by Anthony Obey
The ultimate goal of most retirees’ investing efforts is, simply, INCOME REPLACEMENT; so that when you no longer can – or want to – work, you can sustain your lifestyle for as long as you live.
You also want to prosper well enough to have the means to really enjoy your Golden Years of life, invest more time and energy into your family as well as making an impact on others. Finally, when you breathe your last, most of us want to have enough prosperity that we have something to pass on to your loved ones and/or your favorite cause(s).
800lb Gorilla…I Mean ‘BEAR’ in the Room
However, reaching this simplistic goal is far easier said than done for most investors – as you try to build stable financial houses on fundamentally shaky, ever-shifting ground.
Investors face challenges including:
Longer life span – Life span’s have actually increased, not decreased. So why is this on the list of challenges an investor faces? You see, most people are living longer than people did 50-80 years ago (into their 90s for the average non-smoking couple). So if you retire at 65, you need an investment plan that replaces your income and lasts for 30 years!
Inflation – A silent killer, averages 3.5% and reduces purchasing power year after year.
Taxes – As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.”
Market Risk – the ‘800lb’ Bear I mentioned. Market risk is the risk that value of an investment will decrease due to moves in the market.
Financial Literacy – Most folks aren’t professional, sophisticated, or educated investors; which is the cause of such low portfolio performance for most people.
Low portfolio performance and a lack of clear strategy for how to get on track to solid investment practices is the reason many people don’t believe they’re prepared for retirement and why many expect to work well past the normal retirement age of 65.
Financial literacy is so critical today because the challenges of investing have become YOUR responsibility – not your employers’ and not the governments – as Defined Contribution Plans (401ks, IRAs, etc.) replaced Defined Benefit Plans (Pensions) in the 1970s.
Many people realized their investment portfolio was a mere house of cards during the Great Recession of 2008-2009. The question you must ask is, “Am I building a solid retirement nest egg or a house of cards?”
Turn Your Financial ‘House of Cards’ Into a House of CASH-FLOW!
This is part 1 of a multi-part series we’re giving you in order to teach you how to generate steady income in shaky markets. You see, your financially secure retirement is critically important. Quality of life plummets for many people in retirement.
Those who can afford to retire often keep the same investment approach past the time they should be changing their approach, based on their changing investment objectives; which further impacting their retirement lifestyle in a negative way.
We don’t want to see this happen to you.
So let’s take a quick look at the overall strategy for building a solid investment plan that helps protect you against bear markets. Market declines are unavoidable, but a strong investment approach can maximize your ability to replace your income into the future when you get ready to retire.
In this article we’ll briefly review the steps you should take to start investing well, based on the objective of income replacement, but we’ll dive deeper in following parts.
Match your Investments to your Objectives for Success
While most people should have the objective of replacing their income so they can generate a full-time paycheck for around 30 years in retirement (if you retire at 65), most people are actually using an investment method that is contradictory to their own objective!
The standard investment strategy is that of ‘Capital Appreciation’ – where you buy a stock in hopes that in goes up in price so you can then sell and earn a profit – which is called capital appreciation/gains.
The “traditional” portfolio, with a 60/40 split, produces very little income. If you have a sizable $1 million portfolio on this split, most financial advisors recommend a mere $40,000 a year in income. That is unacceptable – let alone unlivable!
Our definition of wealth is based on the amount of income a portfolio generates monthly and annually to meet the objective of income replacement. Our goal is 1% a month – or 12% a year – that we generate as income off our portfolio. (Keep in mind, the above is a goal, not a guarantee)
Decide if Your Current Approach is Helping or Hurting You
Capital Appreciation is a fine approach to investing in the land of Make-Believe – where we just buy and hope the investment ONLY rises and never fluctuates or falls in price. Then we’d only experience capital appreciation and benefit from the power of compounding.
But in the real-world, markets fluctuate daily and we experience a bona-fide bear market twice every 10 years. So when it’s time to sell your investment because you need the income every month for retirement, you’ll likely experience the nemesis of compounding – ‘reverse compounding.’
When you go to sell a stock that’s declined in value, you see that it takes far more effort to recover the capital loss you experience for selling lower than what you bought it for.
If these losses you experience when selling stocks to live on the income occur in the wrong order, it dramatically increases your chances of what academics call “retirement ruin.”
This is the downfall of depending on the Traditional Capital Appreciation model of investing in retirement. In order to avoid reverse compounding and ultimate retirement ruin, you must drop the growth investment model like a bad habit and run for higher ground.
Discover and Implement a Better Approach for a Better Retirement
We know that income replacement is the ultimate objective for being able to retire and live well for decades to come in retirement, right? Then doesn’t it make since to adopt an investment approach called ‘Cash-flow’ Investing?
With this approach, we take all of the above mentioned investment challenges into account when approaching the activity of investing for a secure financial future. The Snider Investment Method is a Cash-flow investing model that is built to achieve two critical objectives for people investing for income replacement.
Those two objectives are:
1) Cash-flow – We use a combination of stocks, options and cash management techniques with the goal of generating 1% a month income from an investment that can be used as income or reinvested for compounding.
2) No Permanent Loss of Capital – We seek investment preservation by purchasing stocks from fundamentally sound companies we’re willing to own for the long-term, even if price declines. We minimize our chances of selling stocks at a loss by diligently screening stocks and following a simple set of action steps and rules that help us control emotional reactions to market changes.