The Retirement Community Gets This WRONG

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[The following is a partial transcript of this episode of The Scott Alan Turner Show. Listen to the full episode to hear this story, listener questions, money hacks, and inspiring stories of people that are changing their financial lives. Subscribe to the free podcast on iTunes or Google Play]

In This Episode

  • How to avoid overdraft fees
  • Dog food marketing tricks

Listener questions:

  • Are dividends a good strategy for income (Brady)
  • Should we take a 401(k) loan to pay off debt (Sofia, Sioux City, IA)
  • Can I get out of my car lease (Haley, Yonkers, NY)
  • My kids won’t spend money (Ian)
  • What type of home insurance is best (Luis, Bridgeport, CT)
  • I have 20% down for a house, should I get a 15 or 30 year loan (Owen)
  • Are ETFs or index funds better (Taylor, Seattle, WA)
  • I’ve got an $8,000 medical debt that is in collections (Destiny, Fresno, CA)
  • Are CDs good for short term savings (Elia)

Resources/links:

Your nest egg could get scrambled if you fall for this money myth.

They gray hairs and the financial independence, retire early community are obsessed with income. Me too, because I need money to eat and buy cupcakes. Specifically, everyone is obsessed with money from investments to live on, in the form of dividends. That money people earn from savings and investment accounts. If you’ve got a 401(k) or IRA, you’re getting dividends. You’re just not getting a check mailed to you once a quarter because they go right back into the 401(k).

[Listener voicemail]

Everyone needs to hear this, because most people have it all wrong. Because they’ve bought into the some myths I’ll bust for you today.

Imaging this. A farmer has some milk cows. The farmer can sell whole milk. Or they can separate the milk and sell heavy cream and skim milk. Those are the two options. The heavy cream can be sold for more money, but the skim milk is sold for less. So the heavy cream and skim milk makes the farmer the same amount of money as selling whole milk.

Most advisors, retirees and the FIRE DIY community separate the milk. They live off the skim milk.

The other option is selling some of the whole milk, and living off that.

Fancy Nancy is this little red haired girl with big curly hair, who likes big words. They are books I read to my twin 5-year-olds and they learn new words. So stick with me, we’ve got a couple new $5 words. But they’re Fancy Nancy $5 words, that could be worth tens-of-thousands of dollars to you.

The Fancy Nancy definition of living off the skim milk is an income strategy. It’s living off of DIVIDENDS.

The Fancy Nancy definition of selling the whole milk is the Total Return strategy. It’s selling some INVESTMENTS and living off that money.

Fancy right? Skim milk vs. whole milk. Income from dividends vs. selling investments.

It boils down to this big myth you’ve heard – protect the principal. Don’t spend the principal, or you’ll run out of money! Wrong.

It feels good to protect the principal. I get it. I used to say that too. It feels good to get a ‘paycheck’, especially after leaving the work force. Social security, pensions, annuities, rental income, and dividends.

But when it comes to dividends as a paycheck – the skim milk – the risk is greater. What I care about, and I believe most people do too – is financing my goals. You see companies go bankrupt, downsize, and cut dividends during recessions. Suddenly we’re back to eating PB&J sandwiches not because we want to, but because we have to. And forget the vacation and travel too.

Here are the top three myths on living off interest and dividends – the skim milk.

Myth – You’re not touching the principal.
Truth – Dividends are just the company spending your principal instead. Dividends cause the stock price to go down by the same amount. So you’re investment is worth less. You’ve lost principal. The company took it and gave it away to the investors.

Myth – Lots of people do this.
Truth – lots of people do this because it’s what the media and Wall Street sells us. Coke is trying to convince us sugary soft drinks don’t make us fat. People are finally waking up to that myth too.

Myth – living off bond income or dividends is safer, because what if the market is down?
Truth – Smart investors have proper asset allocation – stocks AND bonds, and are well diversified. Bonds and dividend income have more risk. Dividends can be cut. Bonds that have more income come with more risk.

I know that you’ve seen pictures of the great pyramids in Egypt. They exist. I’ve seen them. I’ve touched them. I’ve got evidence they exist.

Aliens may have built them. But I’ve got no evidence of that.

The M&M Theory is part of the evidence for whole milk. The Total Income strategy. Sounds delicious right? Published in 1958 by two dudes. They would go on to win Nobel prizes. You can go read about it but it’s not nearly as exciting as a bag of M&Ms. The M&M Theory is the evidence. It’s nothing I’m making up. Like the moon landing.

The listeners of the Scott Alan Turner Show are leaders of the pack. True #moneyacs. Some listeners may not be at the stage where this stuff matters yet. But believe me, it will. You’ve heard this stuff tossed around on the news, other shows, and in magazines. But now, you’re smarter than the average bear.

I have included a bunch of links in the show notes if you need some reading material to make you fall asleep. They go into more detail about what Brady originally asked about – living off dividends. Evidence shows the Fancy Nancy word Total Return strategy – selling whole milk – is lower risk, while providing the same amount of money to buy food. And it’s also more tax efficient, but I’m not your tax guy. They make me say that.

  • Same or more money, less risk.
  • Same or more money, less risk.
  • Same or more money, less risk.

Sounds pretty good to me, probably to you too.

You’re probably wondering – why haven’t I heard this before? If Money Magazine, Kibble Burger magazine, and the Motley Fools website didn’t have dividends, the next hot stock tip, and social security tips to talk about every day, they would be out of business. They would have to start telling cat stories, like I do. Many advisors don’t know this stuff. Brokers don’t make money on this stuff.

Know this – the new rules of living off your savings should be:

In the end, WHERE the cash comes from to live on isn’t as important as the TOTAL WEALTH you have.

It’s a good piece of trivia, so you’ll want to talk about this with your FI/RE friends and the elders in your life to see what they guess. Because you’re going to impress them with something very few people know.

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