Outmaneuvering uncertainty: preparing for retirement during turbulent times

The key to a successful retirement strategy is to replace earned income with retirement income
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What Matters Most?

These past six months have been exceptionally challenging. Health has been threatened, freedoms restricted, and activities diminished. However, many people report that this period has also caused them to rethink and reprioritize what really matters in life, and spending quality time at home with family members is an old-fashioned recipe for happiness that seems to have made a big comeback during the pandemic.

This period of uncertainty has also highlighted what matters most from an investment perspective – especially when preparing for retirement. What kind of investment approach will enable retirees to successfully ride through turbulent periods like we have experienced with COVID-19 with confidence and peace of mind?

Growing Income for Life

The key to a successful retirement strategy is to replace earned income with retirement income, but of course this is easier said than done. In today’s low interest rate environment, traditional fixed income is not providing enough income for most retirees to live on. Also, due to inflation, a fixed income stream will decline in purchasing power over time. An ideal retirement solution will provide a reliable income stream that can fund current living expenses and that will grow each year at a rate greater than inflation – even during turbulent years like 2020.

A diversified portfolio of high-quality stocks with reliable and growing dividends can deliver a growing stream of annual investment income while keeping savings invested to grow in value over time. The dividend income can be used to fund living expenses which prevents the need to eat into principal during retirement. This is especially important during periods like we have just experienced when market valuations are depressed. If the income is not needed for withdrawals, it can be reinvested as additional savings.

There are three keys to building a dividend growth portfolio that can weather turbulent times:

1. Own high-quality companies. High quality companies have established market positions, experienced management teams, conservative balance sheets and consistent earnings growth over extended periods of time. These companies are built and positioned to not only weather difficult periods but ideally to come out stronger on the other side.

2. Construct a diversified portfolio. Purchase positions in 45 to 55 high quality companies representing a diversity of industries and economic sectors. Challenges will come in many forms over time, and diversification helps ensure the portfolio will continue to meet long-term objectives even if some individual holdings face periods of heightened adversity.

3. Focus on companies with reliable and increasing dividends. Identify companies that have both the ability and the commitment to grow their dividend in all economic environments – especially those that have demonstrated this over an extended period of time. For example, Proctor and Gamble has increased its dividend for 64 consecutive years! An event like COVID-19 can provide a great litmus test for a company’s commitment to dividend growth. Companies that have increased their dividends in 2020, especially those that have announced increases since the onset of the coronavirus in February, have demonstrated that they have both the ability and commitment to raise their dividends in challenging economic environments.

What’s next?

There will always be something on the horizon to worry about – already talk is turning to concerns about the election and the possibility of another market downturn. While it is natural to be on the lookout for threats to our well-being, it is also important as a long-term investor to have confidence in the strength and resilience of our country. Building a retirement portfolio that provides a reliable and growing stream of dividend income makes it possible to weather turbulent times with greater confidence and peace of mind and, ultimately, to more fully enjoy the things that matter most in our lives.

Will  Will Verity is the President and CEO of Verity Investment Partners. Will and his wife Paula founded Verity Investment Partners (recently named to the Financial Times 300 Top Registered Investment Advisors) in 2002 and has over 30 years of experience in the investment industry.

Categories: Business Insights, Finance