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Today, I want to address a topic that might be uncomfortable, but one that is a great concern to many investors: Our mortality.
As you approach your retirement, your main focus would be towards ensuring that you have enough so that you can live out the rest of your life in comfort. Your retirement journey likely looks something like this:
Step 1: Realizing You Need to Save for Retirement
If you are reading this, you have taken the first step. Those who realize this when they are 20-something have a big advantage. Many don't take retirement savings seriously until their 40s or even 50s and have to race to catch up. Unfortunately, too many never realize it at all and end up relying on government programs like Social Security, and relying on friends and family.
Step 2: Actively Saving
Realizing you should be saving is different from actually saving. It is so easy during your working years to procrastinate and decide that other financial matters are more urgent. You are buying a house, cars, raising children, running into a myriad of unforeseen expenses, and trying to enjoy some of your income as well. Saving for retirement requires most people to sacrifice other things they want. When retirement is so far away, it is so easy to decide that "it isn't going to hurt anything" to borrow from your 401k or stop contributing to deal with whatever immediate financial issue is in front of you.
A word of wisdom for those of you who are still in the saving phase of your retirement planning, if "What do you wish you would have done differently for retirement?" were a Family Feud question, the number one answer would be "I wish I started saving more earlier." Time is the most valuable resource for investors, it is one that we cannot replace, and is a key to compounded growth.
Step 3: Finding an Investment Style
The stock market is a wonderful thing. There are thousands of investment options and numerous ways to make money. As someone who writes publicly about my investment method, I often run into people who want to argue about what investment strategies are "best." On the Internet, these debates tend to turn into framing one investment style as "right" and all the others as "wrong."
The strategy I've developed and have labeled as The Income Method, is the strategy that I have used and fine-tuned throughout my career. It isn't the only way to make money in the market. It is the best way . . . for me, and thousands of others have agreed it is best for them. Is it best for you? I don't know. Only you can determine that.
It is very common for investors to try several different strategies before settling on one that fits their risk tolerance, temperament, and goals.
Step 4: Reaching Your Goals
You have realized you need to plan for retirement, you have saved your money, you have found an investing style that suits your needs and now is the time to execute. If you are following the Income Method, your goal is going to be income-related. Say your goal was to generate $100,000 in dividend income, and you intend to withdraw $75,000 and reinvest $25,000. A great achievement, and a level of income that is enough to fund your chosen lifestyle. Now what?
Many people who have followed me through the years have reached and exceeded their income goals. The Income Method guidelines are to reinvest a minimum of 25% to ensure your income keeps pace with inflation and to provide a cushion from recessions. Some people reach a point where they only need to withdraw 50% or even less, which causes their income to grow even faster. It is a wonderful "problem" to have.
If you are one of those who has achieved step 4: Congratulations. You are enjoying something that many dream about - you can live your chosen lifestyle without having to worry about money.
I was once talking to a retired farmer, and he said it best:
"I'm not rich, but I have enough that I will never have to worry about how I will pay a bill again and that is enough for me."
The Final Step
When people have achieved that target which is "enough," it is very common for their next focus to be on their heirs. Those of us who are married are concerned about ensuring that our spouses will be taken care of if we pass first. Many want to pass along "generational" wealth to their children or grandchildren. Leaving a legacy behind that they hope will allow their family to have a better life.
For those who have built their retirement upon the Income Method, the idea of their income portfolio extending beyond their lifespan to benefit their heirs is appealing. An income portfolio where 25% or more is reinvested will continue to grow indefinitely, providing a growing stream of income, which in turn causes it to grow even more.
I am often asked how this can be done because there is usually a challenge. That challenge is that their heirs might not be interested. In a marriage, it is very common for one spouse to take the lead with finances – including investing. Younger heirs might not even have reached Step 1 yet. Hand them a portfolio, and they might sell everything and spend the money on things that they believe are important like a fancy all-expenses-paid vacation. Thanks, Grandpa and Grandma - enjoyed getting drunk on the beach!
I'm sure you've heard the stories, and maybe seen it yourself. Maybe you were even one of those who inherited something when you were younger and spent it in a way you would consider irresponsible today.
So how can you pass along the Income Method?
This Isn't a Passive Strategy
The Income Method is not a completely passive investment strategy. It is a strategy that is appropriate for people who are willing to manage their own portfolios. While it doesn't require as much management as strategies that require routine trading, it is a strategy where you should check in on your portfolio every few months.
From time to time, investments will have events. For example, in 2023, our investment in Hersha Hospitality preferred shares was called due to an acquisition. Also called were Great Elm Capital Corp Notes and iStar preferred. On the common share side, Magellan Midstream Partners and Spirit Realty Capital were both acquired. Even when you are not voluntarily selling, companies will be merged or sold, and fixed-income investments will be called. That capital needs to be put back to work, so someone needs to be putting in the work to find new opportunities.
