Managing Retirement Income in Today’s Low Rate Environment


Investment advice has always been pretty crusty, and this definitely is the case with what we do after retirement. There’s too much on the line to be stuck in the past.

We’ve also come a long way with our understanding of markets and investing, at least on the leading edge, although we still are very much stuck in the past overall. Having the much more powerful tools of today are only useful if we use them the right way, and we’ve never really been very good at this and still aren’t.

The human mind and the quality of our thinking and analysis is always the determining factor in how well we position ourselves for success, and is what allows us to cut through all the noise that is generated in the investment world and ensure that we are focused on the right things.

When it comes to how we approach managing our retirement money in retirement, the crustiness of our approach really becomes exposed, as long as you aren’t so entrenched in the status quo that you don’t even notice. Few people notice in this world where culture reigns supreme and very little is questioned.

The gap between what we think about and what we should be thinking about is pretty wide, and this becomes well evident when we look at how people are being advised, which exposes some very faulty thinking.

Whether or not the advice that we are given is even coherent doesn’t dissuade people from providing the advice, or their followers from taking it. There is simply too much on the line for us to simply take whatever is served to us and consume it without any real thought.

This problem is so entrenched that even views that should by all accounts be deemed ridiculous can somehow be seen as worth considering and people will line up to follow this advice, much like one blind person leading another where the person being led is also blind to the leader being blind as well.

We are ultimately responsible for our own fates, and while there may be people out there who will take us by the hand down the wrong path, we’re the ones that grabbed their hand and if the past is questionable, we are the ones that need to be asking the questions.

Back when we were children, we asked all sorts of questions. As we age, some of these questions do get answered, but the biggest reason why we stop asking isn’t that, it is because our curiosity has been conditioned out of us. This is especially evident with seniors who are furthest away from childhood curiosity.

The fundamental tool for questioning whether our investment approaches make sense or not, or how far they may be off the mark, doesn’t even require much knowledge at all about investing but does require a desire to understand. The lack of this desire is what most defines our approach to this, which applies to both clients and advisors, and if no one is motivated to think about things, we are doomed to repeat the same mistakes over and over.

When it comes to how we mess up the management of our money in retirement, the crux of this confusion lies in this narrow definition of income that we insist on. This ultimately rests with investors themselves, as if they were more aware, they wouldn’t be subject to being influenced by advice that commits the same mistakes.

The Value of Stocks Go Up and Down, Whether We Like It Or Not

The best way to get a feel for the extent of this is to examine the recommendations of these advisors. Charles Lieberman, chief investment officer at Advisors Capital Management, has recently spoken on this topic and serves as a good representative of the thinking that is out there in the industry.

Lieberman begins his remarks by telling us that he “dislikes” the total return approach to investing in stocks. On the face of this, this might sound like he doesn’t like stocks, but that’s not it. He actually likes stocks and advises that we have 80% of our portfolio in them.

How do you own stocks and dislike paying attention to total returns? This is like saying that you like to drive but don’t like looking at the road in front of you. This would be much more amusing if not for the fact that this view is a pretty popular one and a lot of people have tied themselves up over this and suffer the consequences.

Whenever we buy a stock, we pay a certain amount for it and depend on earning a return on this investment, which results by way of a combination of the price of the stock going up and being worth more, in addition to any dividend payments that we earn along the way, which is completely true whether we like it or not.

All things being equal, we should prefer to seek to maximize our profit, although this always needs to be tempered by keeping the risks that we take acceptable. In all cases though, the returns that we get from stocks, the total return that is, is what matters, and if we focus instead on a certain portion of this, dividend income that is, and choose to ignore the much greater portion of the return, as well as all of the risk present as this is the part that goes up and down, that should strike us as unbelievable.

As ignorant as this may be, a lot of people take this approach, and will choose their investments based upon what they call this income component with little or no regard to how it may stack up overall. This will not lead to the maximation of total return or even the pursuit of it, because it is not even being pursued.

If you hold stocks that are subject to deviations in value that end up representing the lion’s share of potential returns and the entire amount of potential losses, and you choose to ignore all this, you are giving up both managing return and risk. It doesn’t matter whether you like the fact that the great majority of returns are gained by way of capital gains, if you play this game, that’s what happens.

Although we may be ignoring the potential for overall gain, stocks that pay higher dividends tend to perform poorly. We’ve not only ignored what is surely the goal of investing, to make money, we’ve actually figured out a way to make a lot less, and do this with a dumb smile.

The biggest problem with this isn’t even so much with our choosing not to manage the total return that we are seeking whether we like it or not, it is the fact that we are also ignoring risk. Investors in retirement are the last people that want to be ignoring risk, and prefer a more conservative approach generally, but are duped into completely exposing themselves to risk by trying to pretend that it isn’t there.

Given that successful stock investing requires the right balance between return and risk, if you ignore both, by not liking to pay attention to return rather than pursuing it, and not liking to pay attention to risk either, it’s even hard to imagine a worse approach.

