It's a delicate balancing act. I mean, just because you leave the workforce doesn't mean you no longer want to still grow your portfolio while covering your living expenses—who doesn't always want more money if you can have it? Avoiding having to dive into the principal is a big consideration as well. Especially in the beginning years. And of course, even when inflation is low, it's still a factor to keep in mind. That $100 you have today will not be worth the same $100 tomorrow because inflation will eat away at some of the value.
You need to have a reliable source of income to pay your bills while continuing to build your wealth as much as possible, and that means making things so that the dividend income you are receiving exceeds what you are using to fill the gaps.
That means sensibly managing dividend yields to ensure you can get the best bang for your invested dollars. But, in all fairness, that can be a bit tricky with so many variables to consider.
When we had the massive decades high inflation, courtesy of poor economic policy by the Biden administration, it came with at least one silver lining, and that was higher yields on basic savings from banks as the Fed raised rates in an attempt to slow down the economy.
In other words, being able to get a 5% yield on "safe" money was an advantage, and offered a bigger incentive to be cash heavy during that time. The thing is that when you are relying more heavily on dividend income as a major source of your income in retirement and semi-retirement, you want to keep your money as close as possible. You don't want an enormous amount of risk because the bulk of your growth opportunities have come to pass.
Chasing massive yields from monthly payers, such as can be found with many ETFs, can be very risky. Seeing yields surpassing 10% is not uncommon but share valuations can fluctuate wildly. So, finding more sure investments become crucial to maintain as much of your portfolio balances as possible.
Ideally, anything between 4%-8% is considered a good yield as an average to shoot for.
Now that interest rates are falling, it becomes less desirable to hold money in a high yield savings account and it becomes more important to start looking back to the markets to increase your dividend income.
The rate on my Ally savings account, for example, has fallen to 3.8%, and will likely drop further as the Fed continues to lower the benchmark rate. A $100,000 balance which offered $5,000 a year will now only offer $3,800 a year. I don't want to simply lose the $1,200 difference. But rather, I want to adjust my cash position to bring it back around.
One ETF I like is BXMX which offers a 7% yield and happens to be rather stable. While a 7% yield is always more attractive than a 5% yield, because the cash position was "safe," it offered a desirable compromise at the time. Now it offers a better opportunity to earn higher dividend income even if my principal will not have the same benefits of safety that my savings account did.
The key takeaway here is something I have always said that no matter whether you are still working or retired, your money should never be left in a set it and forget it mode. You have to be constantly aware of what's happening with your money, and what's in the best interest of maximizing its value, both in terms of growth and income.
The balancing act part comes in as you try to mitigate risk and offer all of the things you wish to get from it. Growth, income and relative safety.
Even finding something that offers 4% is better than making spending adjustments from the 1.2% you no longer will realize and is a decision that recoups at least $200 worth of potential lost income. It's still important to keep enough cash handy to deal with emergencies and keeping that money safe and accessible is essential. The rest of it should be maximized to offer the best return and income possible.
Currently I am only moving the dividends from the high yield savings to higher yielding stocks and ETFs. But as interest rates continue to fall, more of that cash position will be moved to higher ground.
Balancing growth and income while managing inflation and avoiding principal depletion can be a daunting task, but it's well worth being one to take on. Sensibly managing dividend yields and staying aware of market conditions, even when you no longer have a more reliable source of income, maximizes the value of your wealth and ensures more financial stability, even when things become more complicated or difficult.
It's more important to consider levels of safety in retirement and semi-retirement. Of course. But being too safe can cost you more money than a carefully considered level of added risk would.
Like the way I write or the things I write about? Follow me on my Facebook page to keep up with the latest writings wherever I may write them.
© 2024 Jim Bauer
More from the Springboard at HubPages:
The Biden Inflation Catalyst
Certainly, there are myriad factors as to what causes inflation to occur. Do presidents have a role? Most certainly they do, although they do not necessarily directly impact inflation, fiscal and other policies absolutely do. So, how can we tell Biden is the man behind the inflation we have now?
Certainly, there are myriad factors as to what causes inflation to occur. Do presidents have a role? Most certainly they do, although they do not necessarily directly impact inflation, fiscal and other policies absolutely do. So, how can we tell Biden is the man behind the inflation we have now?
Posts
No comments:
Post a Comment