A good marriage is, among other things, a synergistic partnership where the couple divides family duties based on their respective interests and abilities. As a financial advisor to many couples, I have seen time and time again that investing for retirement is a task most often handled by the husband. While there is nothing inherently wrong with this arrangement, I do believe it is vitally important for every woman to understand the fundamentals of personal finance, including how to invest for the future.
Knowledge of investment strategies allows you to truly understand and give input on a process that will have a huge impact on your future – whether or not you are in a relationship. If you are married, a solid grasp of investment principles also ensures your ability to continue to effectively build for the future should you lose your spouse.
Income investing is one strategy that I share with my female friends who want to take control of their retirement planning.
Income investing focuses on generating cash flow from your investments. This may include holdings such as stock dividends, bond interest, or similar types of assets. This income is reinvested to accelerate the growth of your portfolio until you retire when it can be redirected to provide you with a “paycheck” to help meet your spending needs.
Investment income commonly comes from three places: dividends from stocks, interest from various types of bonds, and distributions that come from a variety of investments that do not fall exactly into the stock or bond category. At Capital Investment Advisors, we use “The Bucket System” to explain in easy terms where your liquid investments should go in order to generate the level of income that you need.
When using the Bucket System, your savings are divided between “buckets” or types of investments:
Cash bucket. This is your emergency liquid cash fund – CDs and money market accounts. It is the money that helps you sleep well at night. People often wonder exactly how much money that they need in this emergency fund. The truth is, it will differ from person to person, and family to family. A good rule of thumb is to have at least six months of cash set aside in this bucket.
Income bucket. This bucket includes a variety of bonds including government and municipal bonds, corporate bonds, and high yield or junk bonds. It is ideal to maintain a blend of bond types to maximize return while protecting your principal.
Depending on that blend, the annual yield for this bucket typically ranges from the 1 percent to 6 percent range.
Growth bucket. This one is filled with the US, international and emerging market stocks. Pure “growth” equities pay little or no dividends and are owned primarily for “capital appreciation.” Think of stocks like Google or Amazon – fast-growing companies that chose not to pay out their profits in the form of dividends. Income producing stocks are also expected to have some level of capital appreciation but have significant cash flow to go along with it – typically in the range of 2 to 5 percent. These stocks can show up in nearly any industry segment but are most prominent in one of the following four industry sectors: consumer staples, healthcare, utilities, and telecommunications.
Alternative income bucket. Here is where we group investments that don’t quite fit neatly into the growth or income bucket. Examples include pipeline and energy storage companies, Closed-End Funds, and master limited partnerships. You could consider this your overall portfolio yield-enhancer as yields from these alternative investments can range from 3 to 8 percent annually.
The percentage of savings that you put into each bucket will differ depending on several factors including your age and your level of risk tolerance. Once you have decided to adopt the bucket system, the next step is to consider meeting with a qualified financial planner to discuss how to fill each bucket to maximize potential performance.
My advice is to get started today. If your husband handles your investments, ask him to share his strategy and your current assets – in depth. If you handle your own finances but don’t have an investment plan, think about finding a professional to help you get started. Friends and co-workers can be a good source of referrals.
Those conversations will be a huge investment in your peace of mind.