(Forbes) While you’re preparing for retirement, having a portfolio of dividend-paying stock investments is great. But is that all you should have?
Here is a better income strategy to set yourself up for a dignified retirement.
Times are changing.
Historically, people believed that the best—and only—way to invest for retirement was to buy stock in companies that paid predictable and rising dividends. Today, if your financial advisor recommends only this method, it may be time to start looking for a new advisor.
Buying stock can be profitable, but it is also extreme volatile. If all of your money is in stock and there’s a dip in the market, your retirement plans could be damaged indefinitely.
Diversify, diversify, diversify.
Having stock is a good strategy for growing your assets, but it’s not a good strategy for income. A diverse portfolio should also include assets such as cash, bonds, certificates of deposit (CDs), real estate and private debt.
These asset classes don’t correlate with stock performance, which helps reduce the possibility of a catastrophic portfolio decline. Plus, most bonds and CDs have set maturity dates, so you can control when capital becomes available to meet your income needs.
Have your cake and spend it, too.
Your retirement portfolio should be divided into two components: the income portion and the growth portion. Just as it sounds, the income part of your portfolio is the money that you’ll be pulling from to live once you’re no longer receiving a paycheck.
This part should never include stock investments.
The growth portion of your assets is where you keep your stocks. As your investments grow, you can start to sell them off and use that money to replenish your income portion. If equity markets decline, you’ll ideally have enough funds in your income portion to sustain your income long enough to wait to sell stocks until the market has recovered.
Annuity is not a dirty word.
I have warned before that using an annuity without a good understanding of how it works could be unfavorable to your financial independence. This is true, but when used well, an annuity can be impactful.
This type of account has a component of longevity-based income, meaning you’ll have a contractual income stream that you can’t outlive—in other words, money for the rest of your life.
Before you commit to an annuity, make sure you fully understand how it works.
The lesson:
Having dividend-paying stocks is great, but the volatile nature of investments makes them instruments for growth, not for income. Make sure your portfolio includes options that don’t rely on the stock market—like cash, CDs and annuities—so you don’t run out of money if the market dips.
