BC: RIPS OR FUN WITH DIVIDEND GROWTH EQUITIES
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Why do seemingly all retirement experts gravitate to the capital withdrawal method of funding retirement? It’s the same approach implied in the ING “What’s Your Number” advertisements, where people carry around numbers like $1,888,456 to signify how much they need to accumulate before they start depleting their resources in retirement.
Let’s say that Wall Street’s financial wizards invented an entirely new product for retirees, called RIPS (for Rising Income Protection Security), with these characteristics:
Negligible fees.
Provides income at a reasonable rate, say 4% the first year.
The income is taxed at a favorable rate.
The income grows every year, faster than inflation in most years.
Principal can be retrieved at any time without penalty.
Over long time periods, principal grows or contracts approximately in line with the stock market, although usually with less volatility.
No matter what the principal does, the income stream grows every year, usually faster than inflation.
When you die, the entire product can be bequeathed to your heirs, and for taxation purposes, its cost basis resets to its current value.
Do you think that retirees might be interested in RIPS? I think interest would be huge. Why doesn’t Wall Street tout such a product? Perhaps because there is no money in it for them. Negligible fees, no loads, infrequent tiny commissions.
But the product already exists without fanfare or a cool name. It’s called a dividend-growth stock. A portfolio of well-chosen dividend-growth stocks has all of the characteristics listed. Specifically to the point of planning for retirement, the question I have is, Why don’t retirement experts even mention that such an alternative exists? Every dollar you receive from a growing dividend stream is one less dollar that you will have to withdraw from your nest egg in retirement. It is quite possible that, when combined with a pension, Social Security, and other sources of income, the dividends from a dividend-growth portfolio may mean that you never need to withdraw a penny of your assets to live on in retirement. Or that your withdrawal rate can be cut down to 2% or 1%, much safer than 4% or 4.75%. Your withdrawals may decline over time as the dividend stream outpaces inflation.
Let’s go over some of the key distinctions of RIPS, aka dividend-growth stocks, compared to other retirement investments.
Unlike non-dividend stocks, dividend-growth stocks provide a stream of income that grows every year. Prior to retirement, those dividends can be reinvested to grow the portfolio—and the income stream—even faster than the rate of dividend growth itself. After retirement, the dividend reinvestment can stop and the dividends taken as income. The income stream will still increase every year as the dividend payouts are increased by the companies.
Unlike bonds, the income stream from dividend-growth stocks is not fixed. It grows every year, usually faster than inflation.
Well, TIPs and I-bonds sort of do that too, but their income rarely exceeds inflation (they are indexed to a measure of inflation). RIPS income growth usually exceeds inflation.
Unlike bonds, the principal value of dividend-growth stocks can rise over long time-frames to a higher value than that originally invested. It is also subject to market risk and can decline.
But whatever happens to the principal value, it does not impact the income stream.
Unlike annuities, the income stream is not fixed.
When you die, there is something to leave to your heirs. With annuities, your principal is kept by the insurance company. |
