I will not pull any punches in this article. Most folks reading this, who are not on this path, will simply never be able to retire. The reasons are simple and obvious:
- If you save less, you will have less.
- If you spend more than you earn, you will never be able to save.
- If you do not invest what you save, you will run out of money during retirement.
Whenever I have written about retirement strategies, I have taken for granted that everyone has been reading my articles all along and knows precisely where I am coming from, but I really felt that it was time for a wakeup call with some cold hard facts.
Perhaps everyone already knows all about these issues, if you do, please forgive the review, but I also believe everyone can use some reminders. If this is old hat to you, perhaps you can share this with others who might need some guidance. You might even suggest that they sign up for Seeking Alpha, which is free to everyone, and filled with knowledge for all levels of investors, and those seeking to save for the future.
The first thing I would urge everyone to do is to take a look at all of the retirement articles I have written. Even the ones for the so called "novices," or beginners. Read the other fabulous SA authors who consistently write about retirement and portfolio building as well.
We do have a portfolio that we have built specifically for our Seeking Alpha readers, so we can follow an effective way for just about anyone to either copy, or simply follow along. "Team Alpha" has been doing just fine thus far, and I believe that investing in this format will give everyone a good shot at a comfortable retirement. (Here is the latest "Team Alpha" article)
Our portfolio now consists of Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America, American Capital Agency (NASDAQ:AGNC), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), 3M Company (NYSE:MMM) and Bristol-Myers Squibb (NYSE:BMY).
As we go into the final quarter of 2012, Team Alpha has increased by 24% through August, which outperformed the S&P 500 by about 8%. As you can see, we do not have Apple (NASDAQ:AAPL) stock. If you back out Apple from the S&P 500, we actually outperformed by almost 11%.
OK that is just fine, but how did we actually get here? For many Americans, this portfolio is nothing more than a pipe-dream unfortunately.
We spend too much, save too little and let our fears and preconceived notions get in the way of actually taking responsibility into our own hands. What do we really believe deep down that keeps us from taking action? Here is what I hear from friends, acquaintances, and even family members;
- "Social Security and Medicare will be there. The politicians will never change them, no matter what they say."
- "I can sell my home and downsize to a tiny place and live off of my Social Security and profits from the house."
- "I know my kids will help me, after all I raised them and paid for everything."
- "I will keep working until I drop dead."
- "I want to enjoy my life now, I cannot save anyway!"
- "The stock market is rigged and nobody ever wins."
Sound familiar? I think these 6 common thoughts are rampant. I also believe they are all baloney. To me, they are excuses. An excuse not to save enough, an excuse not to cut down on spending, an excuse not to invest wisely, and all are based on fairy tales.
Don't get me wrong, millions upon millions of folks will head into retirement hanging on to these beliefs and will continue to "complain" about their lot in life, right up until they die. Some might be fortunate to have kids who will foot the bill. Some will be content sitting around doing absolutely nothing in their later years. Some might even be able to work well into their 80s. The truth is, those are the exceptions, and not the rules.
Since I love charts, let's toss one up here for the cold stark reality:
Per capita income of under $40k/year, a savings rate of a tick above 4%, and a government announced inflation rate of a little over 1.5% (for now).
Add that to lower equity values in homes, and rising healthcare costs, rising fuel prices, and skyrocketing food costs. Even if Social Security and Medicare were to remain the same, does this paint a pretty picture to you?
Is there any wonder why articles like this have been showing up more and more?
Thirty five percent of Americans don't expect to retire, up from 29 percent two years ago, according to findings from a "2011 Risks and Process of Retirement Survey Report" from the Society of Actuaries, the New York Times reports..
Four in 10 of the survey's so-called "pre-retirees" say they won't retire say because they are financially unable to do so, as they either need the income or the employer benefits
The reality of this situation is even affecting small business owners and entrepreneurs, as noted here:
The weak economy has been tough for small-business owners across the board, with their total revenue inching up by just 3% since 2007 and declining in fields such as construction (-12%), real-estate services (-3%) and retailing (-2%), according to financial-software maker Intuit Inc. But for entrepreneurs in their 60s and 70s, the consequences have been particularly vexing..
