Co-authored with Treading Softly.
It’s not uncommon that I get asked what I do for a living. If you were to drive by my home, you’d hear the sound of a rooster crowing, dogs barking, and children laughing. My old co-workers have come to assume it’s because I have secretly become a farmer.
While I would love to claim such a title, I am nowhere close to being anything other than a “hobby farmer” at best. By trade, I am an investor and analyst who spends the majority of his time writing and helping members of High Dividend Opportunities.
I do like agricultural examples and use them frequently because they’re straightforward and easily relatable. My grandparents on both sides lived on and operated farms at various points in their lives. On my father’s side, his parents lived on a farm from childhood and operated it until shortly before they both passed away – selling it to someone who still operates it to this day. My other set of grandparents lived on a farm for a shorter period of time during their adult years, giving it an honest attempt before deciding it was not their cup of tea.
A farm is a nearly perfect analogy of how to live off your assets rather than selling them to survive. A farm is an exceptionally valuable asset, but it is what that farm produces provides the farmer’s livelihood. Many farmers hope to pass that land down to future generations who will work it and care for it. They won’t liquidate their farm acre by acre for their day-to-day survival – it goes against everything they strived for all those years before.
Consider your daily life; would you sell your car to pay your power bill?
You’d likely go to many other extremes to maintain possession of your car – especially if it enabled your ability to earn a living. In the end, you would sell if you were forced to do so to survive, but it’s far from your first choice. Instead, you would seek to find a new income stream than to sell your assets to survive day-to-day life.
Yet, when it comes to retirement, we have a sudden shift in perspective. Many “experts” tell us that we should fund our retirement by methodically selling off our assets.
From Birth Through Your Employment Years
When you were a little child, you rarely considered the value of your possessions or worried about cash flow. You simply lived. You may have attributed sentimental value to a favorite toy or beloved pet. Indeed, some of your “most valuable” possessions likely carried very little monetary value.
This changes as we age.
As we age, we come to a greater understanding of the value of money. $100 no longer seems life-changing, now $1,000 or even $10,000 suddenly has the value we attributed to $100 when we were 5 years old. The more money we have, the more it takes for an amount to be “life-altering.”
Through all this, we’re exposed to what should be regarded as fundamental mantras such as “Live below your means”. When we enter our working years we’re forced to learn about how to budget our income and expenses. Some learn quickly, others experience the pain of borrowing so much they can barely make the minimum payments. Since you are here, you are one of those who eventually figured out the benefits of saving at least some of your income for the future. We are certainly never taught to factor in selling our possessions to pay our power bill!
Like a farm, you have an expected income stream from your hard work, and bills to pay with the money you’ve earned. During your working years, you are in a phase of life where you accumulate possessions and belongings. You often earn more and more income from your working hours as time goes on. You earn enough to cover your bills and buy assets that have a present and future value.
In reality, your entire life until this point has been covered by a constant cash flow to pay the bills, cover expenses as they arise, and save for the future.
The Big Retirement Mistake Most Make – Change
An interesting and highly concerning phenomenon occurs when we hit retirement; suddenly the expectation of cash flow to pay for our lives stops. It’s as if what has been the accepted “norm” is tossed out of the window and rejected for no apparent reason.
I think this comes from two tragic flaws in our retirement planning logic:
- We stopped working, so we expect income to stop coming in.
- We place an expiration date on our lives.
We stop working when we retire, so we suddenly think all our income must also stop.
While income may stop coming from our prior place of employment, it shouldn’t stop altogether. It’s kind of foolish to think like this and it’s counter-intuitive. We know without a doubt that expenses will continue non-stop, yet we decide that an orderly dismantling of everything we built is the best answer to our retirement problem instead of finding a replacement for what we enjoyed before.
Imagine, for a moment, a farmer, who instead of growing crops, decides to sell his farm one acre at a time. This plan is only sustainable for as long as he has land to sell, then he’ll find himself farmless and likely homeless. It doesn’t matter if the price per acre keeps rising. Every year, the farmer will sell another piece, and the farm gets smaller. It’s a race – will the farmer run out of land, or die first?
