90% of financial planners teach to focus on growth when we’re young and then figure out cash flow in their 60s. But what happens if the dividend returns aren’t there in your 60s? I go over that in this podcast.
My name is Kenny Wolfe and I’ve been a real estate syndicator and investor for over eleven years; in this time, I’ve built a successful real estate investment firm, Wolfe Investments. If you’re new to the show, make sure to subscribe so you’re notified when a new episode comes out.
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90% of financial planners teach us to focus on growth when we're young and then figure out cash flow when we're in our sixties. But what happens if the dividend returns aren't there when we hit our sixties? I go over that in this video.
Welcome to Real Estate Investing with Kenny Wolfe, the show with weekly topics designed to help you learn how to build your ideal life through real estate investing. My name is Kenny Wolfe and I've been a real estate syndicator and investor for almost 12 years now, and in this time, I've built a successful real estate investment firm, Wolfe Investments. If you're new to the show, make sure to subscribe so you're notified when a new episode comes out.
Financial planners teach us when we're young to focus on investment growth strategies, and then once we're older and have amassed a bigger nest egg, the focus needs to shift to cash flow. In theory, I totally agree with them, but what if you've worked 40 years saving and investing for growth, only to find out that the dividend or interest percentages aren't what you need to cover your cash flow needs in retirement?
That would be bad, but that's just what's happened for majority of soon-to-be retirees. Today, the S&P 500's average annual dividend is 1.82%. From 1970 to 1990, it was slightly above 4%. The Dow Jones average dividend yield today is just under 2% as well. Over the past 20 years, it has been mostly between two and 3% dividends, and beyond being low percentage of cash flow, those dividend yields aren't even keeping up with inflation. Your nest egg would have to be absolutely huge to make a $75,000 a year cash flow in retirement. At 2% dividend or interest rate yield, you would need $3.75 million working for you. According to the Federal Reserve, the average retirement savings, at age 60 years old today, is $221,000. That's a far cry from the 3.75 million that's needed based of today's retirement age savings. But let's go crazy and say you only need $50K a year of cash flow coming in retirement.
Again, you need $2.5 million worth of retirement portfolio income to hit that $50K a year cash flow coming in. Let's look at the average AAA corporate bond yields. That's where a lot of financial planners aim for their clients to be investing for cash flow when they're near retirement. In June of 2022, the average is 4.24% annual interest payments. You take that 4.24% interest rate, and you need $1.77 million working for you. It's a lot less than stocks, but still that's eight times more than what the average 60-year-old has saved up for retirement today. Something is wrong with a focus on growth and then worry about a cash-flow-down-the -line plan. Either the retirement savings wasn't enough, the growth of those retirement savings didn't work, and/or the available dividends and interest rates today aren't high enough on the return side--probably a mix of all three if we're being honest.
I know some of you are saying social security will come and save the day, but there's no way social security can help even the average US citizen make up the difference between what was saved and what can be earned through interest and dividends. Alright, what's the answer for those that are young? Look how you can do better than the prior generation. Look how you can build upon their mistakes. Learn from 'em. Start saving for retirement a lot sooner than what you think you need to do. Start in your twenties or earlier if possible. Compounding returns will help you create more of a nest egg and/or cash flow sooner, and then it just keeps building upon itself. Another way to tackle the issue is to invest in cash flowing assets sooner rather than focusing on just growth. I'm completely biased, but real estate investing has been a great way for me, not just to build up cash flow, but also to enjoy some great growth in the value of my investments.
We've been hitting better than 20% annual returns in real estate over the past 10 years for our investors. Those kinds of returns can quickly turn into large amounts of a nest egg and cash flow, only if you stay the course and keep compounding your returns. I also think just investing in the stock market through mutual funds and bonds won't be the answer for Americans going forward, for them to retire at a larger and more comfortable lifestyle. Americans were told to invest for growth and then worry about cash flowing that nest egg when you start approaching your sixties. With the corporate bonds averaging just over 4%, the average American is off by eight times what needed to be saved. The plan didn't work. It's much better to invest in cash flow and growth as soon as you're able to let compounding returns work for you. No one is past savings, so if you're late to the game than finding larger cash flowing assets like real estate can be the answer.
This has been real estate investing with Kenny Wolfe. Thanks so much for listening.