Retirement: Will My Money Last?
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Retirees are acutely aware that their investment capital must provide income now and into the future.
Retirement: Will My Money Last?

Dividends: An Old Idea for a New Reality

Retirement: Will My Money Last as Long as I Do?

As more baby boomers ease into retirement, the notion of distribution, of spending from assets, has been the subject of the day—especially since they are being greeted with one of the toughest economic environments of their lifetimes.

The key question on everyone's mind is: Will my money last as long as I do? Retirees have become more painfully aware that their investment capital must provide life support for now and into old age.

Many financial professionals suggest a withdrawal rate of 4 to 5% per year, plus increases to adjust for inflation. Gains from stock are often presumed to be some regular percentage, such as the historic 10% per year. But history tells us that those gains don't necessarily arrive on a convenient schedule. This charts shows the annual returns for the S&P 500 during those 50 years. As you can see, there were years when returns were negative. What does that mean for a retiree? In those years, they must sell principal shares at depressed prices to meet their spending needs.

There is a qualitative difference between total return and return made up of dividend income, plus appreciation. The difference is that the dividend income is always positive and readily available to meet a retiree's income needs, whether the market is up or down.

Let's look at a hypothetical illustration comparing a total return approach to a dividend income approach for generating 5% annual income.

One million dollars was invested on January 1, 2000, and 5% was withdrawn from both portfolios at the end of each year. In one case, the portfolio was invested in high yielding stocks and in the other case in the S&P 500. Dividends and excess of withdrawals were reinvested. Notice that the ending market value of the high-yield stock portfolio that used a dividend income approach is 60% greater than the ending market value of the S&P 500 portfolio that used a total-return model. Why? Because the dividend portfolio generated enough cash flow to meet the annual spending requirement eliminating the need to sell principal shares in any given year.

Here we show a total amount of distributions an investor would have received over the 10 years ending December 2009, if they invested in the dividend portfolio versus investing in the S&P 500 portfolio. Both withdrew 5% at the end of each year. The dividend portfolio would have produced over $510,000 of cash flow compared to about $352,600 for the S&P 500. What this implies is that a retiree invested in the S&P 500 would have had to make standard of living adjustments or meet their annual spending requirement from other sources.

Now let's look at positive versus negative compounding. This graph shows that by reinvesting the excess dividend income above the 5% needed each year by the end of 2009 the dividend portfolio would have contributed almost $133,000 toward positive compounding, compared to the more than $232,000 in principal shares an investor in the S&P 500 would have had to sell to meet in order to meet their annual 5% income need.

So the question on retiree's mind: Will my money last as long as I do? Our solution: After nearly two decades of managing dividend focused portfolios for a full range of clients, we firmly believe that a portfolio targeting financially strong dividend paying stocks is the key to building long- term sustainable wealth and is essential to maintaining wealth for investors who spend income.

All investments carry a certain degree of risk, including the possible loss of principal. Dividend yield is one component of performance and should not be the only consideration for investment.

The companies shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell their securities.

Investments are not FDIC insured, may loss value, and are not bank guaranteed.

© 2018 Miller/Howard Investments.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.