The Importance of Growing Retirement Income

This past Friday we were informed that the year-over-year rate of inflation as measured by the PCE price index* had risen by 4.9% which is the fastest gain since September 1983.

The comparison brought me back to 1983 with its 11% 10-Year Treasury yield (currently at 1.8%) and an unemployment rate of 8% (currently at 3.9%).  Yes, for those of you under 40 we had double digit unemployment and mortgages back then and the world didn’t come to an end.  Enough waxing nostalgic about the good old days.

The latest inflation news did remind me of the importance of building a retirement plan with “growing” income.  This topic has been all but mummified over the past decade while inflation barely made an appearance above ground.  But with its recent resurrection let’s take a look at the effects of relying too much on fixed income for your retirement cash flow.

Assuming the Federal Reserve will get the current inflation rate back to some level of normalcy, even a 2% inflation rate can have a huge impact on a fixed income retiree.  The chart below illustrates the effect of 2% inflation over time reducing $50,000 of purchasing power down to $30,477 by the 25th year.  This deterioration of the family dollar forces some retirees to dip into principal which can start a dangerous cycle.  Having watched post-depression retirees pile into fixed income securities in the early 80s I know that it will not take 25 years to begin to feel the pinch.  Without a healthy dose of growing income from dividends and other investments, today’s retiree could be sharing their children’s Netflix login credentials sooner than they think.

Chart: All numbers were calculated based on hypothetical rates of inflation of 2%, 3% and 4% (historical average from 1926 to 2021 was 2.91%) to show the effects of inflation over time; actual inflation rates may be more or less and will vary

We have identified inflation as one of the 5 key risks to our clients’ retirement income.  To learn more about these risks, CLICK HERE for our informational brochure.

The S&P 500 dividend growth rate has averaged 9.4% for the past ten years and 5.75% for the last 30 years. The income strategies we build for clients take advantage of this growth which can provide purchasing power for our clients in retirement.  The proper balance of dividend stocks and fixed income can make all the difference for long-term success.

Source: Standard & Poor’s. Not inflation adjusted.

A cornerstone of our wealth planning process is to determine the estimated expenses our clients will expect each year and then synchronize withdrawal strategies to meet the annual distribution needs. Growing income from dividends in our privately constructed accounts can afford clients to have their distribution needs built entirely from monthly income, leaving the principal to grow. By managing the proper mix of securities for dividend growth, our income portfolios can help keep our clients ahead of growing inflation. And by not using the principal for distributions, the market gyrations become less threatening to the clients’ portfolio.

To learn more about how we can target specific yields from dividends and interest for client distribution levels CLICK HERE.

*The PCE price index (Personal Consumption Expenditures), released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States.

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