Retirement Date Vs. Financial Independence - What's Your Strategy?

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Includes: AVNS, D, DLR, DUK, FCPT, GE, HCP, JNJ, MMM, O, OHI, PEP, SO, TLN, VZ, XOM
by: Dividend Nut

Summary

Are you working toward a retirement date?

What are your financial goals?

A plan is needed to help you get there.

When I was younger, I had a retirement age in mind and a financial plan all figured out. My plan was to "make a lot of money and retire at 55". Ah, youthful ignorance...

Retirement and financial independence are two different things and should be treated differently. Many people have a retirement date in mind, but do not know if they can get there financially. A friend wants to retire at 66, as that is when he and his wife plan to start collecting Social Security. When discussing finances in retirement, he was not sure how to manage the additional 401(k) income needed. Asked whether they had enough for 30+ years of retirement, he did not have a firm plan to be financially independent once they stopped working.

I have always been a saver, and fortunately my wife is the same way. Our plan was to live below our means, pay off the house in 20 years, and set up automatic savings plans for retirement (401(k)), IRAs, college, and vacations. I have always tracked our portfolio growth, but did not have a "number" in mind, so I did not know how we were doing toward a realistic goal. As I approached my 50s, I added a "total value number" and then an "income number" about four years before our retirement in 2015 at the ages of 58 and 60.

When I was 54, I started developing a retirement strategy after reading the literature and talking to people. I discovered that many other people had a retirement date in mind, but did not really know if they could afford to retire.

Some things I heard early on about retirement finances, I was not comfortable building a cash-generating plan around:

  1. Twenty-five times your working income is needed in retirement.
  2. You need eight times your final gross combined salaries.
  3. You should use Monte Carlo analysis to determine if you have enough money.
  4. Withdraw 4% of your nest egg each year for a 95% chance of having enough money until you die.

In 2010, I discovered Seeking Alpha and started reading two to three hours every night. My thoughts quickly changed from a retirement date to a financial strategy once I realized I was actually after financial independence. I knew that once I figured out when we would be financially independent, setting a retirement date would be easy.

As an engineer, I was looking for a simple financial equation that would work for our retirement life. I found one and built a strategy around it.

Investment Cash Flow + Social Security + (Cash Reserve) > Retirement Expenses

I know this may be obvious to some, but for me, it took a while to get off the ING tag line of "what's your number" and get on the "investment cash flow" track.

For investment cash flow, I follow the teachings of Eddie Herring, Martin Rice, Bob Wells, David Fish, Chowder and David Van Knapp and have developed a written investment plan. This plan shows how to turn our retirement investments into a lifelong income stream with increasing payments by using dividends from dividend-paying stocks for our living expenses.

We have qualified dividend income from our brokerage account, taxable income from my IRA, and a small pension from my wife's job. This is transferred monthly to our checking account to meet expenses. We maintain a small cash buffer in each brokerage account to handle any variation of dividend payment dates.

Side Note

As it turned out, dividend stock investing is the strategy my father and mother successfully used for their retirement for over 30 years. I did not understand what he was doing until he started to lose his memory at age 85 and he asked me to help with their investments and taxes. Their success has given me the confidence that income from dividend-paying stocks can work over an extended period of time.

I realize that there are other income-generating strategies like harvesting shares, annuities, bond ladders, and letting an advisor handle your finances, but for me, a self-directed dividend income strategy works best (It did take me two years to work up the courage and confidence to fire our financial advisor, transfer funds and go out on our own, but that is a topic for another day...)

Prior to 2010, our investing strategy was a collection of mutual funds in our taxable account and a 2015 Target Date Fund in my 401(k). I noticed that two of the funds had four of the same stocks in the top 10 holdings. When we went out on our own, we started with these, including Johnson & Johnson (NYSE:JNJ), Exxon Mobil (NYSE:XOM), PepsiCo (NYSE:PEP) and Verizon (NYSE:VZ).

