensiveness.

How to Build your investment portfolio to meet your retirement needs

There are any number of core investment philosophies, each with it own merits and uses. How do you decide which strategy or philosophy works best for you?

At Wela, we believe both growth and income investing have important roles to play in a successful retirement portfolio. During the front part of your wealth-building years, we recommend a growth strategy in which you invest heavily in stocks that will gain in value over the years (and decades), allowing you to reap significant profits when you cash out.

But as you near retirement we believe in transitioning to an income-driven portfolio consisting largely of assets that generate a steady cash flow that can provide you with a “paycheck” in retirement. That income comes from stock dividends, bond interest and income from alternative investments, such as preferred stocks, real estate investment trusts (REITS) and royalties from energy trusts.

One thing I love about income investing is that a well-crafted income portfolio can meet your retirement spending needs for years while limiting the drain on your capital.

 

Working Years: To understand the benefit of income investing, it might help to think of your retirement portfolio as a house. During your working years, you build your portfolio brick-by-brick -- dollar-by-dollar, asset-by-asset. It begins as a starter home -- functional but not fancy. Over time, you add rooms and amenities; a second floor, basement media room and a deck. With luck, the house appreciates over the decades until it’s worth, say, a million dollars.

Retirement: Now it’s time to retire. How do you get your money out of the house? Well, if it’s a growth “house,” you sell it off piece-by-piece and use the proceeds to fund your retirement. When the last piece is sold, the money is gone.

But if it’s an income house, it generates “rent” in the form of that asset income from stocks, bonds and other investments. That income, previously reinvested while you were “building the house” can now be used to cover your expenses. You may well have to sell some parts of the house over the years, but at a slower rate than the owner of a growth “house.”

How much slower? Well, imagine you have a portfolio at retirement worth $500,000 that can generate $20,000 in annual income. Assuming you can live on that money (plus Social Security, pensions, et cetera) after 10 years you would have derived $200,000 from your portfolio but it would still be worth about $500,000, depending on how the market moves.

In order to derive the benefits of both growth and income investing, we recommend the “bucket” approach to creating an effective retirement investment portfolio. As the name suggests, your investments will fall into one of three categories or “buckets.”

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal. To maximize your return over time you will need to diversify these holdings.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend “owning your age” in bonds. When you are in your 30’s, bonds should make up 30% of your portfolio. When you are 50, that percentage should be 50%.

Stocks – This is where growth comes into play. During your working career this bucket will contain mostly shares in companies that have large growth rates, but don’t pay much of a dividend. Think Netflix or Amazon. Ideally, these stocks will significantly appreciate in value over the years. When you retire, you will shift your holdings into income stocks – shares that show some growth but pay a nice dividend. Apple and Disney are good examples. There are several excellent growth ETFs that allow you to tap into the appreciation of a whole basket of companies.

Alternative Income – This smallest bucket holds income-generating assets that are neither stocks nor bonds. This includes real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

While income investing isn’t the only way to saving for the future, in our experience it’s a way to have your “house” provide safety and warmth during your retirement years.

Interested in learning more about investing? Read how an average family retired with 1 million dollars in savings. Download our free eBook on investing here

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.