This Myth About Your Financial Safety in Retirement Seriously Needs to Die
You never want to sell your investments
Most online financial advice for retirement is a scam.
Not because someone wants to deceive you. They simply don’t know what retirement is like if they’re not retired.
My friend Aldric says we should talk to real retirees to learn what life is like at the other end of our working years. So I did just that. What I heard from them blew my mind.
Only one retiree said investing in index funds is the way to go.
The other five don’t want to hold index funds.
I talked to my colleague Tom last week. He’s hanging up his boots next year so I can consider him a retiree. When I asked how his investments were doing, he said,
“Quite well, Denis. I have a regular income larger than my paycheck.”
We were standing near a whiteboard. Tom grabbed a marker and drew a scheme of his investments. It’s simple:
Corporate bonds
Government bonds
Dividend-paying stocks and ETFs
No index funds. See the common feature among Tom’s three investment vehicles? They all generate cash flow. It’s a crucial point.
My friend Tracy retired last year and moved to Mexico where she joined a community of US and Canadian retirees. They’re all afraid of one thing - to outlive their retirement funds. The fear is real now that people live to eighty years or longer. So the retirees take on part-time jobs and barely spend anything.
Selling even a tiny part of your portfolio is frightening. Once sold, it’s gone forever. You also don’t know what the rest of your index fund portfolio will be worth next year.
Should you sell more now or wait a few months and sell for 10% more? You can’t help but think about hitting the eighth decade and having an empty portfolio.
There’s only one solution if you never want to sell your investments: To generate a cash flow from them that covers your living expenses. That’s dividends if you invest in the stock market.
Index funds also pay dividends. But it’ll take you decades to reach a cash flow that allows you to retire. I used to hold QQQ (an ETF based on the NASDAQ). Its dividend payout ratio is 0,6%. I needed $5 million invested before I could live off the dividends.
Tom invests in something that gives him a cash flow eight times as large. Reaching financial freedom with $625k is easier than with $5 million.
Index funds have nothing to do with it.
I feel you if this seems strange. I used to think that index funds were the Holy Grail of retirement.
The argument is, if you can’t pick individual stocks that outperform the indexes, what’s the point? Invest in an index fund and forget. Or even better, dollar cost average into an index fund. You’ll most probably make good money a few decades later.
But you can’t divide retirement into black and white. We know little about this complex issue. The foundation for 401(k)s was created in 1978. Roth IRAs became available in 1998. That’s less than one generation of data.
The state pensions in developed countries are shrinking due to the aging population. Baby Boomers are pulling out of stocks. We’ve never faced this situation. No model tells us exactly how to prepare for retirement in the 2020s and beyond.
It’s hard to deny in 2024 that index funds work. The stock market has been insanely kind to investors.
BlackRock CEO Larry Fink spoke about retirement in his recent Letter to Shareholders. More than 50% of the capital BlackRock manages (north of $5 trillion) is for retirement.
He didn’t say that half of BlackRock’s clients invest in the index funds managed by the company. BlackRock manages thousands of other ETFs and mutual funds.
This tells me that the company’s customers invest in more than just index funds. For example, industry-specific funds or dividend-paying funds.
My own statistics say that most of the happy retirees aim for cash flow. They don’t wake up with the dilemma of how many units of their ETFs to sell.
They know exactly how much and when they’ll get paid for holding their ETFs or bonds. It’s possible for them to never sell their portfolios. It gives them peace of mind.
So here’s what I suggest: Ask yourself seriously if you’re afraid of outliving your retirement fund. Take your time to answer this question honestly. Imagine what it feels like to have zero savings when you’re eighty.
Get ready for retirement in advance, both financially and mentally. If you see yourself fretting over selling or not selling, you know the solution.
Aim for a cash flow so you’re never selling your portfolio.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
Great article Denis. Cash flow is more important than savings. Savings depreciate while investments providing an income preserve your capital from inflation.
I’m retired. I set the goal first: generate a monthly cash flow that at a minimum meets my spending goals and that won’t expire before I do. From there, I designed the plan and investment strategy. Index funds were great for the accumulation stage but not so much for the withdrawal stage. Always remember, investing is a tool, not a plan.