bluecollardollar: on dividends in retirement plans

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The mutual fund investor has a great many more options available to them in the post-Great Recession marketplace. The question is: are they right for you as you make a retirement plan using 401(k)s or IRAs?
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on dividends in your retirement plan

It is an accepted fact that retirement will need to be put off for as long as possible. This was tough medicine to take for those who are close to retirement. They may not have planned to work longer at the same career or worse, look for another income opportunity at an age when they least expected it.

Some have simply accepted the fact, almost as if they knew all along they might not have any other option. Some are blaming everything from their plans to the fund managers to the markets to Wall Street. It may have had something to do with the aforementioned and often cited culprits. But in almost every instance, it was because there was not a significant level of contribution made when the time was on their side.

But the concept of retiring later moves that "time as a friend" idea to the forefront. And not just for the young. People in their forties and fifties could reap the benefits of lackluster portfolio choices in their early years with the potential of twenty or thirty years to fix those mistakes.

They have two hurdles that I have encountered recently amongst this age group: the disbelief that the markets can perform and a too conservative approach to investing. But there is a way to beat that bias and actually come very close to achieving your goals.

Dividends illustrated here are not guaranteed but their growth potential in your portfolio is evident.

The answer lies in dividends. While many of us won't take the time to invest in individual stocks, an education process that involves more research and sometimes risk than we are willing to take on, dividends can be found in many mutual funds. An index tracking the S&P 500 is a good place to begin. Beyond that, mutual funds focusing on companies that pay dividends is the next best option. (Be careful that your diversification doesn't suffer with too much of any one underlying holding - many dividend funds invest in the same companies as the index.)

The increased returns using dividends comes as a result of companies who are committed to growing their dividends over the long-term. And even if the stock price itself doesn't appreciate in tandem, the dividend portion of the profits increase the return, almost as if the stock price didn't go down. Because many of the dividend paying companies your fund might invest in are stable, stock prices are often not impacted by day-to-day price shifts.

What is noteworthy is the impact a 2% return, often the average dividend payout can have on a portfolio balance. Suppose you're average. You make $70,000 a year and you are within 20 years of retirement. You contribute 5% and your company matches 50% of that 5%. With a beginning balance of $30,000 in that 401(k), a 2% return will net you about $221,170.

Doubling your contribution rate to 10% with the same factors at play will increase your net return to $397,761. And that's just for dividends. Imagine a market return of 4% - well you can see where this is going.

Dividends give you the bump that time needs for every investor age.

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