If you're retired, shouldn't your portfolio be built around dividends?

It sounds logical.

If your investments generate $60,000 in dividends each year, you have $60,000 of income without having to sell anything.

But there is a problem with building a retirement portfolio around dividends:

Your portfolio doesn't know how much income you actually need.

It doesn't know your tax situation. It doesn't know when you'll need money from your IRA. It doesn't know whether a Roth conversion makes sense this year. And it certainly doesn't know what to do when the market drops 25%.

That's why we don't believe retirement portfolios should be built simply to maximize dividend income.

Instead, we focus on the total return of the portfolio and how it fits into the rest of your financial plan.

Dividends Are Only One Piece of the Puzzle

Dividends aren't bad. In fact, they're an important part of many investment portfolios.

The issue is what happens when dividends become the primary reason for owning an investment.

A company paying a 5% dividend isn't automatically a better investment than one paying 1%.

You could end up owning investments you wouldn't otherwise choose simply because they have a high dividend yield. You may also create more taxable income than you actually need.

And here's an important distinction:

Investment income and retirement income are not the same thing.

Your retirement income should be based on what you need from your portfolio, not simply on what your portfolio happens to produce.

So How Do We Create Retirement Income?

We start with the bigger picture.

Let's say you need $80,000 from your investments this year.

Instead of saying, "Let's build a portfolio that produces $80,000 in dividends," we ask:

What's the most effective way to generate that $80,000?

The answer might include dividends and interest.

It might also include selling investments that have appreciated.

In some years, we may intentionally realize capital gains. In others, we may harvest investment losses to offset gains and potentially reduce taxes.

The goal is to make the withdrawal intentional, rather than letting the portfolio dictate the answer.

Taxes Matter, Too

This is where retirement income planning becomes much more interesting.

You may have money in a taxable investment account, a traditional IRA, a Roth IRA and other accounts.

Each account can have different tax consequences.

So if you need $80,000, the question isn't simply:

"Which investment should I sell?"

It may be:

"Which account should the money come from, and what are the tax consequences of taking it from there?"

That decision can change from year to year.

A low-income year might create an opportunity to realize capital gains at favorable tax rates.

Another year might be a good opportunity for a Roth conversion.

Later in retirement, required minimum distributions may become a major part of the income picture.

These decisions don't happen in isolation.

Your investment strategy, withdrawal strategy and tax strategy should work together.

What Happens When the Market Drops?

This is another reason we don't believe dividends alone are a retirement strategy.

A stock can continue paying a dividend while its value falls significantly.

A 6% dividend yield doesn't protect you from a 30% decline in the underlying investment.

When you're retired, managing the risk of selling investments during a major market decline can be just as important as generating income.

That's why we want to understand how much you need from your portfolio, when you need it and how your investments are positioned to support those withdrawals.

The goal is not to avoid every market decline.

That's impossible.

The goal is to have a plan for dealing with them.

Retirement Income Should Be Intentional

A retirement portfolio should do more than produce dividends.

It should work alongside your Social Security, pensions, cash reserves, tax strategy and other sources of income.

It should help you answer questions like:

• How much can I safely withdraw each year?
• Which accounts should I withdraw from first?
• When should I realize capital gains?
• Should I consider a Roth conversion?
• How will future RMDs affect my taxes?
• How should my portfolio change as I get older?
• What should I do when the market experiences a major decline?

These are much bigger questions than simply asking how much your portfolio pays in dividends.

The Bottom Line

We don't believe your retirement income should be dictated by whatever your investments happen to pay you.

Your investments should support your retirement plan, not the other way around.

That means looking at total return, taxes, withdrawals, Roth conversions, RMDs and investment risk as pieces of the same puzzle.

The goal isn't to build a portfolio that produces the most dividends.

The goal is to build a portfolio and financial plan designed to help you use your money efficiently throughout retirement.

Got questions, comments, or feedback? Simply hit reply! We personally read and respond to every message.
​
Thanks for being a part of MY Wealth Watch!
​
​Keeping wealth in focus,

The MY Wealth Management Team