I’ve talked before about how things happen in waves in my practice. I seem to deal with very similar problems in clusters. These days, I’m helping a number of people who have sold their homes to use the proceeds to generate income.
They have generally been on their own and in retirement. Their home was becoming too much for them. They no longer needed the space. The maintenance was becoming difficult. And decisions around major repairs were costly and stressful. It was time to downsize.
As you can imagine, a great deal of their personal wealth was in the home’s equity. So the sale brought them a large amount of cash that could be invested and used to supplement their income from other sources. It could help offset new expenses such as rent. Or it could give them a greater ability to spend on things like travel or hobbies.
They want to avoid using the principal in a substantial way. The idea is to use the principle to generate income and to preserve the original amount as much as possible, mostly so that they can be assured it will always be there to provide for them. This is a long-term plan.
The good news is that it is easy to generate a substantial amount of income these days. This is due in large part to the increase in interest rates, but also to the relatively low cost of dividend-paying investments. Two years ago, it would have been difficult to do without taking on more stock-market risk and reaching for higher payouts. But with interest rates more favourable, I am able to balance the portfolio and implement several risk control measures.
So how much income are they getting? Generally, 5% of their investment. So someone with $500,000 could comfortably withdraw $2,000 per month and not touch the principal. This is achieved with the typical balance of 65% in stock-related securities and 35% in fixed income (GICs, bonds, bond funds or ETFs).
You might ask, if GICs are paying 5% or more, why wouldn’t I put it all in GICs? I could. And I would if the client was very risk averse. There are a number of reasons to invest more broadly than GICs which I have covered before. It is mostly because we don’t want to fall behind if rates come down. Stocks with dividends can be expected to increase in value over time and the dividends should increase as well. This helps ensure the buying power of the money. And it can be achieved without excessive risk. Blue chip companies such as banks, telecom, utilities and real estate trusts are in some cases paying dividends in excess of 6%. By this, I mean that a stock that costs $100 per share, for example, will often have a dividend that is over $6 per year.
As with any investment goal or objective, this starts with thorough planning and understanding of the client’s unique needs. It is followed by rigorous and disciplined portfolio structure to attempt to manage risks, deal with unexpected needs and ensure adequate liquidity. The portfolio will have ups and downs, but should largely maintain its value and its spending power over time and provide the client with stable, reliable income and peace of mind.