Index funds are a fantastic tool to leverage the stock market’s growth. They are as close to a “set it and forget it” investment plan as possible.
However, there is one thing I want you to take away from this article; index fund investing is not enough for a worry-free retirement.
To have a great retirement where you are in control, you’ll need to understand how to convert your index funds into income. Let’s begin.
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What are index funds? I have covered index funds previously, so that I will skim over the wavetops. Index funds are groups of stocks (called electronic traded funds) that track a specific market index.
There are three major indexes and a total stock market index. Each of these indexes has multiple index funds that track them. Here are my four favorite index funds.
- Total Stock Market (VTI)- Tracks all the stocks on the stock market
- S&P 500 (SPY)- Tracks the top 500 companies and businesses
- Dow Jones Industrial Average (DIA)- Tracks 30 top companies
- Nasdaq 100 (QQQ)- Tracks top 100 growth companies
How to invest in index funds. Buying index funds has become super simple over the years. They became more accessible with the invention of fractional shares, dollar-cost averaging, no commission fees, and discount brokerages.
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In short, there is no reason not to invest in index funds. I invest in index funds weekly and monthly in my dividend portfolios and children’s custodial accounts.
Where to invest in index funds. You can invest in index funds in your 401K, Roth IRAs, Health Savings Accounts, and traditional taxable brokerage accounts.
Advantages of index funds. Index funds will give you the growth of the stock market. If you continue to invest over the ups and downs of the stock market, you will generate great returns.
The idea is to keep investing for 30-40 years, giving you a massive lump sum of money to execute your dream retirement. However, this is where things fall apart.
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Chances are you will fail at retirement. If index funds are your only retirement plan, chances are you will fail at having a happy cash flow retirement.
You may have enough money to survive, but you will fear running out of money. Your fortune will be trading on the stock market daily, and you may become obsessed with things you cannot control.
Take control of your retirement planning. I am not saying index funds are a bad investment or retirement plan. In fact, they are wonderful, and I fully support them.
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However, they cannot be your only plan. Let’s take another retirement plan that people depend on for lifelong success—their primary residence.
If you buy a home in a high-cost-of-living area like California, you may not have enough money to invest while paying for your home. Therefore, your home becomes your retirement plan.
Let’s say you rack up $1 million in home equity over 30 years, and now it’s time to retire. You have planned to use the $1 million to buy a home in Alabama, buy two annuities, and play for long-term care insurance.
What happens if the housing market tanks before your retirement date? What if your home equity drops to $800,000? Do you sell? Do you wait? Do you go back to work?
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Life is full of surprises, and the markets are worse. You can run into the same scenario with index funds.
You can save $1 million in your 401K and plan to retire using the 4% rule. This rule says you can take out $40,000 the first year.
However, you are selling shares into the market to create income from your 401K and index funds.
If you start the year with 100,000 shares of VTI, you may end the year with 98,000. And the following year, the total maybe 95,000. You are dismantling your hard work every year.
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Index funds as a complement to income planning. We spend our entire lives receiving income to fund our lives—we call these paychecks.
Index funds provide solid growth but very little income via dividends. You’ll have to depend on a financial advisor if you don’t know how to convert your index funds into income.
Can you imagine retiring and depending on the stock market AND a financial advisor to handle your money? Do you want to rely on these two things to ensure a long, safe, and cash-flow-heavy retirement? I sure don’t.
A bottle of wine. Let’s say someone gives you a bottle of wine worth $1 million; what would you do with it? Of course, you say sell it, but what would you do with the $1 million?
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You could pay off your home, fund the kids’ college fund, or put money in index funds. These things don’t do much for your retirement.
As an income investor, I can convert this $1 million into $80,000/year in dividend income. If I reinvested 25%, I would never run out of money, never sell shares, and increase my revenue every year. Sounds good, right?
I did the work to learn more about investing than index funds. The main takeaway from this article is that index fund investing doesn’t give you the education you require to have a great retirement.
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Index funds give you a massive lump sum of money you need to convert to income. However, you can build index funds and an income portfolio simultaneously (like me) during the wealth accumulation phase.
Conclusion. If I received a $1 million bottle of wine, I wouldn’t sell it. I would create videos and blogs about the history of the wine, stories, fan fiction, etc.
I would create income via royalties around the bottle of wine and its appeal. Then, once I created an income stream, I would invest that money into income-producing high-yield dividend funds.
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In the end, I would have a bottle of wine (still increasing in value), a content business (growing in notoriety), and an income portfolio (adding more dividends every month).
That’s the idea of index fund investing as part of a larger plan. It’s nice to throw your money into index funds and walk away, but at some point, you will need “the information.”
When you think about index funds, think about the $1 million bottle of wine. How would you invest that $1 million to ensure income for your entire life?
You will become a target when you retire with a large lump sum in index funds. Everyone will know how to spend YOUR money best. The only way to avoid that scenario is by learning how to invest your money for income. 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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