Many of them are stuck in "business purgatory," unable to retire and forced to hang on for a recovery that economists say could still be a long way off.
I am far from being a doom and gloomer, but facts are facts. I also do not claim to have all the answers, and some might say I have NO answers. Those sentiments might be true, however, I do know that there are steps we can take as individuals, and as families, to at the very least, give it the old college try!
The Simple Path To Having A More Favorable Retirement
There really are no magic formulas folks, and everyone's circumstances are unique; however, I believe that the following actions could go a very long way towards helping everyone:
- Begin saving as soon as you receive your first paycheck.
- Save at a minimum of 10% of your net income.
- Max out every tax deferred program available to you. It might be a 401k, an IRA, or even a ROTH IRA.
- Take whatever you have left over, after you have taken money out for saving, and spend 5% less than the rest of what you receive.
- Put the "other" 5% away into an emergency fund. The sooner you do this the better off you will be.
- If you do not think you can afford this approach, cut back on your spending. Do you really need that new iPhone? Can you live with basic cable and not all of the sports packages? The point is, you can trim expenses and live within your means.
- In the early stages of investing with small amounts, stick with mutual funds. Depending upon your age, growth funds are good for the 20-40 age group. Growth and income funds are suitable for the 40-60 age group, and when one has a "number" they feel good enough about, I would move into the high dividend paying, mega cap, blue chip monster stocks, which have wonderful balance sheets that are less prone to risk than the "growth" stocks.
Every individual is different. It depends on your expenses, not your income. If you know how to spend less than what you bring in, you will always be comfortable. It does not take a rocket scientist or a brain surgeon to figure this out, although one must wonder what our government leaders might be thinking.
Then again, I suppose if each of us had a legal printing press to print whatever money we need, well then just ignore all of the above and get those presses rolling! In the real world, the dividend growth stock investing strategy appears to be the best that I have been able to figure out. Then again, what the heck do I know anyway?
Why Dividend Growth Investing?
There are many roads for investors to take. Some consist of higher risk value stocks that offer compelling capital appreciation potential. Some are flat out high risk stocks with uncharted roads, but with high hopes for success. Some investments are more like stuffing your mattress, but uber safe, with little risk of loss (except for inflation).
I would say that there is just about any form of investing for any investor. So why would we choose the dividend growth investing path?
To keep the answer simple enough for even me to understand, let me outline:
- Investing in blue chip, large cap stocks, we can cut down on the investment risk.
- When these companies pay a dividend back to shareholders, they create shareholder value just by paying the dividends alone.
- If the companies we invest in have a stellar record of paying dividends continuously, we can rely on receiving a steady stream of income when we need it.
- Prior to needing the income, we can reinvest the dividends so that we can wind up owning even more shares, which will give us even more income.
- By investing in these large cap, blue chip, dividend paying stocks, we have much better liquidity that if we invest in the little penny stocks that offer the moon but deliver only hot air, and could be impossible to sell if we need the cash.
- If the companies we choose have a winning track record of dividend growth, then we will see regular increases in the dividend amounts. Some companies have histories of over 50 consecutive years of increasing dividend rates. I like knowing I can expect a raise every year.
- By investing in dividend growth stocks, we can safely assume that we will at the very least, keep pace with inflation.
- Finally, never count these enormous companies out as far as capital appreciation is concerned. As we can see in our "Team Alpha" portfolio, we can have our cake, and eat it too.
To me, the reasons noted above are compelling enough for anyone to consider this road we travel. I truly believe that just about anyone can benefit.
Let's succeed together!
Disclosure: I am long XOM, JNJ, T, GE, NLY, AGNC, O, INTC, CSCO, BMY, MMM, SO, KO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.