Where Do I Start? The 8%–10% Cash Flow Blueprint For Pre-Retirees

You realize that you need cash flow in your portfolio as retirement is approaching, and you will be faced with losing the income stream from your job. The idea of having an investment portfolio devoted to generating an income stream appeals to you.

The big question in your mind is: "Where do I start?"

Create A Plan

Step one is obvious, but unfortunately, it's a step that many people try to skip.

At High Dividend Opportunities, we target an average current yield of 8-10%. This is a range that is consistent with the long-term returns that can be harvested from the stock market. Note that at these yields, we expect the majority of your total return will come from interest and dividends. We believe that targeting a higher average yield will usually be taking on too much risk. If you target a lower yield, then your returns are likely to include more capital gains.

Here are a few key questions you will want to consider.

How much variation in income can you tolerate?

Can you tolerate variation in your income? Dividend-paying stocks can change their payouts, sometimes higher, sometimes lower. Some pay an explicitly variable dividend. So depending on the flexibility of your personal budget, you might want a higher allocation to fixed-income investments like bonds or preferred equity that pay a predictable amount.

We recommend 35-50% allocation to fixed-income. You'll want higher if you value predictability and stability, you can go lower if your budget is flexible.

How much will you need to withdraw?

If you withdraw cash from your portfolio, then less is invested and your future growth will be lower. If you reinvest everything into your portfolio, then you'll own more shares every month, and you will find that the dividends you collect grow quickly. Of course, the whole point of having an income-based investment strategy is that you intend to withdraw some cash flow to replace your income!

Plan On Reinvesting

When you retire, the world doesn't stop spinning, you still have a life to live, and you still have a future to plan for! Too many in the investment world treat "retirement" as if it is the end. It isn't an end; it's a new beginning.

Inflation is going to keep driving your income needs higher. You're still going to have unexpected financial needs. The stock market is still going to rise, bubble, and collapse. Except now these things are going to be more meaningful to you because, as you are out of the workforce, the opportunity to return to work diminishes with each year.

For this reason, we recommend planning on withdrawing a maximum of 75% of the income your portfolio produces. This allows for at least 25% of your dividends to be reinvested, acquiring more shares and growing your income. It also has the additional benefit of providing you with a cushion to protect from dividend cuts.

Is this a realistic goal with your current capital?

You now have the tools to determine if your goal is realistic. If you have a $500,000 portfolio that is averaging 8-10% yield, that would be $40,000-$50,000 in cash flow.

If you are withdrawing 75% of that, it means you would be withdrawing $30,000-$37,500 from your portfolio annually and reinvesting approximately $10,000/year.

When you combine this with your other sources of income you might have in retirement like Social Security or a pension, is that enough for you to live the lifestyle you want to live?

What If It Isn't?

Look, there's no magic to dividend investing that is going to provide you with infinite money. The amount of cash you can harvest from the market is entirely dependent upon how much money you have invested. Someone who can follow our strategy with $1 million is going to have more than someone who is investing $500,000 and less than someone who is investing $2 million.

We aren't here to tell you that you're going to be the next investing whiz that beats the market by some unbelievable amount or that you can turn $1,000 into $1 million if you just follow a system.

The Income Method is an investment strategy that is going to provide a relatively boring 8-10% in cash flow per year, and that stream of cash flow will grow most years because a portion is being reinvested. Returns that are consistent with what we've seen the US stock markets produce over long periods.

The advantage of our strategy is that you have visibility. You can do the math above and know if your portfolio is producing enough cash flow to meet your needs or not. You'll know if your portfolio can support your spending because you'll collect your dividends before you spend.

When problems arise, you can address them early. You can hold off on retirement a little bit longer. You can find ways to increase your income. You can find expenses that you are willing to reduce. You can make intelligent financial decisions like you've been doing your entire life because with The Income Method you know two vital facts:

1. How much income your portfolio is producing this year.

2. How much you can withdraw from your portfolio this year.

   
   

With those two facts, you can proactively manage your budget. That's what The Income Method is designed to provide.

At High Dividend Opportunities, we believe the best investments don't require investors to predict every twist and turn in the market. Instead, we look for businesses with durable assets, strong cash generation potential, and the ability to return meaningful amounts of that cash to shareholders. HDO is the largest Investing Group on Seeking Alpha and the #1 choice for income investors and retirees.

Our 4-day flash sale is officially coming to an end, and the details are in the banner above. What matters more is what you get once you are inside: a model portfolio of 40+ high-yield picks, real-time buy and sell alerts, and a strategy built to pay you income without forcing you to sell your shares. We help our members develop their strategy to achieve their income goals. If that resonates, there is no better time to join. Claim 30% off →

Create a plan that will produce the income you need in retirement and then implement that plan one dividend at a time. You don't have to do it alone.