Below is our Portfolio of 75 stocks purchased since 2010, sorted by percent of portfolio from highest to lowest.

As we continued to build the portfolio, we purchased more traditional dividend-paying stocks like Southern Company (NYSE:SO), 3M (NYSE:MMM), Dominion (NYSE:D), Duke (NYSE:DUK), General Electric (NYSE:GE), Kraft, Heinz (now (NASDAQ:KHC)), Chevron (NYSE:CVX), AT&T (NYSE:T), and ConocoPhillips (NYSE:COP). We have some small positions like Four Corners Property Trust (NYSE:FCPT), Talen Energy (NYSE:TLN), and Halyard Health (HYH) from spin-offs and are under review for continued holding.

After reading Seeking Alpha for a while, I gained more confidence and branched out to REITs like Realty Income (NYSE:O), Digital Realty (NYSE:DLR), Omega Healthcare Investors (NYSE:OHI), and HCP (NYSE:HCP), and a few others.

Currently, the top 45 positions in our portfolio account for 86% of the income being generated; the remaining 30 positions generate only 14% of the income. Looks like I need to do some pruning, as 50 stocks was my original goal.

Retirement Portfolio

Symbol

Dividend Yield

% of portfolio

% of Income

CCC years

Credit rating

 

JNJ

2.92

3.98

2.63

53

AAA

1

XOM

3.64

3.98

3.28

33

AAA

2

T

5.62

3.37

4.29

31

BBB

3

VZ

5.02

3.37

3.83

10

BBB

4

PPL

4.45

3.12

3.14

14

A-

5

SO

4.83

3.10

3.39

15

A-

6

VTR

5.47

3.02

3.74

5

BBB+

7

DLR

4.07

2.90

3.09

11

BBB

8

O

4.60

2.75

2.87

22

BBB+

9

WEC

3.67

2.71

2.25

12

A-

10

PEP

2.79

2.65

1.68

43

A

11

GE

3.01

2.55

1.74

5

AA+

12

MAIN

6.87

2.52

3.92

5

BBB

13

WPC

6.18

2.34

3.27

18

BBB

14

HCP

6.39

2.19

3.17

30

BBB+

15

CVX

4.76

2.17

2.34

27

AA

16

OHI

6.59

2.13

3.17

13

BBB-

17

PG

3.49

2.12

1.68

59

AA-

18

KMB

2.89

2.09

1.37

43

A

19

RDS.B

7.64

2.06

3.57

3

AA-

20

EMR

3.80

1.77

1.52

58

A

21

LEG

2.77

1.63

1.02

42

BBB+

22

ORI

3.91

1.59

1.41

34

BBB+

23

TMP

2.92

1.50

0.99

18

N/A

24

SCG

3.66

1.45

1.2

15

BBB+

25

Symbol

Dividend Yield

% of Portfolio

% of Income

CCC Years

Credit Rating

 

KO

3.07

1.44

1.00

52

AA

26

RCI

3.78

1.39

1.19

10

BBB+

27

SYY

3.00

1.35

0.92

38

A-

28

GILD

1.62

1.34

0.49

1

A-

29

XEL

3.60

1.33

1.08

11

A-

30

NNN

4.55

1.29

1.33

18

BBB+

31

UTG

6.74

1.24

1.90

3

N/A

32

HP

4.95

1.23

1.38

42

BBB+

33

DUK

4.85

1.18

1.30

11

A-

34

DRI

3.90

1.18

1.05

1

BBB-

35

CPB

2.51

1.08

0.67

1

BBB+

36

CB

1.74

1.17

0.46

33

A

37

CNK

2.86

1.06

0.69

1

BB

38

MMM

2.58

1.05

0.61

58

AA-

39

TGT

3.10

1.01

0.71

48

A

40

KMI

8.62

1.00

1.95

3

BBB-

41

SXL

6.48

0.94

1.38

12

BBB

42

SNY

3.67

0.91

0.75

3

AA

43

USB

2.33

0.87

0.46

4

A+

44

BCE

4.55

0.87

0.89

6

BBB+

45

SJR

4.39

0.86

0.86

12

BBB-

46

COP

5.56

0.84

1.05

15

A

47

CHRW

2.23

0.83

0.42

17

N/A

48

KHC

3.11

0.80

0.57

1

BBB-

49

D

3.38

0.80

0.69

12

A-

50

Symbol

Dividend Yield

% of Portfolio

% of Income

CCC Years

Credit Rating

 

