Personal finance gurus often emphasize cutting costs to save for retirement, but fail to highlight the importance of finding high-quality income investments. Radio host Dave Ramsey recently endorsed a retiree withdrawing 8% of their portfolio in retirement, which aligns with the strategy of the CEF Insider service. By using an 8% withdrawal rate, investors can build hypothetical retirement portfolios based on an average American income of $59,384 a year and different savings rates.
For example, a saver who puts away 10% of their post-tax income could have around $80,000 in a decade and about $671,000 in 30 years. Doubling the savings rate doubles these figures, indicating that the more one saves per month, the richer they will be. The goal is to replace wages with passive income, making it easier to earn passive income the more cash one has. By investing in high-quality closed-end funds (CEFs) yielding 8% or more, investors can earn a significant income stream in retirement.
Comparing a 10% saver who invests in CEFs with an 8% yield and a 20% saver who sticks to index funds tracking the stock market, the CEF investor earns nearly triple the income of the index investor despite having half the cash. For example, the Columbia Seligman Premium Technology Growth Fund (STK) offers a consistent income stream with a historical 9.3% yield, generating reliable returns for shareholders. By investing in such CEFs with steady yields, investors can retire on an 8% withdrawal rate.
Using the example of an investor with $1 million in STK, purchasing the fund at its IPO and receiving quarterly dividends of $0.4625 per share resulted in $92,500 in annual income or $7,708 per month. After 16 years, the hypothetical STK shareholder would have almost $1.6 million in price gains, 50% more than they started with, on top of the 9.3% annual yield. This demonstrates that retiring on an 8% withdrawal rate is possible with the right CEFs that offer consistent income and growth.
Ultimately, the key to a successful retirement plan lies in finding high-quality income investments with steady yields. By focusing on CEFs that offer reliable income streams, investors can achieve financial security in retirement while enjoying substantial returns. Dave Ramsey’s endorsement of an 8% withdrawal rate is feasible with the right CEFs, making it essential for individuals to consider income-generating investments as part of their retirement strategy.