When we retire, this is exactly what too many of us do. After spending a lifetime creating something beautiful, we trash it in our “golden years.” This is not a race I want to “win.”
During retirement, we should still focus on cash flow over expenses, just as before. How can we do this? By following the example of farmers!
A retired farmer will frequently lease their fields to generate income while not having to work those fields. It will not provide the exact same level of cash flow, at least at first. They are not taking on the risk of planting and tending that the other farmer is doing. However, over the years, a retired farmer might acquire more land to lease, inflation will drive rents up and the farmer is released from all of the day-to-day expenses of operating a farm.
The farmer is no longer generating income from labor, and instead is generating income from the value of the land. Likewise, we need to put our assets to work generating income.
Two Key Considerations
There are two very important considerations when planning to have a cash-flow-focused retirement:
- You and your spouse or partner must be on the same page about doing so.
- Will you leave an inheritance behind or not?
The first consideration is extremely important: In a relationship, one person is usually the “money person”; not necessarily the one who earns the money, but the one who oversees or manages it. They pay the bills, create the budget, and oversee the bank account. Even if both parties are actively involved financially, you both will need to be on the same page when it comes to retirement planning.
This becomes even more essential in the event that one of you dies first, the surviving partner needs to know what the heck is going on. Retirement advisors are helpful here especially if you can find one who matches your retirement goals and philosophy. You want to avoid leaving a complex jumble behind that the surviving partner needs to untangle to be able to survive – they’ll have enough going on already. It’s nice to avoid this additional burden if possible.
In my conversation with various Investment Advisors and Retirement planning professionals, I’ve discovered that there is often a common dissonance or disconnect between spouses or partners when it comes to retirement investments and planning. While one is often more experienced than the other, both are prone to having strong opinions. Getting on the same page can greatly reduce stress and make life easier for whichever spouse survives the other. Financial disagreements are a leading cause of failure in marriages and relationships; it’s best to solve those issues before they arise.
The second consideration will determine your spending habits. Many retirees have no plans to leave an inheritance behind – especially if they’re dismantling their net worth to buy hotdogs at the grocery store. It may come from an “I earned it, so I’m spending it” mindset, or more commonly it’ll be a byproduct of how they saved for retirement. Retirees, who built their retirement nest egg simply expecting to slowly dissolve it over a number of years, have nothing left over to leave behind if they live long enough.
Yet with income investing, the nest egg remains untouched, and if desired, can be passed on to the next generation or whomever or whatever you want to pass it on to. Both Wealth and Poverty have been discovered to be generationally passed forward. 45% of people who spent 8-14 years of their childhood in poverty, sadly still find themselves in poverty by age 35. Likewise, wealth passed on from one generation can have a profound impact on the next, helping provide a base to continue building the family’s wealth. Income investing opens this door of opportunity for being the foundation of your family tree moving from potential poverty to higher levels of income over time. You get to decide what you and your spouse want to do and have to commit to it.
Take some time, make a decision, and commit to it.
Cash flow – income in and expenses out – has been a fundamental part of your entire life! During childhood, your parents dealt with it. As a working adult, you were forced to come to terms with the reality of it. As a retiree, you should not ignore all your life lessons about it. Building a portfolio to generate recurring income to cover your recurring expenses, simply makes sense.
You don’t get to make a one-time payment for retirement and never face a need for money again – I’d love that if it were an option! Likewise, it seems foolish to build a portfolio for exactly such a purpose, which so many of us do at the advisement of “common logic.”
Retirement should be enjoyable and relaxing and nothing is more relaxing than knowing in good times and bad that my next dividend check is just around the corner. No amount of market turbulence will disrupt or off-balance my portfolio. Nor do I have to worry about when to sell my shares to fund my life.
I’m going to be like the farmer, working diligently in my fields during my working years and leasing my farmland in my retirement – an income farmer if you will. I will be keeping my assets and living off of the income they provide. My children and grandchildren will benefit from my work and efforts to improve their financial outlook for years and generations to come. I trust they will carry forward my life’s work with diligence and care.
Will you choose to set up your farm next to mine?