Retirement Question

[FrugalTexan75]

I am curious .. I have read about people getting their investment income to levels to cover their monthly bills, etc. What investments do that? Would that be dividends they are talking about? What funds pay dividends?

I have money in several different IRAs, a 401k, and in one particular stock. But on all of those whatever dividends there are, they get reinvested each month. (The stock isn't paying dividends yet, and I don't think the dividends on the 401k and IRAs is touchable.)

So .. I'd like to figure out how to put money into something that I can eventually take the dividends/interest from monthly. (Before I'm 59 1/2!)

I don't currently have much of anything to put into something like I'm talking about, but well, I like to think and plan ahead.

[thesimplemoneyblog]

There are lots of different ways to do this. However, since your money is mostly in an IRA and 401(k), you aren't really able to take it out prior to 59 1/2 without paying taxes and penalties (sure, there are a few ways to avoid the penalty though).

With the dividends being reinvested, typically with an IRA, you can call the custodian (bank or institution where the account is held) and ask them to NOT reinvest dividends and instead have them pay to cash. You typically cannot do this with a 401(k) though. This isn't likely to help you at this time though since you are under 59 1/2 for those accounts.

Some ways you can get dividends are from dividend paying stocks (or equity income focused mutual funds). There is a lot more to picking the right stock or mutual fund than just picking the one with the highest or close to highest dividend. You have to carefully consider the prospects of the company today, their future growth, and ultimately their ability to both pay and grow their dividend over time. Dividends are not certain, and a company can decide to cut or eliminate their dividend if they are going through difficult times. Also, certain sectors of the economy have a tendency to pay dividends (financials and utilities) whereas other sectors have a tendency to not pay any dividends (technology). As such, it is important when looking at your total financial picture to not focus too much of your investments in one particular area. You can buy these types of investments through a brokerage/investment account (OptionsHouse, Schwab, Fidelity, Vanguard, Scottrade, eTrade, etc.). You can either work with a representative there, seek a financial advisor to help you, or you can manage the account yourself depending on your time to dedicate to investing research as well as the assets you have available. Other than dividend paying stocks, people also search for bonds issued by companies to generate some income.

Other ways to generate income are through CDs, money market accounts, and savings accounts at banks and institutions. Since interest rates are so low right now, it will take quite a substantial amount of assets to generate any type of reasonable income or interest. A study I read about six months ago said that with interest rates so low, a person has to have 10 times the capital/assets that they did ten years ago to generate the same amount of income.

[Petunia 100]

Laura,

REITs pay a lot of dividends. (Real Estate Investment Trusts, owned by shareholders so trade like any other stock). Also, large value stocks tend to be good dividend payers. It is safer to buy them with via a mutual fund or ETF, so you don't have too much money wrapped up in any one stock.

Are you familiar with MorningStar? They have screening tools which help you search by certain criteria, such as dividend rates.

There are a lot of blogs dedicated to income investing. I suggest you start reading some to get a feel for this type of investing. One I like to read is "death to the full-time job". The author used to blog on "death to the mortgage", but his mortgage is now paid in full so he has moved on to building his dividend portfolio.

Morningstar Stock, Mutual Fund, Bond, ETF Investment Research

http://deathtothefulltimejob.blogspot.com/

[disneysteve]

As stated, stocks, bonds, mutual funds, CDs, REITs and other things can all generate income. Not only do mutual funds sometimes pay dividends, they may also pay capital gains.

[humandraydel]

What funds pay dividends?

Well, there is really nothing special about what you are talking about. There are all kinds of funds of various asset classes that pay dividends in varying amounts. Everything from Treasury bonds to REITs to MLPs to dividend stock funds. For example, here are the yields for several Vanguard funds:

Total Stock Market Index - 2.08%
Utilities Stock Index - 3.87%
High Dividend Yield Stock Index - 3.29%

Short Term Corporate Bond - 1.23%
Long Term Corporate Bonds - 4.23%
Total Bond Market - 1.59%


Of course, you can't judge an investment off of JUST the yield - obviously the risks are significantly different between all those investments. The bottom line is you need a balanced portfolio, and investing solely based on dividends is not necessarily the best approach.

[FrugalTexan75]

Thank you everyone!

I've been reading Mr. Money Mustache's blog, as well as Jcollings (something or other...) and I have seen both of them mention Reits and Vanguard. I just wasn't really sure where to start in getting actual investment income for myself. I've seen on my IRA and 401k statements where it talks about dividends being reinvested .. I don't plan on touching that money til I have to (IRA/401k).

