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Retirement Date Vs Financial Freedom. What's Your Strategy?

  • Are you working towards a Retirement date?
  • What are your Financial goals?
  • A plan is needed to help you get there.

Retirement and Financial Freedom are two different things and should be treated differently. Many people have a retirement date in mind but do not know if they can retire financially. A friend of mine wants to retire at 66, as that is when he and his wife would collect Social Security. When discussing finances in retirement, he was not sure how to manage the added money needed from his 401K. I asked him what do you need and do you have enough for 30+ years in retirement. He had thought about a retirement date but did not have a firm plan to be financially independent after that date.

I will admit that when I was younger I had a retirement age in mind and a financial plan all figured out. It was "make a lot of money and retire at 55". Ah, youthful ignorance…..

I had always been a saver and fortunately my wife is the same way. Our life plan through the first 25 years of marriage was to live below our means, pay off the house in 20 years and set up automatic savings plans for retirement (401K), IRA's, college and vacations. I have always tracked our portfolio growth but did not have a "Number" in mind or an income number early on so I did not really know how we were doing towards our original goal. As I approached my early 50's I added a "Number" and then an "Income Number" was added about 4 years before our retirement. Not to make you wait any longer my wife and I retired in June and March of 2015 at 58 and 60.

As it turned out we had actually reached our financial independence several years before we retired. Go figure…..

When I was 54 in 2009 I started to develop a retirement strategy from reading and talking to people. I discovered that many people like me and my friend had a retirement date in mind but did not really know if they could retire financially.

Some items below are things I heard early on about retirement finances, none of which I felt comfortable building a cash generating plan around.

  1. 25 times your working income is needed in retirement.
  2. 8 times final gross combined salaries
  3. Use Monte Carlo analysis to determine if you have enough money.
  4. Withdraw 4% of nest egg each year for a 95% chance of having enough money when you die.

In 2010 I discovered Seeking Alpha and started reading 2-3 hours every night on my iPad. My thoughts quickly changed from a retirement date to a financial strategy, once I realized I was actually after Financial Independence and Freedom. I knew that once I could figure 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 and built a strategy around it.

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

I know this is simple and 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 "Income Cash Flow" track.

For Investment Cash Flow I follow the teachings of Eddie Herring, Martin Rice, Bob Wells, David Fish, Chowder and David VanKnapp and as such 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 transferred monthly to our checking account to meet expenses. We maintain a small cash buffer in each brokerage account to handle any variation of dividends payment dates.

Side Note: As it turned out this is the strategy my Father and Mother used, for their retirement income for over 30+ years. My Father kept their investments very hidden so I did not really 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.

I realize that there are other income generating strategies like harvesting shares, annuities, bond ladders, letting an advisor handle your finances and others but for me, a self-directed, dividend income strategy works best for us. However, it did take me 2 years to work up the courage and confidence to fire our financial advisor, transfer funds and go out on our own, but that is another article…..

Below is our Portfolio of 75 stocks purchased since 2010. Our investing strategy before then was mutual funds in our taxable account and life funds in my 401K. When we started investing on our own a full position was small and as we were able to add funds from the 401K to IRA transfer, the value of a full position has increased. We have some small positions like FCPT, TLN and HYH from spin offs and are under review for continued holding.

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

For Social Security we have decided to take it when we each reach 62. Each person's situation will be different and the amount of SS can help to balance out your specific Financial Equation. There are many articles on Seeking Alpha that can help you determine when to take it. In an April 26th 2014 article written by Robert Allan Schwartz titled "Why I will start Social Security at age 62", I clearly state my reasons and won't reiterate them here.

When you calculate your Retirement Expenses it is important to be honest with yourself and partner on 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 some 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 3 years.

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

What is your plan to generate income in retirement and when is your Financial Freedom date?

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.