AAPL

1.74

0.72

0.28

3

AA+

51

PAA

11.64

0.61

1.61

14

BBB+

52

MDT

1.99

0.61

0.27

38

A

53

NIO

6.26

0.60

0.85

1

N/A

54

MRK

3.33

0.58

0.44

3

AA

55

AFL

2.51

0.56

0.32

32

A-

56

WU

3.27

0.56

0.41

1

BBB

57

PFE

3.57

0.54

0.43

5

AA

58

GOF

12.38

0.52

1.46

1

N/A

59

KIM

3.89

0.45

0.40

4

BBB+

60

MSFT

2.66

0.43

0.26

13

AAA

61

ARLP

15.44

0.42

1.46

13

N/A

62

DMO

10.82

0.41

0.99

1

N/A

63

CCP

7.32

0.38

0.63

1

BBB+

64

PSEC

13.55

0.37

1.14

3

BBB-

65

PRU

3.25

0.33

0.24

6

A

66

BRK.B

0.00

0.30

0.00

0

AA

67

CSX

2.48

0.30

0.17

11

BBB+

68

CSCO

3.06

0.28

0.20

5

AA-

69

GOOGL

0.00

0.26

0.00

0

N/A

70

GOOG

0.00

0.25

0.00

0

N/A

71

FCPT

0.00

0.14

0.00

0

N/A

72

TLN

0.00

0.07

0.00

0

N/A

73

DE

3.22

0.05

0.04

11

A

74

HYH

0.00

0.02

0.00

0

BB

75

There are many articles on Seeking Alpha that can help you determine when to start taking Social Security payments. Each person's situation will be different and Social Security income can help to balance out a specific financial equation. We have decided to start taking Social Security when we each reach 62. In an August 26, 2014, article written by Robert Allan Schwartz titled "Why I Will Start Social Security at Age 62," my comment clearly states my reasons and I won't reiterate them here.

When you calculate your retirement expenses, it is important to be honest with your partner about what you want to do in retirement. Per Bob Wells, having a retirement life plan will help with this. In our case, our expenses have actually gone up from our working years, due to increased travel plans.

We keep one year's worth of cash reserve set aside for life emergencies and any large expenses, like prepayment for a trip or a newer car.

Conclusion

Using income from our dividend-paying stocks, we are able to pay our bills and have extra money for some travel. Our current yield is 4.4% with a portfolio beta of <0.7 and a dividend growth rate of >5% for the past three years.

Having an investment income plan is important to understand how you are going to fund your next 30 to 40 years in retirement. In our case, working toward our financial independence helped us define our retirement date, and fortunately for us, we were able to retire on our own terms.

How will you generate income for financial independence? What is your retirement date? It's time to start your plan.

Disclosure: I am/we are long JNJ, XOM, T, VZ, PPL, SO, VTR, DLR, O, WEC, PEP, GE, MAIN, WPC, HCP, CVX, OHI, PG, KMB, RDS.B, EMR, LEG, ORI, TMP, SCG, KO, RCI, SYY, GILD, XEL, NNN, UTG, HP, DUK, DRI, CPB, CB, CNK, MMM, TGT, KMI, SXL, SNY, USB, BCE, SJR, COP, CHRW, KHC, D, AAPL, PAA, MDT, NIO, MRK, AFL, WU, PFE, GOF, KIM, MSFT, ARLP, DMO, CCP, PSEC, PRU, BRK.B, CSX, CSCO, GOOGL, GOOG, FCPT, TLN, DE, HYH.

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.