Our 40s are a time to double down on life and start getting things done. Hopefully, we will leave our 30s with no debt and an online business or a high-paying job.
The goal of our 40s is to ensure we have enough income in our 80s and 90s. We do that by focusing almost solely on income-producing, high-yielding fixed-income.
Welcome back to the Bond Investing at Any Age series (20s, 30s), where we use fixed-income to live our dream lives.
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I am here now. I am 41 years old, and my entire focus is on creating multiple income streams that will last forever.
My wife and I reached $1,100/month in dividend income last month, which puts us on the path to our goal of $3,000/month in three years.
Your 40s are a weird time. It seems that all of your peer group wants to travel back to high school. People compete on social media by buying huge homes, fast cars, and luxury vacations.
I do not get the fascination with adults spending so much time and energy on Halloween. If you are broke or don’t understand passive income, don’t you have better things to achieve?
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Focus on income. However, since you are reading this, I assume you take life more seriously than your family and peers. You want the best possible outcome for your retirement and future generations.
Having a considerable nest egg is excellent, but we live by receiving income. Our entire lives, we receive a paycheck that we use to fund our lifestyles.
In retirement, we do not want to convert to selling shares because it can become complex. We want to buy bonds, bond funds, and baby bonds that provide us with revenue without selling them.
We can split our income into two categories: on and off the stock market. We must ensure we have a good mixture of both to protect ourselves from recessions, downturns, and market crashes.
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Off the stock market income. Buying corporate and municipal bonds directly from corporations and municipalities is tough. Therefore, the easiest way to purchase bonds away from the stock market is via Treasury Direct.
I wrote a step-by-step guide on how to buy 30-Year Bonds that you can use for any Treasury bill, note, or bond. Yes, other bonds have higher yields, but buying bonds is complex.
You typically must go through a broker, which costs additional resources. “The Bond Book” describes the entire process and even recommends Treasury Direct for most people.
Off-market to On-Market allocation. What is the best allocation of on and off-market income-producing securities?
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Remember, we still have our high-yield savings, certificates of deposit, and Series “I” bonds in our portfolio. I am just focusing on bonds that pay us significant income.
If your goal of all income-producing securities is $10,000/month (dividends and bonds), $2,000/month should come from Treasuries.
Treasuries can lose value if you try to sell them; however, they will always pay you if you hold them. Dividends and bond funds may fluctuate, so having a rock-steady income is always a good backup plan.
Bonds trading on the stock market. Bond closed-end funds are the best way to capture high-yielding bonds on the stock market.
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There is a caveat; you’ll need to understand these funds. Take the time to read “Step-by-Step Bond Investing” and follow Seeking Alpha.
You use closed-end funds purely for income. You must have the right mindset to invest in these funds because they use leverage. Using leverage means that these funds can fluctuate with the whims of the market.
If I aim for $10,000/month on dividend income, I will allocate $5,000/month to closed-end funds. If you find a good entry point (a low price), your yield increases, and you can also grab some capital gains.
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I use PIMCO closed-end funds in a few portfolios and haven’t been disappointed yet. My three favorite PIMCO funds are (PDO), (PTY), and (PDI).
The Rule of 72. It’s good to focus on the rule of 72 when investing for income. The rule states that if you divide 72 by the dividend yield, you’ll see how long it takes to return (or double) your investment.
For example, if your CEF yields 10%, it will take 7.2 years (72/10) to get your initial investment back. You will be much more successful if you focus on this metric.
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Focusing on the rule of 72 helps me stay on point during downturns in the market. My main goal is to get my initial investment back while keeping the asset. We call this an infinite return.
When I buy $5,000 of a closed-end fund yielding 10%, I need to collect my money for 7.2 years. Once I get my initial deposit back, all the rest of the money is free.
No matter how much the price of my CEFs fluctuates on the open market, I want the income. I want my CEFs to return all my initial investment so I can have as many infinite returns as possible.
Some other types of bond income. CEFs are the best way to create a pure paycheck replacement; however, we have other sources of interest payments.
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Baby bonds are a great way to invest $25 into an income-producing asset. They are the identical twin of preferred shares, except they pay you interest (not dividends).
You also have bond ETFs that cover short, medium, and long-term treasuries, municipals, corporate, and high-yield debt.
Conclusion. Investing for income can shift your mindset from investing for capital gains. Income products are susceptible to interest rates, so it will take some restraint to remain invested.
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I focus purely on income. I am buying Series “I” bonds and 30-year Bonds every month, but my priority is on closed-end funds.
Once I have enough money to recreate my paycheck, I can use my bond revenue to invest in any way I choose.
Bond prices adversely react to raising interest rates, so everything moves downward together. If you hold stocks or bonds, you will eventually go through a cycle downturn—it’s part of the investing process.
Our job is to ensure we have a plan for market downturns. I focus on income and buying more high-yielding products when they are on sale.
We can buy our freedom from the workforce if we invest in income long enough. I am currently in this phase of my life, and it feels good to have sweet CEF income coming to my inbox every month. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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