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Yes, you read the headline correctly. Contrary to popular opinion that there are no guarantees, I know TWO retirement strategies that no matter what else you might do, will always work. Of course that does not mean that the strategies are easy, because if that was the case, we would not have an individual financial stability problem at all.

On the other hand, it actually can be easy if you have one major asset working for you.

Discipline.

Two Strategies That Will Insure Financial Security For Just About Everyone

In keeping with my efforts to keep the mysteries of the markets easier to understand, let me just bore you with these two bullet points:

  • Income
  • Expenses

The world of financial security can be yours if you simply understand these two topics.

I will take the liberty of creating a hypothetical couple, both age 66, and retiring "tomorrow". I will put them into the average category from an earnings and expense standpoint. The kids are grown and out on their own and our hypothetical couple are ready to embark on what can be the best years of their life, or the most challenging. From a financial perspective of course.

The most recent data from the U.S. Census Bureau has the median household income at $52,762 before taxes so based on this information, our couple will fall right at the median for income.

Based on the most recent findings our average couple will have the following expenses broken down into these categories:

paycheck
(Click to enlarge)

  • Housing - $16,557 (26.5%)
  • Transportation - $7,677 (12.3%)
  • Food - $6,129 (9.8%)
  • Personal Insurance and Pensions - $5,373 (8.6%)
  • Healthcare - $3,157 (5.1%)
  • Entertainment - $2,504 (4.0%)
  • Apparel and services - $1,700 (2.7%)
  • Everything else - $5,012 (8.0%)

These expenses total $48,109 for our average couple. Now, let's assume that on the day our couple retires, all expenses remain the same for the time being, but of course their income of $52,762 will no longer be coming in.

Social Security will now become one of the most important parts of our couples retirement income. Take a look at this chart:


(Click to enlarge)

Our couple will fall into the range between $16,752-$22,212 and each will receive just about $19,000 per year ($1,580 per month).

$38,000 from Social Security in total leave a gap of a drop over $10,000 to pay all expenses, if they remain the same.

Where does this money come from? Keep in mind that the only two strategies that will insure a secure financial retirement is based upon income and expenses. Our couple can either reduce expenses or increase income.

Fortunately our average hypothetical couple has been saving at the average rate for to build a nest egg.

According to the U.S. Census Bureau, the average couple has been able to amass approximately $106,000 between retirement and regular savings accounts.

Creating Income By Dividend Income Investing

Based upon our Team Alpha Retirement Portfolio, if this couple were to invest $100,000 in the stocks that are held in this portfolio on an equal allocation basis (20 stocks, 5% in each or $5,000), according to our most recent article on allocation and diversification, our couple could have an immediate income stream of roughly $4,390 in the first year of retirement:

The Team Alpha portfolio consists of Ford (NYSE:F) Chevron (NYSE:CVX) Apple(NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson(NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp.(CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Newmont Mining (NYSE:NEM), Intel (NASDAQ:INTC), and Wells Fargo (NYSE:WFC).

Stock Forward P/E Price/Bk Yield Now
XOM 11.7 2.49 2.70%
JNJ 16.6 3.78 2.90%
T 14.3 2.19 5.00%
GE 14.4 1.99 3.20%
BKCC 10.2 1.02 10.80%
AAPL 10.8 2.95 2.90%
PG 18.8 3.38 3.00%
KO 18.3 5.63 2.70%
NEM 11.8 0.97 5.10%
WFC 11.5 1.53 2.80%
O 18.7 1.95 4.90%
KFN 6.9 0.9 7.80%
NLY 8.2 0.78 13.50%
CSCO 14.2 2.44 2.60%
CVX 10 1.72 3.20%
BMY 25.5 5.51 3.10%
MCD 17.8 6.69 3.00%
CSX 13.7 2.67 2.50%
F 11.9 3.82 2.30%
INTC 13 2.32 3.80%

By investing in this manner, the gap between income and expenses will be reduced to about $5,600.

In order for this strategy to work, the gap can be closed in only two ways; reduce expenses or increase income. The most likely way for the gap to be closed will be to reduce expenses to live within the current income received.

By reducing each of the areas of expenditures noted above, by just 15%, total expenditures would be reduced to roughly $41,000. The most obvious ways to achieve this would be to take the following actions:

  • Downsize into a more affordable place to live. (look to reduce this expense by 25%)
  • Eliminate 1/2 of the transportation costs (this will probably happen almost by itself when commutation costs are gone).
  • Reduce dining out by 50%. (note the amount spent in the chart above)
  • Contributions to 401k's and IRA's will be eliminated in retirement. (Potential savings of $1,500 to $3,000 per year)

By taking the steps noted, expenses should be reduced by more than 15%, but for our purposes I will keep the expenses at $41,000.

I have always maintained the one key ingredient in this strategy is to spend less than you take in. Based on our hypothetical couple, and the average income, expenses, and investment portfolio dividend income, we now have a SURPLUS of $1,390 between income and expenses.

-Total income of $42,390

-Total expenses of $41,000

Assumptions Can Also Be Misleading

Keep in mind that in the future, we really do not know how much income will be received from Social Security so it is vital that the younger investors reading this realize that they must take action now to help secure a more financially stable future.

  • Save more, and sooner, for a longer period of time.
  • Eliminate debt now rather than later.
  • Spend less than you have coming in, forever.
  • Begin investing in mega cap, blue chip, dividend paying stocks as early as possible, and reinvest the dividends until you actually need the income.
  • Monitor your investments so that you can make sure that the rate of dividend increases stays at least equal to that of the average inflation rate.

When investors understand the power that dividend investing could have on their financial future, I believe that the very basic strategies outlined in this article will be virtually guaranteed to work for just about everyone.

Stay focused my friends!

Source: The Team Alpha Retirement Portfolio: The Only Retirement Strategies Guaranteed To Work