Archives for September 16, 2019

Pay yourself first

Rather than treating savings as an afterthought, set up a standing order into a separate account as soon as you get paid, says Anna Bowes, the co-founder of Savings Champion. “That way it can become just another bill, but one that you will benefit from in the future.”

Jasmine Birtles, the founder of MoneyMagpie.com, calls it paying yourself first. “Everyone says they have no money at the end of the month to put into savings,” she says. “That’s why you have to put the money into a savings account at the beginning of the month.”

It doesn’t matter how much it is, says Bowes, as long as you start. Some savings accounts accept payments from just £1.

Set goals

While most finance experts advocate saving into a pension, retirement should not be your only goal. Shorter-term goals may be more motivating. If you usually pay for your holiday by credit card and pay it back over months, consider saving for it in advance.

Many banks let you set specific markers that show you how much progress you are making towards your target. When you have ticked off one goal, keep saving for the next.

Use technology

Birtles recommends the “savings jars” offered by digital banks such as Monzo and Starling, which allow you to separate money from your current account, but move it back easily if you need it. Many of these banks also let you set spending limits – either overall daily maximums or for different categories of purchases – then round up your spending to the nearest £1 and squirrel away the difference.

There are also apps that may help kickstart a savings habit. Chip, for example, makes automatic “microsavings” based on how much you are spending. Birtles suggests Moneybox, which lets you put small amounts into an investment Isa. There are fees, she warns, “but it’s still worth doing as it gets you into stock market investing with just 50p here and there.”

Lock your money away

If you find a savings account linked to your current account too easy to plunder, open one at a different bank and pick one without a cash card. You could even destroy the online login details if you really don’t trust yourself.

Alternatively, go for an account that restricts your access. Regular savings accounts often have terms and conditions that you need to stick to. “That could discourage skipping deposits and making withdrawals,” says Bowes.

Have a flutter

Premium bonds may not be fashionable or hi-tech, but every bond you own has the chance of winning you up to £1m. Though you are likely to get better returns from a good savings account, you need just £25 to buy bonds, and they are a bit of a faff to cash in, which should help you resist withdrawing your cash. Plus there’s always the hope that next month could be your lucky one …

Where are you going to find meaningful income to get you through retirement? Not from popular stocks, with the S&P paying less than 2%. And bonds won’t help either, as their yields are in the tank, too.

Instead let’s consider real estate investment trusts (REITs), which are tailor-made for investors who are at or nearing retirement. Specifically, I’d look to dividend-growing REITs, like the three I’m about to show you. This trio of landlords are on pace to double their dividends in just four years.

How Dividend Growth Can Quickly Double Your Money

Respected healthcare REIT Ventas (VTR) is the perfect example of how this strategy can do more than provide income. Heck, it can make you as rich as you always wanted to be!

Ventas–which invests in all sorts of properties, from senior care to medical offices to even research facilities–is the second-largest such REIT on the market. It’s also one of the most underappreciated growth stories on Wall Street. In its 2001 annual report, Ventas boasted 268 properties across its portfolio; today, it’s a healthcare juggernaut with more than 1,200.

The stock has behaved exactly like you would imagine. Since the start of 2002, the S&P 500 has put together a 267% total return. Ventas? Almost 10 times that, at 2,310% returns when you include both price gains and dividends!

But it wasn’t just about the growth. Booming profits fueled a virtuous cycle. Yes, some investors bought in for upside potential. But others were drawn to a rapidly growing dividend that at one point doubled in a five-year span.

That’s changing, however.

Funds from operations (FFO) growth has slowed in recent years, and even declined in 2018. The once spry dividend has grown just 9% in total over the past five years, including a mere 0.3% hike this year.

In other words, we want to find ourselves a 2001 Ventas … not the 2019 version.

Flagging Dividends Are a Red Flag

Public Storage (PSA) also shows both stages of the dividend-growth coin. From 2009 through 2016, Public Storage–the premier name in self-storage real estate–could do no wrong. The entire self-storage industry was blossoming. Management couldn’t hurl cash at shareholders fast enough. The payout more than tripled during this period, and unsurprisingly, that’s exactly what the stock did.

But, like with Ventas, shareholders have greeted a slowdown in the payout with diminished enthusiasm. Indeed, Public Storage hasn’t touched the dividend since raising it in the final quarter of 2016, and PSA has barely stumbled ahead with subpar three-year returns.

Beat the “Aristocrat REITs”

Like the S&P 500, REITs boast a small group of Aristocrat-esque payers that have upped the ante on their dividends every year for at least a quarter-century. They’re good companies with respectable stocks, but they’re not the first place we should look to for dividend growth, because that dividend growth has slowed to a crawl.

Again, we want stocks that look like the VTRs and PSAs of yesteryear, with relatively young but aggressive payout histories—and I have three that fit the bill.

These young guns’ payouts are expanding at more than three times the rate of REIT royalty like Realty Income (O) and Federal Realty Investment Trust (FRT).

And if they can keep this momentum going, they’ll double their dividends in four to five years. And when payouts increase by 100% or more, so do the stock prices attached to them.

Extra Space Storage (EXR)

Dividend Yield: 3.0%

5-Year Dividend Growth (Avg.): 13.9%

Extra Space Storage (EXR) is picking up where Public Storage left off. There’s plenty to love about the self-storage space, even now that it’s starting to mature. But perhaps its best quality is that it’s economically indifferent.

