Retirement planning is just like the years you spend at work—you require income to fund your lifestyle. There isn’t a magic formula that will allow you to retire.
The simple truth is that you need more income than your expenses. Once you can achieve this without working, you’ll be financially free.
Therefore, during retirement, you seek a consistent paycheck. Many of us will have a government pension, company plan, or social security.
Bond Investing in Your 30s
But what if I told you that you could create your own steady paycheck, that you had the power to keep increasing it, and that your paycheck would sometimes pay you a bonus?
Welcome back to the Retiring on Dividends series (101, 102, 103), where we build paychecks from our paychecks.
The magic of closed-end funds. My favorite investment products of all time are closed-end funds or CEFs. CEFs are actively managed funds that have a set amount of shares.
CEFs differ from exchange-traded funds because ETFs can grow and constrict based on the amount of money flowing in or out.
CEFs have a set number of shares, so they have a Net Asset Value. This means that you can see the NAV versus the share price at any time—sometimes, you may buy at a premium or a discount.
The 4% Rule vs. Dividends
But why are CEFs my favorite type of retirement income product? For me, CEFs are like bonds without the hassle. Plus, the CEFs I love pay me monthly.
These amazing CEFs have a set dividend, so I know how much income I will generate when I purchase them and when I will receive my dividend payments. CEFs allow me to build a paycheck that resembles my working days.
CEFs vs. paychecks. I receive about $2,000/month in dividends. About $1,000 of that comes from monthly CEFs. I can reinvest my excess income to buy more income.
My favorite monthly CEFs are PIMCO (PDI, PTY, PDO), Collateral Debt Obligation funds (ECC, XFLT, OXLC), economic funds (UTF, UTG), and tax-free funds (NVG).
These funds pay me a set amount every month, just like my working years. However, one significant difference is that I can increase my monthly payment.
Bond Investing in Your 20s
Social security checks are outstanding, but they only increase 2-3% per year based on cost-of-living allowance raises. Due to inflation, you will lose your purchasing power over time.
With CEFs, I can reinvest 25% of my income to keep growing my pot of money. I will always beat inflation by a hefty margin if I keep this up.
I can also purchase beaten-down CEFs to increase my yield on cost. As I said, CEFs pay a set amount of dividend income. If my purchase price is lower, I get the same income for less.
I can also use my CEF income to purchase other types of stocks and funds. For example, I may want to invest in index funds for growth or new dividend-paying stocks like Google (GOOG) or Facebook (META).
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CEFs allow me to take control of my financial destiny and not rely on the government, corporation, or family to provide for me.
Feeling special with special dividends. Nothing feels better than receiving a 13th annual dividend from your CEF of choice.
When the economy is rocking, some CEFs pay a special dividend near Christmas. CEFs are required to pay most of their income through dividends so this rule can benefit shareholders.
When you own a lot of CEFs, your special dividends can sometimes pay for most of your Christmas shopping. It is truly one of the great benefits of being a CEF investor.
Financial Independence through Real Estate 4
Start buying CEFs now. You don’t need to wait until retirement age before purchasing CEFs; you can start today. Heck, I am 43 years old and completely in love with CEFs.
Because I purchase CEFs today, I can allocate the correct resources to index funds and dividend growth investing stocks.
Many people grow their portfolios for years on index funds. When they retire, they either sell shares of the index funds to pay for their lives directly or convert their portfolio to bonds or CEFs.
I can do it now instead of waiting until I turn 65 to learn about CEFs. I can create a portfolio that is 20% index funds, 20% DGI, and 80% income. I can keep this portfolio allocation until I pass away.
The Bear Market is Your Friend
We all need income; income makes the world spin. There is never a time when we don’t need cash flow. In fact, I can use my CEF income at age 43 to pay for vacations, emergencies, and investments.
Getting started with CEFs. From the outside looking in, CEFs can look risky. Their price moves based on interest rates because most of them use leverage.
The best way to jump into CEFs is to understand the bond market. You can take a bond crash course via “The Bond Book.” You must understand how interest rates affect housing, banks, and lending.
CEF investing is relatively passive. It becomes more passive as you learn the ins and outs of the products. Over the years, you build trust in these products and don’t have to follow the news as much.
Bond Buying is Bac, Baby!
A big part of CEF investing is using the income to diversify your portfolio. Many CEFs yield over 10%. It’s best to diversify this income into other products that can grow differently than fixed-income ones.
Fixed income is almost directly tied to interest rates, so it is a good idea to find investments with no direct correlation to rates. This could be dividend stocks like McDonald’s (MCD), Starbucks (SBUX), or Wal-Mart (WMT).
As much as I love my CEFs, it would be unwise to go all in. The Federal Reserve can destroy the value of your portfolio by raising rates, as we saw in 2022 and 2023. The best defense is a strong offense. Start thinking ahead of ways to protect your portfolio’s growth.
Are CEFs for everyone. Everyone needs income. If you don’t want to invest in CEFs, you need a way to generate 10% returns on your income.
Five Takeaways from “Extreme Early Retirement”
An index fund that grows at 10% annually is excellent; however, capital gains can’t feed you. That means you must sell shares to keep your “income” growing above inflation.
You have some high-yield dividend stocks like Verizon (VZ), Altria (MO), British Tobacco (BTI), and AT&T (T) that may serve you well.
However, nothing does income better than CEFs. I use them as the base of all my portfolios because income is the lifeblood of every single human being.
Live Your Best Life with Dividends
Conclusion. When you retire, you want CEFs to cover all of your basic expenses. For example, if you require $4,000/month in expenses, have CEFs cover that.
Once you achieve this feat, you can layer on index funds, real estate investment trusts, and dividend growth stocks. These are great, but can’t assist you better than CEFs.
You spent 30-40 years living on paychecks; why would you stop when you retire? You want to use a combination of CEFs, rental income, social security, and pensions to live your best life.
The sooner you learn about the CEFs, the better your chance of building a magical income-investing portfolio that resembles your working days. 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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