A half-million dollars is a lot of money.
Unfortunately, it won’t generate much income today if you limit yourself to popular investments.
The 10-year Treasury has “rallied” to 1.85%. Put your $500K in them and you’re well below the single-person poverty level at $9,250 annually. Yikes.
Dividend paying stocks are masquerading around as bond proxies for this reason. But they still don’t yield enough. Vanguard’s popular Dividend Appreciation ETF (VIG) pays 2.1%. The iShares Select Dividend ETF (DVY) pays 3.2% – better, but that’s still just below the poverty level for two people at $16,000 per year.
When investment income falls short, retirees sell their investments to supplement the income. Of course the problem here is that when capital is sold, the payout stream takes an immediate hit – so that more capital must be sold next time, and so on.
The Only Reliable Retirement Solution: No Withdrawals
Rather than rely on, say, a 4% annual drawdown for income, the only dependable way to retire and stay retired is to boost your payouts so that you never have to touch your capital.
This is easier said than done, and obviously the more capital you have the better off you are. But with rates and yields so low, even rich guys have a tough time living off interest today.
You can actually live better than they can off a (much) more modest nest egg if you know where to look for lesser-known, meaningful and secure yield. I’m talking about annual income of 6%, 7% or even 8% – so that you’re banking up to $40,000 each year for every $500,000 you invest.
And you’ll never have to touch your nest egg capital – which means you’ll never have to worry about stock prices.
The only thing you need to concern yourself with is the security of your dividends. As long as your payouts are safe, who cares if your stock prices swing up or down on a given day?
Most investors know this is the right approach to retirement. Problem is, they don’t know how to find 7% and 8% yields to fund their lives.
And when they do find high yields, they’re not sure if these payouts are safe. Will the company or fund have enough cash flow to pay the dividends into the future? And how sensitive are these payouts to interest rate increases?
Let’s walk through my three favorite corners of the investment universe for income today – with a special focus on the interest rate question, which is mistakenly believed to be a high income threat by headline-focused investors.