Wednesday, August 21, 2013

I’ve Done Nothing to Further My Stock-based Retirement

An article on CNBC.com noted that “The average contribution rate in 401(k) plans, which grow tax-free until withdrawal, remained steady during the period, at 10.5 percent, according to Vanguard's 2013 How America Saves report.” 

For the past six years, I’ve put nothing into the IRA that I rolled over from my 401(k) when I left the hotel business.  However, just because I haven’t made monetary contributions to this fund, it doesn’t necessarily mean that I haven’t made a few moves that have allowed our retirement plan to continue to grow.

DRIPs
I like DRIPs -- or dividend reinvestment plans -- because such a plan has allowed me to continue to grow my retirement savings without putting an extra cent of my own money into the equation.  My DRIP is broadly diversified between large cap stocks, bonds, cash, and foreign and domestic holdings.  Its share value moves with the movements of the market and the fund pays regular monthly dividends that equate to about 6 percent of my fund total annually and that are reinvested into the fund as additional shares.  In this way, I continue to grow my retirement account share total without adding any more of my own money.

Diversifying retirement savings
Some people seem to think that the stock market is the only way to go when it comes to retirement, but there are other things that can be done to build a more secure retirement than just sinking money into stocks.  One such move for us has included remaining debt free.  According to creditloan.com, “…the average American’s interest payments on debt at $600,000 over the course of a lifetime.” 

Without dumping this amount of money into paying off debt, we not only don’t have to earn as much income, but hopefully we will be able to put more money toward our retirement savings.  Not only this, but real estate can be another move that can help spread out some of our retirement savings.  After downsizing from our single-family home after the housing market collapse, we were able to convert our equity to help us buy a smaller condo outright.  In this way, we hope to remain mortgage free until retirement, allowing us to pay less on debt and enter retirement without the burden of a mortgage payment.

Developing a retirement plan that works for us
Instead of just thinking about retirement as a stock-based retirement plan paired with a little money from Social Security too, we’re considering a plan that combines several retirement types.  First off, we’d like to draw some of our income from Social Security.  But more than that, we’re hoping to build in some of our income from part-time work, interest from savings, and dividend payouts from our DRIP plan.  In this way, we hope not to have to put so much money into a stock-based plan, preferring to break our retirement income into various streams.  For example, I’d be happy if we derived our retirement income something comparable to the following breakdown:

  • Social Security -- 40%
  • Part-time work -- 15%
  • DRIP payouts -- 30%
  • Interest from savings -- 15%
In this way we’re diversified among our various income streams, and we could rely upon the drawing down upon of these assets should we encounter unexpected expenses of some sort or come up short at times with our interest or DRIP payouts.  At the same time, we avoid putting all our eggs in one basket when it comes to stock-based investments.

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