I have plenty of emergency savings and don't plan to tap into my retirement portfolio for at least 30 years, so a short-term drop didn't shake my long-term investment plan. However, it did have me thinking about the best ways to build a resilient portfolio that will meet my cash flow needs during my golden years.
Here's how I'm thinking about building a portfolio focused on cash flow before and during retirement.
A big stock market drop is a good wakeup call
If you've read enough investment books and articles, you've likely come across the statistic that the S&P 500 goes up about 10% every year on average. But it doesn't feel like that on days when you see your investment account drop by hundreds or thousands of dollars at once.
It's important to avoid the urge to sell when the markets fall, as you've already experienced a major loss and would likely miss out on a subsequent upswing. The investors who tend to get the best performance over time are the ones who follow a steady investment plan and add to their portfolio on a regular schedule over time.
But that doesn't mean a jolt in your portfolio shouldn't stop you from assessing your current investment strategy and if you should make any small tweaks to meet your long-term goals.
I care more about what I'll make per month in retirement than how much I have in total
Most people set a target savings level for retirement. A goal of $500,000, $1 million, $2 million or more might be a reasonable goal for you to reach your desired level of financial independence.
While these types of goals can be valuable, they are not the only way to think about your retirement goal. Instead of a fixed asset value, consider a goal around your monthly retirement cash flow . Perhaps you want to bring in $3,000, $5,000, or another amount per month.
If you know how much you want to "earn" every month in retirement, you can work on a plan for multiple income sources to fund your retirement needs.
Multiple income sources today can be part of your retirement plan in the future
Investments come in many forms. Here are some ways you can build income sources for retirement that produce a steady and reliable cash flow:
- Investment dividends: Single stocks, ETFs , and mutual funds can all pay dividends to investors based on their small slice of ownership in the company. The average dividend rate for S&P 500 stocks is about 2%, but a dividend fund can pay you 3% or more.
- Fixed income payments: Fixed income investments, including bonds and bond funds, offer fixed payments in return for your investment. Bonds are popular for investors nearing retirement due to their relative stability compared to stocks in many cases. Bond ETFs can pay around 2% for more conservative portfolios to over 5% for riskier portfolios heavy in junk bonds .
- Real estate income: I have a small but growing portfolio with Fundrise , a real estate investment platform that has continued to pay me steady dividends through the COVID crisis and is definitely part of my long-term plans. However, I would also like to invest in my own rental properties to help me build more diverse income streams over time.
Pick your target income in retirement and work backward to pick a savings goal
If you want to earn $100,000 per year in retirement without tapping into the principal balance, you would need a $2 million portfolio that pays you 5% per year. Depending on how much you want to earn and your expected rate of return over time, you can calculate exactly how much you would have to save and invest to meet your goal.
There's no need to let a temporary economic situation derail your long-term plans. But it is OK to review your plan and make any needed updates to make sure you're still in line with your retirement cash flow goals.
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