I will take a look at Morningstar - I have heard of it, but never really played around with it. It will be awhile before I have much money to put into anything again (have to pay my car off first!) I would really like to retire in the next 13 - 14 years (which would make me approximately 50), so I need to figure out how to balance what I'm putting in my IRA vs. accounts with investment income pre-60 years old. (I have no access to putting money in my 401k anymore. Just IRA's.)

[kv968]

I will take a look at Morningstar - I have heard of it, but never really played around with it. It will be awhile before I have much money to put into anything again (have to pay my car off first!) I would really like to retire in the next 13 - 14 years (which would make me approximately 50), so I need to figure out how to balance what I'm putting in my IRA vs. accounts with investment income pre-60 years old. (I have no access to putting money in my 401k anymore. Just IRA's.)

You shouldn't really be worrying now about what will generate income when you retire. You're still in the accumulating/growth stage where you want to grow your money so there will be a decent amount when you retire to provide that income. The best chance at achieving that is by properly allocating your portfolio and saving.

I'm not saying that dividend paying funds and/or bond funds shouldn't be a part of that portfolio but worrying about getting everything into them at this point isn't necessary.

May I ask, what are you currently invested in with your IRA's and 401k?

[MakeAStash]

During your dividend search you will find various investments pay various rates of dividends. Keep in mind there is a reason some rates are higher than others. Sometimes the reason is the type of business, and sometimes it's due to the level of risk of that investment. A 10% dividend may look great at first glance, but might be that high only because investors are expecting the company to cut the dividend payout. Yes, that can happen.

[FrugalTexan75]

You shouldn't really be worrying now about what will generate income when you retire. You're still in the accumulating/growth stage where you want to grow your money so there will be a decent amount when you retire to provide that income. The best chance at achieving that is by properly allocating your portfolio and saving.

I'm not saying that dividend paying funds and/or bond funds shouldn't be a part of that portfolio but worrying about getting everything into them at this point isn't necessary.

May I ask, what are you currently invested in with your IRA's and 401k?

Umm... My 401k is with AIG and it is in a bunch of different things - not really sure. I think it is fairly conservative. It was at its highest level in 2007, then PLUNGED nearly 40%, but is now almost back to where it was. The last time i contribuited to it was in 2005. I have a Roth with Scottrade invested in a stock. I have a traditional Ira with Trowe invested in a stock, and a ROTH with them invested in a retire 2035? Plan. Oh, I also have a traditional Ira with BOFA in a CD which I need to move in April somewhere else. (That was done before I really knew much about IRAs - I just knew I should have one. I keep meaning to move it every two years, but get busy and forget.) I also have two taxable accounts invested in a stock. Probably 40% of my net worth is in one stock and the rest in a variety of things. (Part of the stock investment was inherited, otherwise the % would be much lower.)

I don't want to see the income for 12 - 13 years from whatever I do. But I do want to put it in places where I can use the generated income when I'm 50 or so. I currently live on approximately $11k/yr but have rent and utilities included as part of my salary. Other than this last month where I replaced my 16 yr old car, I save around 50% of my net income (ROTH, car repair, EF, etc.) I'm working on lowering my grocery and cell phone expenses to increase my savings amount. I figure I'll need around 20k/yr to live comfortably and do some travel and volunteer work once I retire.

[snafu]

One idea would be to open a discount account for a REIT or Dividend ETF or Mutual Fund to DCA [Dollar Cost Average] a set amount like $100. per month until you leave employment. Over 156 months that has potential to total $25,000. to help fund the transition to 40K withdraws.

[FrugalTexan75]

Thanks Snafu.

I'd like to make sure I hit the $3k mark each year in my ROTH because that gives me the full tax savers credit. So that leaves me with about $300 mo to spread out between EF, Car Repair/Replacement, Vacation and FIRE (Financially Independent Retire Early) savings. Once my car is paid off, I'll have another $200/mo (car payment is $154/mo 36 months 1.99%) +~$20/mo reduced insurance premiums to put towards it. If I'm figuring right, I should get around $2k back this year from my taxes (tax savers credit, put money into traditional IRA, education credit, general refund.) Part of that will go towards completing the $3k in my ROTH for 2012, and the remainder I could split in half - 50% towards car repayment, and 50% towards FIRE. On my 3 paycheck months I could put 50/50 to car loan/FIRE.

If I could even find $50/mo to put in (if they'd take that low amount) I could at least get started ... I just need to take a look at Morningstar and figure out how to find those discount REITs, etc.