CPA, Certified Financial Planner, and Wealth Management Advisor based in Findlay, Ohio
#AskAdamZ is a series of live videos I’m doing on Facebook. You ask your questions on money, investing, or saving for retirement, and I’ll give you my answers.
Send me your question or use the hashtag #AskAdamZ on social media.
Here’s today’s episode where I answer the question: With the market at new all-time highs is this a bad time to buy stocks?
What if I told you there was a way to build more wealth without sacrificing your lifestyle?
What if you had a solution to saving more money for your future without giving ANYTHING up today?
You’re all-in, right?
Okay, here it is…
Yep, that’s right. It’s all you have to do.
And, if you are like the average American, then you should start today!
Here’s why…
There is a good chance that if you are reading this you are behind on your retirement savings.
If we look at the families that do have retirement account savings, we find that the average American family has less than they will need to achieve their goals.
(Yes, this is a few years old, but the numbers haven’t changed much since then.)
There is no question about it.
Retirement savings for most Americans is inadequate.
Tomorrow’s retirees will need to rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a major shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional employer related pensions.
Now that the burden is on the employee or entrepreneur to save for his or her own retirement, the implication of inadequate retirement savings is that…
the projected retirement income for future retirees will not be enough to cover rising living expenses during a full modern retirement (which often lasts 3 decades)!
If I’ve just described you, then the first thing I want you to know is that it’s okay. You see I am a big believer that it’s okay not be okay, but it’s not okay to stay that way. I want to help you change the current path you are on by showing you that there is a simple way to begin heading in the right direction. It is possible!
Saving half of your raises is a great next step for you.
Make today the day that you get intentional about creating a better future for yourself. If you follow this one simple step, you will accomplish more than you ever thought possible with your money. Trust me…twenty years from now, you will not regret the decision to save half your raises!
The easiest way to illustrate why this approach works so well is to show you two examples:
Let’s say you follow the traditional financial planning approach of saving something like 10% of your income. You may find that it becomes increasingly difficult to ever reach your retirement goal. Here’s why…
By following a plan of saving 10% of your income and spending the other 90%, you will be increasing your standard of living by 90% of every raise you ever receive in the future. Over your career, this means that your lifestyle rises just as fast as your retirement contributions. Ultimately, this means that the amount of assets needed at retirement to generate an income that covers your standard of living gets larger and larger — making it very difficult to ever reach your retirement goal at all!
Compare the traditional “Save 10% of Your Income Plan” to a plan where you limit your increases to your lifestyle expenses by spending just 50% of your future increases in income, and saving the other 50%. I like to call this “The 50/50 Rule of Future Raises”.
By following The 50/50 Rule of Future Raises, the increases to your standard of living are much more controlled and your lifestyle expenses rise much more slowly. If you follow this rule, then your savings rate (% of income saved) will grow exponentially and your spending rate (% of income spent) will actually decline as your income grows!
This is how people retire early while still enjoying a rising lifestyle! The only difference to your lifestyle is that the increases to your standard of living aren’t as big and fast. That’s not a bad trade-off for actually being able to retire someday within a reasonable timeframe, and with a stream of income that covers your standard of living.
(Note: Financial planning expert, Michael Kitces, wrote an excellent blog post about this concept that I highly recommend you read. His article goes much deeper in illustrating why this works so well.)
The real power of this strategy lies in the fact that you don’t have to make any sacrifices to your current lifestyle while saving an increasingly larger percentage of your income between now and retirement!
We all want to have our cake and eat it too! We want to save more money, but we don’t want to give up anything to do it. By saving half of your raises it’s possible, because you are simply waiting for your next raise or bonus, and then you have the opportunity save more while also spending more.
By giving yourself permission to spend half of every raise, it also feels much easier to save. It’s a balanced approach to enjoying your life today and preparing for your future life.
The best way to get started is to establish a baseline today. Draw a line in the sand today and say, “Enough!”