You could create a more passive portfolio, such as one that is based on a variety of funds that produce income. For example, you could buy all the funds in the HDO Model Portfolio, and you are going to have very good diversification and a good average yield. This would be a simplified portfolio for a spouse to take over as they don't have to worry about individual companies. However, even funds don't last forever. Managers merge funds and liquidate others. It is still prudent to rebalance occasionally, and the income from funds will vary over long periods.
Start Early
The ideal scenario is to have someone willing and capable of taking over and managing the portfolio, and that person is working with you while you are alive. That way, there is someone who knows what is going on and why you own the stocks you hold, and has participated in the decision-making process. If you have young kids or grandkids, try to stimulate their interest in managing their own investments. Getting them actively involved by investing in companies they recognize, showing them the dividend income coming in, and letting them have a reward when they reach certain milestones.
Don't try to be too controlling - let them choose some investments even if you believe they are bad. Nothing teaches a lesson in humility better than the stock market!
If you can motivate an heir to take an active interest, not only will you have confidence that your legacy will be taken care of, but it can also be a great bonding experience that they will remember for the rest of their lives. I still have fond memories of my dad having me look up various tickers in the newspaper to see what the share prices did yesterday.
Make Sure Everyone Knows What's Going On
For the older kids and spouses, try a more direct approach. It isn't fun to have a conversation with someone you love about the reality that you will die. It is uncomfortable for everyone involved, but it is a conversation that is priceless. Make sure you are communicating directly, and bluntly. There is a big difference between saying
"Hey, I think investing would be a fun thing for you to do!"
They are thinking: Sure, that's what you said about [insert lame school activity your kids hated].
Be direct about why you want them to learn about investing.
"I won't be here forever, I need you to know what is going on so that you can manage things when I'm gone."
Too many people pass on, and their heirs don't know what is supposed to happen. Unfortunately, it sometimes leads to siblings fighting in court and breaking families apart at a time when they should be pulling together.
If you have decided to appoint one person as an executor of your estate and/or trustee, discuss it with everyone involved. Be willing to explain why you trust that person, and give everyone an opportunity to voice their concerns. If anyone is going to have hurt feelings about not being chosen to be in control, resolve it now. If multiple people have control, make sure they will be able to work together for the benefit of the whole family.
If everyone knows your wishes, it is much more likely that your wishes will be executed. If they are just relying on what one party with a financial incentive says are your wishes, the risk of a judge making the decision and wounding relationships increases dramatically.
Simply put, it is a conversation that is too important to beat around the bush and to approach indirectly. Clarity and directness are essential and will prevent many potential issues in the future.
Things Change - So Draw a Map
Perhaps one of the most common situations I observe is one spouse is actively managing the portfolio, while the other spouse has absolutely no interest. It is probably a good thing for marital relations. Do you really want to be arguing with your spouse about whether to buy or sell a particular ticker? Sounds like a situation ripe for the "I told you so" hammer to be dropped. Let's face it, marriages that go the distance generally involve a couple who don't trespass on each other's domains.
It is very typical for spouses in a healthy relationship to separate their duties. Each has control over their responsibilities and odds are, your spouse does a lot of things that you don't show the slightest interest in doing. If your spouse dies before you do, you're going to have to figure them out. I think there is a tendency for people to think that managing money is somehow more important and more difficult than the tasks their spouse performs. I assure you, it is neither.
Sometimes, when a widow(er) takes over a task their spouse was responsible for, they discover they like it. Something they avoided before because their partner took care of it, becomes something they find out they enjoy. Your spouse might have eyes that glaze over when you start talking about stocks, but if something happens to you they might take to investing like a fish to water. I've seen it happen.
Somewhere, in your important papers, have a list of your accounts and the investing resources you use. Consider taking some notes about why you hold certain tickers - that's a good practice to remind yourself. Make sure your spouse, or any other heir, will know where those important documents will be. Remember that everyone is on a different step of their investing journey, your heirs might not have even reached Step 1 yet. Provide them with a map, and necessity might provide them the incentive to follow it.
Conclusion
If you are at a point in your investing where your focus has shifted to leaving a legacy - congratulations! That is a point a lot of people never reach.
You can't force your heirs to adopt the Income Method or any other investment strategy. You can't even force them to remain invested at all. There are plenty of stories of even massive inheritances being squandered. You can't control that.
What you can do, is make sure that you provide the tools your heirs will need to be successful. Ultimately, it is up to them to take those tools and use them.
If you are one of those who has a spouse or other heir who simply is not interested, don't despair. Draw a map for them by providing a list of websites and services you use, notes about why you bought certain tickers, and maybe a list of some of the articles that outline The Income Method. Consider writing a letter. Talk about your investment journey, how you started, why you started, what you learned, and how you chose the investment strategy you use. Write down all the things you wish you would have known when you started your investment journey.
Your heirs might not display any interest today, but when someone you love passes, the world changes. Your perspective changes. And while there might be a lot of negatives and sadness, there can also be some positive emotions as well. Going through the effort to outline to your heirs what you were doing and why, provides one message to them loud and clear - that you cared about them. And for those left behind, that will be the most precious knowledge you could ever leave them with.
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