Personal-finance gurus often stress the importance of cutting costs when saving for retirement. However, it is equally important to focus on finding high-quality income investments to help reach retirement goals. Radio host Dave Ramsey recently expressed comfort with retirees withdrawing 8% of their portfolio in retirement, a strategy similar to the benchmark used in the CEF Insider service, which currently yields 8.7%.
To illustrate the impact of different savings rates and investment choices, two hypothetical retirement portfolios were created based on an average American income of $59,384 a year. One scenario involved a saver putting away 20% of their income, while the other saved 10%. Both scenarios assumed an 8.5% rate of return, mirroring the stock market’s historical annualized total return.
An analysis of these scenarios revealed that the more one saves per month, the richer they will be in retirement. By focusing on replacing wages with passive income, individuals can ease their retirement transition. Comparing a 10% saver who invests in high-quality closed-end funds (CEFs) yielding 8% with a 20% saver who opts for index funds tracking the stock market, it becomes evident that the CEF investor can earn significantly more income despite having less cash invested.
Using a real-life example of the Columbia Seligman Premium Technology Growth Fund (STK), it is shown that consistent high yields from CEFs can provide steady income for retirees. By investing in STK at its IPO price and enjoying a 9.3% yield, investors could generate substantial income over the years. The STK example demonstrates that it is possible to retire on an 8% withdrawal rate with the right CEF that offers a stable 8% yield.
Investors can benefit from the steady income and potential price gains provided by CEFs like STK. By choosing the right investment vehicles with reliable yields, retirees can secure their financial future. As Lead Research Analyst for Contrarian Outlook, Michael Foster emphasizes the importance of selecting CEFs with strong yields for sustained income in retirement. By focusing on income-generating investments, individuals can accelerate their journey towards retirement and ensure financial stability in the long run.