Commit to being content with your current lifestyle until you are on track for retirement. Consider today’s income your new baseline.
Start a spreadsheet to document your baseline and your commitment. As you save a portion of each raise, calculate your new savings rate and spending rate. You will be amazed at how those change after just a few years of following this strategy.
As we approach the end of the year, it is likely that your company will be offering you a bonus or salary increase. Companies often declare or pay bonuses in December as they review employee performance. Many companies also like to declare pay increases at the end of the year, so that they are effective January 1st. This is a great time to start following The 50/50 Rule of Future Raises.
Once you’ve made the commitment to save half of your raises you will want to put this money to work for you. You don’t want your money just sitting idle in cash or a low interest savings account. The biggest threat to your retirement is a low savings rate. Now that you’ve found a way to solve that problem, your next biggest threat is inflation, which is simply the increasing cost of everything we spend our money on over time.
You need to invest your hard-earned retirement funds in something that has a good chance of growing at a rate that is faster than inflation. Not only do you want to keep up with inflation, but you want to increase your buying power over time.
Read this blog post to find out why I believe that dividend growth stocks are the best solution to this problem:
“3 Big Reasons Dividend Growth Stocks Are The Ultimate Long-Term Investment For Retirement Income”
I know that my blog attracts a lot of readers who are already putting a significant amount of money away for retirement. There is also a good chance that you are a reader who has done very well saving for retirement. You have worked hard and intentionally saved a meaningful portion of your income every year allowing you to build a nice nest egg.
You might be right on track with your retirement savings, or you may even have more than enough money saved for retirement. If that’s you, then congratulations are in order because you are in the minority! What you have accomplished is super-exciting and commendable!! Now that you have meaningful savings you should check out my last post: 3 Big Reasons Dividend Growth Stocks Are The Ultimate Long-Term Investment For Retirement Income.
If this is you, I want you to help me share this simple strategy with the young people in your life. One of my goals is to help more people get this right from the beginning. You have done well at this and you shouldn’t shy away from sharing your story! You can help future generations change the trajectory of their lives by showing them that committing to some simple disciplines early on will set them up with a future of no regrets.
Sign up for my weekly newsletter, 7am Saturday, where I will occasionally share financial planning and investing tips. Learn more here.
“Don’t Save 10% Of Income, Spend (Just) 50% Of Every Raise And Systematically Save More Tomorrow!”, Michael Kitces
#AskAdamZ is a series of live videos I’m doing on Facebook. You ask your questions on money, investing, or saving for retirement, and I’ll give you my answers.
Send me your question or use the hashtag #AskAdamZ on social media.
#AskAdamZ is a series of live videos I’m doing on Facebook. You ask your questions on money, investing, or saving for retirement, and I’ll give you my answers.
Send me your question or use the hashtag #AskAdamZ on social media.
Are you looking for a way to invest your money for retirement?
Or, are you looking to build a stream of passive income? An income that regularly rises to keep up with your ever-increasing living expenses?
What if that income was enough to make work optional? How would that change your life?
If you are seeking growth of your investments while also earning a stream of growing income, then look no further than dividend growth stocks.
Dividend growth stocks are the ultimate long term investment for retirement income for the following 3 reasons:
Thousands of stocks pay cash dividends as way to distribute profits to shareholders. The best companies increase dividend payments year after year. Since 1921, these dividend growth stocks have contributed an excess return of 7.5% over stocks that paid no dividend at all. The real power driving this return premium is the increase in income each year as dividends are increased.
Over the 40-year period ending December 31, 2014, the average dividend paying stock generated a total return over 3.5 times more than stocks that did not pay dividends!
Investors searching for income are forced to look beyond fixed income investments in today’s low interest rate world. Not long ago, an investor could invest in a 10-year US Treasury bond and get a decent income with little risk.
The chart below shows that the interest rate on an investment in a 10-year Treasury has dropped from a high of 15.84% in 1981 to just 1.60% on September 30, 2016.
