First, a quick primer on the business life cycle
In order to understand income investing, we must have a working understanding of the business life cycle.
Investing in Coca Cola is very different than investing in Uber. They are in different stages, and while both are investments, the outcome and goals of the proper investor is very, very different.
When two companies love each other very much...
A new company is made! This company spends its first years in a delicate limbo. It is burning through cash, fighting for market share and revenue, and finding its footing in establishing operating procedures.
In short, it's trying to survive.
This is the "startup" phase of the business cycle. These businesses are typically not available for public investment but are often available to private equity firms (i.e. private investment).
Once the company gets stable and can operate efficiently, it enters the "growth" stage. Think of this as the early 20s. Lots of drinking and accumulation of life lessons.
During the growth stage, the company is aggressively trying to capture market share, win new customers, break into new verticals, etc. It is NOT interested in paying out dividends to shareholders, as it is busy using that cash to fund new investments and capture new market share.
After the growth stage comes the maturity stage. It's when the company settles down and has a few kids. Since it has captured most of the available market share, it's generating more cash than it knows what to do with (no more good investments for the business), so it pays out that cash to its shareholders in the form of dividends.
At some point, the product or brand loses relevance and must either reinvent itself or face a slow death. Sort of a late-stage mid-life crisis to stick with our people example. This stage is marked by declining revenues and lack of innovation.
Retirees need income, not growth
There's an old model in the financial advisor world in which retirees are split between stocks and bonds to continue getting the growth from the stock market and the income from the bonds.
The model assumes drawing down the principle over the remaining life of the client.
Why would you do that???
With some retirees, this might make sense. But for most, creating a livable income stream makes way, way more sense, since you get to KEEP the principle and pass it (and the income stream that goes along with it) along to your heirs.
A better way:
Note the Changes:
Growth happens between the ages of 25-65, a much longer period of risk. We advise using a risk-averse method that still has high growth potential. We use an in-house proprietary system to achieve this for clients.
At 65 (or earlier), your retirement investments begin paying a constant stream of income on which to live. Depending on how well your investments performed, this can be quite high and allow for a very comfortable retirement.
Not drawing down your principle allows you to leave your nest egg behind fully intact to the next generation. If they continue this method, you will create generational/legacy wealth for your heirs.
In short, if you are entering retirement, you need money coming in every month that is reliable. You need to be able to wake up on payday, get paid an amount that you know ahead of time, and NOT ever deplete your funds.
This also circumvents the problem of outliving your money, since your money is never actually declining.
If you're concerned you might outlive your money, or want to lock down an income stream WITHOUT drawing down your principle, give us a call. We can help.