When I ask people what they are investing for, I often get answers such as “growth” “high returns” or “to make money.” I rarely hear the right answer, which is: Income! During the 2008 financial crisis there were many people that had quite a bit of assets (namely in real estate) but couldn’t pay their bills and had trouble selling their properties.
They were “asset rich but cash poor.” You can’t spend assets and the last time I checked, the local supermarket wouldn’t take bartered products as payment for food! We all need income we can count on, which is why for so many people Social Security benefits are a big deal.
The goal of investing is to create enough income and cash flow so you never have to worry about paying bills or running out of money. Income is freedom and without it, there is little chance for financial security.
Once upon a time, individuals would work for one company, retire, and then receive their pension. Today, workers enrolled in traditional pensions have declined by 90% since 1979! On top of that, the average worker currently hops around from job to job every several years, barely giving enough time to establish a 401(k) plan.
So what’s the answer? In order to create the income you desire, you need to achieve critical mass of your investments. This means you have hit the sweet spot where your investment portfolio generates enough capital growth, interest, or dividend income to meet your lifestyle needs and protect against inflation.
However it also matters on what the market is doing when you retire. If the average worker retired in the mid-1990s, they would be doing well. However if the same worker retired in the mid-2000s, he would be broke before the end of his life. Why? The earliest of our retirement years define our later years.
In the 2000s we had already seen two market declines of 50%. To break even from that loss, he would need to make 100%. If you suffer losses right before or early in retirement, it is very difficult to catch up. Most won’t be contributing to replenish their funds or have the time to recover. On top of that, drawing down the account for retirement income will make it even worse.
The market doesn’t give us average returns, it gives actual returns that when combined become the average. For those wanting to take income from their investments, the order of the actual returns is more important than the average of the returns.
So what’s the answer? Having a combination of a diversified investment portfolio, a guaranteed income product like a fixed annuity (must be right for your circumstances), a long-term income investment focused on principal and inflation protection, a smart tax strategy for qualified accounts, and the optimal social security strategy can provide the lifetime income solution you need. This optimal mix can give you upside potential if the market were to rise, and the downside protection if it were to fall.