If you look at this rate after inflation (which is currently 2.3%), you are left with a negative yield of -0.7%. In other words, if you are investing in 10-year Treasuries today, you are losing money after you factor in inflation!
So, what’s a conservative investor to do?!
Well, the first thing you have to ask yourself is: “what is the real risk with my investments?”
If you are investing with a time-frame of 10 years or more, then it is my belief that inflation will be a real threat to your portfolio.
The chart below shows you the impact of a 3% inflation rate.
So, if we assume you’d like to live on a nice, round number of $100,000, this chart shows you the future income you will need to maintain your lifestyle. After 30 years, and an inflation rate of 3%, you will need nearly 2.5 times the income you started with!
As you can see, a fixed income portfolio won’t take you very far with today’s low interest rates. Most investors will need to follow a plan that will grow their income throughout retirement.
Today’s retirees will need to invest differently than the retirees of the 80s and 90s. Back then, a retiree could build a laddered bond portfolio and enjoy yields of 5% or more. Today, it is tough to build a bond portfolio that will exceed inflation.
That doesn’t mean that bonds don’t have a role in your portfolio. Bonds will still act as a great diversifier and help minimize, or cushion, the possible downside volatility you will see in your stocks. But, don’t expect to see high income or growth from your bonds.
As you can see in the next chart, the dividend yield on an S&P 500 ETF is currently 2.11%. So, the US stock market is currently yielding more than the 10-year Treasury Bond!
But don’t just buy the market. Be selective by establishing your criteria for a strong dividend paying stock. Build a portfolio of stocks in a variety of industries and you have the potential to do quite well with your money over the next 10 years or more.
Volatility leads to some really bad decisions.
When stocks dive, investors are prone to panic-selling…leading to lower returns.
As investors, we want to look for the best returns with the lowest amount of risk, which is often expressed as volatility.
Dividend growth stocks have shown higher returns with lower risk than stocks that don’t pay a dividend. Furthermore, dividend growers also produce better results with less risk than companies that pay a dividend but don’t grow those dividends.
By owning dividend growth stocks, you are likely to experience less volatility.
Furthermore, if you’ve done your research on the companies you own, when volatility comes you can be confident that they are durable enough to withstand a recession and sustain their dividend.
One more thing to think about is that as you extend your time horizon, you reduce the probability of losing money in the stock market. As you can see in the chart below, 94% of all 10-year periods since 1926 have had positive returns.
If you extend your time horizon to 20 years, you can have even more confidence that you will make money in the stock market. History doesn’t always repeat, and past performance doesn’t guarantee future results, but it’s good to know that there has never been a 20-year period where the S&P 500 has lost money.
These probabilities are why I have confidence saying that an investor is more likely than not to experience better results from investing in high quality dividend growth stocks than bonds over a time-frame of 10 years or more. Especially in today’s interest rate environment.
Historically, we have seen that dividend stocks have offered a great way to invest to see returns better than the market and to generate increasing income. However, it is important to recognize that with low interest rates, investors’ search for yield has bid up the price of some dividend stocks, which may lead to lower returns in the coming years.
Before buying a stock, you will want to be sure the valuation is reasonable. A great place to start is by looking at the company’s P/E and P/B ratios relative to the company’s historical range, as well as other stocks in the market.
Today’s long-term investor should consider owning dividend growth stocks. I believe dividend growth stocks are the ultimate long-term investment for retirement income for these three reasons:
1) They have historically generated higher returns than non-dividend paying stocks.
2) They offer higher yields than bonds and can be a great alternative if your time horizon is 10 years or more.
3) They are less volatile than other stocks making it easier to endure corrections in the market.
I will be hosting a free webinar in the next few weeks where I will share a lot more about investing in dividend growth stocks. Click here to get more details on my free webinar:
“How to Build Wealth And Make Work Optional With Dividend Stocks”