Lieberman defends his approach by using what amounts to a straw man argument, although you do need to know what straw looks like to be able to tell. A lot of people don’t though and may find this idea to be reasonable.

This one is made purely of straw, which should be obvious if we just take a step back. According to Lieberman, what is to be avoided is the situation where investors have to cash out while the market is in decline, which serves to reduce the asset base and makes it more difficult to maintain returns.

He sees this as spending down our principal, a notion that a lot of older investors would wince at, as this sounds like we will be running out of money faster by doing this. What we want to do instead, according to this view, is to build up an asset base significant enough to be able to live off of the dividends and not worry about the price of the stocks.

This is an idea that many find very appealing indeed, as who would not want to be set for life with this versus spending our savings away. This may be a straw man, but it is at least a well- dressed one, where we have put a tuxedo on him to try to hide the straw.

The first thing that should strike us about this is how few people are even in this conversation, as this takes a pretty big sum of money to pull off to even create a façade of security. It takes a portfolio worth seven figures to live on something like a 3% return, but ironically, this turns out to be a very effective way to spend down your principal, in fact it guarantees that you will.

What the dividends serve to do is allow you to basically keep up with inflation, and perhaps ironically, the low inflation that we have now is what we want with this approach, otherwise we’re subject to seeing the real value of our savings decline even more.

Why Keep Up with Inflation When You Can Do So Much Better?

Lieberman’s goal is to use dividends to keep up with inflation, and we therefore know for sure that we’ll be spending our money away more and more each year even though the nominal value of our portfolio may at least be sought to be maintained. He’s managed to do this over the last 10 years, but bull markets can make just about any hare-brained idea show a positive return.

This is nothing to be proud about given that the stock market has done much better, and if you are patting yourself on the back for achieving a fifth of the return that the market has delivered, this in itself says a lot.

The straw man here is the notion that there is only one thing to do if our stocks are going down a lot in value, which is to hang on to them and accelerate the decline in our asset base by adding our spending to it.

Given that these investors really don’t like to see their “principal” decline like this, we would think that they would be paying attention to this and do something to help themselves. Beyond just following their simple and ill-thought out rules though, we’re not permitted to help ourselves though. Selling on the way down is actually wise, and the way this falls short is seeing us only sell a little rather than a lot more or perhaps all of it, to defend ourselves. You’re not allowed to though.

If we are worried about the value of our asset base, not wanting to sell any of it while we just watch it deteriorate by way of negative market conditions does not do anything to try to preserve it.

This is in response to the idea that we can use the strategy of cashing in our stocks as we progress in retirement, as opposed to just focusing on the so-called income that these stocks deliver by way of dividends. Most stocks pay dividends, but we’re supposed to own the ones that pay higher ones so that the need to cash out is reduced.

Stocks, by their very nature, do not involve considerations of principal because they just aren’t that sort of investments, and this is something that is only involved when you make a loan. The amount loaned is the principal and your return is represented by interest.

If you own a stock that goes up by 10% each year on average in good conditions and you take out this amount, if there is such a thing as principal with equities, it is not going down, you’re taking out the interest essentially.

If conditions are not ripe for this, sticking around and taking a beating is not the only alternative here, and whether or not we care, our so-called dividend stocks are going to be subject to the same devaluation.

Where this all hits the wall is when we compare the differences in total return with these higher dividend stocks, and it really is all about total return, the net changing value of our assets over time after we’ve taken our share each year. In seeking a higher dividend income, we should never be willing to ignore how this may affect the bigger picture, our overall asset valuation.

What would a more sensible approach look like? The first and most important thing is to realize that we need to invest with a positive expectation, and if this expectation turns negative, we ignore this at our peril. In spite of what many may believe, we do have a choice here as far as what our market exposure is at any given time, and just aren’t just relegated to remaining standing out in the field no matter what the weather.

If we’re worried about spending while we watch Rome burn, we need to ask ourselves why we would want to even be in this city when such things happen. Moreover, and even more importantly, if we have doubled or tripled the return of the income folks over time, our asset base ends up a lot larger, we’ve earned a lot more income and there is a lot more to spend, which is what we want.

We also want to be honest in our appraisal of the potential value of our investments, and not just grab the tail and pretend we’re holding the whole dog. Viewing dividends as the primary feature and even the sole feature of a common stock is quite ridiculous.

We do need to be aware of the sustainability of our spending, but the way to best sustain it is to focus well on improving our risk to return ratio, not by trying to ignore both. Stocks aren’t bonds and should never be treated as if they are, although bonds aren’t pure income investments either, which are limited to the savings class of assets, like a CD or annuity.

It is only when we focus on putting up bigger numbers overall in a manner that does not involve unacceptable risk that we can say that we’re even focused on the right thing. While we may need to be more careful in managing risk in our retirement years, choosing to look the other way entirely is the worst thing we could be doing.

We should never call investing in common stocks income investing, at least if we define income as dividends, because this is not income investing or anything close. The truth stands whether we like it or not.



Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

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