Fisher of Fees

Paul Durso Advisors & Planners, Finance 101, Insight Investing Articles, Investing, Investing & Planning, Retirement

There are two major issues that need to be dealt with when planning for retirement. First and most important is ensuring that you will have the income you need, and second is the necessity of having a plan.

Income

Income planning seems like a no brainer, right? You figure out how much you need to live on and just take what you need from your investments and go about your day. But if it were that easy, there would be no need for financial planners. (I am betting you wish is was that easy now that I said you wouldn’t need a financial advisor!) The big issue with income planning is the fear of running out of money. How do you take the income you need without triggering the fear of running out of money? Better yet, how do you plan for retirement income and ensure that you will not run out of money?

There are many different techniques people employ to accomplish this, and I will not go over them all, but I will introduce a very simple and powerful strategy you can use on your own. Dividend stocks! Briefly, dividend stocks pay income based on how many shares you own. If you own 100 shares and the dividend payment is $1, then you will get paid $100. It’s that simple. Just take the dividend dollar amount and times it by how many shares you own and that is exactly how much income you will make. It does not matter what the price of the stock is at any given time, your dividend payment does not change according to the price of the stock. Isn’t that awesome?! With this simple yet very powerful understanding you can create an income stream that is not affected by market volatility.

I don’t want to make it sound like anyone can do it just by learning how dividend stocks work, but with a little more knowledge you can build an income stream that you can count on.

The Value of Having a Plan

What is more important, value or price? Personally, I think value is way more important than price. Value is how I determine if the price is worth it or not. Sticker shock only comes into play when there is no value.

A great financial plan often involves a financial advisor. When it comes to how advisors are paid, they can charge a commission or a fee. For perspective, I am only going to refer to fee-based advisors (such as Insight Folios) rather than commission based advisors.

Fee based advisors get paid based on the value of your portfolio. That can be both good and bad for them - good when the market is good, and the value of your portfolio is growing; bad when the market is down and the value of your portfolio is dropping. Why? Glad you asked! It’s good when everything is growing because chances are that there is “enough to go around”. It is really bad when your portfolio value goes down and you don’t have enough to pay yourself let alone your advisor.

Your fee based advisor will be affected by market volatility, but how can you protect yourself from these same market fluctuations? What do you do? If your income stream comes from dividends, then market corrections should not affect you like it will affect the advisor. In a down market the value of your portfolio will go down, affecting the advisor’s income. However, in this same down market your stock dividends continue to pay a set amount, so the price of the stock will not affect how much you get paid.

Personally speaking, I prefer that an advisor takes it on the chin when the market gets tough while trying to ensure that nothing happens to the client’s income stream. If someone must suffer, I believe that it should be the advisor. Truth be told here, if I could get paid on dividend income, I would because they are much more predictable than stock prices. However, I can’t, so I must deal with price volatility. But you don’t need to!