Is the economy booming? Great! Americans are going to buy, buy, buy, until there’s no more room left in their homes, necessitating self-storage units. Is the economy tanking? That’s fine by the likes of Extra Space Storage. Because when Americans downsize, they’re not going to want to part with all their things – so they’ll pay a few bucks a month to keep it stored until conditions improve.

As for EXR itself: It’s the second-largest self-storage operator in the U.S., and it’s gained its size by simply hoovering smaller competitors. The company has spent almost $1 billion a year over the past half-decade making acquisitions to grow its empire.

Yet somehow, there are profits left over for dividend hikes. Plenty, in fact. EXR has juiced its payout by more than 90% since 2014. Shares have actually managed to outstrip that dividend growth.

Extra Space’s current FFO payout ratio is just 73%, leaving a ton of cushion for more rate hikes by typical REIT standards. I will point out, however, that dividend growth has begun to slow over the past couple years, dragging down its average. But even if EXR “normalizes” to rate hikes like its 10% bump in 2018, that’ll send a strong buy signal to shareholders.

Terreno Realty (TRNO)

Dividend Yield: 2.1%

5-Year Dividend Growth (Avg.): 14.0%

Terreno Realty (TRNO) is an option for retirement investors who want to get in near the ground floor. This industrial real estate player focuses on coastal markets such as L.A., Miami and Washington, D.C. It’s a relatively young REIT that got its start as a 2010 “blank check” IPO–a weak offering that was cut twice before finally hitting the markets.

No wonder, given this cloud of mystery surrounding the company (via Reuters):

“It said in a regulatory filing with the U.S. Securities and Exchange Commission that it has no operating history and has not yet identified any acquisitions, or committed any portion of the proceeds to such acquisitions … It also said it may change its business, investment, leverage and strategies without stockholder approval.”

Terreno is the definition of a “show me” stock.

Terreno is doing all the things you want to see in a young REIT. It’s highly acquisitive, making about $220 million worth of deals in 2018 (the company itself is worth just $3 billion). Cash rents on new and renewed leases shot up 19.2% year-over-year in 2018. FFO surged 19%.

My only concern is that 2019 growth has cooled a little bit. FFO from the first six months of 2019 has come in flat compared to last year’s midway point.

Still, Terreno seems to have faith in its prospects. The REIT ramped up its payout by 12.5% at the end of July, and it’s still only paying out 74% of its FFO via the distribution–ample firepower for more.

Crown Castle International (CCI)

Dividend Yield: 3.1%

5-Year Dividend Growth (Avg.): 26.3%

I’ve previously highlighted the dividend prowess of telecom infrastructure REIT Crown Castle International (CCI), which has more than tripled its payout over the past half-decade. But there’s another aspect of the story that’s important to CCI’s dividend-growth future:

That payout is young.

You see, Crown Castle went public in 1998, but it didn’t start paying dividends until 2014 – the year it converted to a REIT structure. And unlike many untested things, young dividends tend to be awfully safe, because the company is only really starting to dip its toe into profits to pay it out.

You can see it all over Wall Street. Consider the first five years of relatively recent dividend payers Cisco Systems (CSCO), Starbucks (SBUX) and Expedia (EXPE). They doubled (and in Cisco’s case) tripled their quarterly dividends within five years and had oodles of room to spare.

Meanwhile, Crown Castle is paying out just 77% of FFO as dividends, which again is extremely low by REIT standards. And FFO growth seems a lock too, given the importance of telecom to everyday life, not to mention the continued rollout of new technologies such as 5G.

Those two factors combined should help Crown easily reach its stated target of 7%-8% annual dividend growth, if not exceed it.

Nearly everyone wants to save more for retirement, especially because so many people are falling behind on their savings. The average 401(k) balance among U.S. adults is roughly $92,000, according to a report from Vanguard, yet that number is skewed by those with especially high balances. A more accurate picture of the typical American’s savings is the median amount workers have saved, which is just $22,000.

If your savings aren’t where you want them to be, there are several ways you can start saving more. Comb through your budget to see if there are areas where you can make cuts, for example, or pick up a side hustle to bring in some extra cash.

One somewhat unexpected way to save more, though, is to establish a healthy emergency fund. At first glance, it might seem as if an emergency fund takes away from your savings. After all, couldn’t you save more by simply putting your emergency-fund money toward retirement? In reality, a well-stocked emergency fund can not only help you save more for retirement, but it can also improve your overall financial health.

The long-term benefits of an emergency fund

The purpose of an emergency fund is to have a stash of cash to pull from when unexpected expenses inevitably pop up.

Only 61% of workers have enough savings to be able to cover a $400 unexpected expense, a report from the Federal Reserve Bank found. Those who don’t have enough savings to pay for these types of costs have to find the money elsewhere, most commonly by borrowing money, incurring credit card debt, or simply not paying other monthly bills, according to the report. Racking up debt or borrowing money may help solve your short-term financial problems, but they can lead to even more trouble down the road — not to mention make it harder to save.

One other way some people handle unexpected costs is to pull the money from their retirement funds. Fifty-two percent of Americans have withdrawn from their retirement accounts before they retired, according to a survey from MagnifyMoney. While your retirement fund may seem like a giant savings account, withdrawing your money for reasons other than retirement can hurt your long-term nest egg.

Not only will you likely be subject to income taxes and a 10% penalty fee for withdrawing money from your 401(k) or traditional IRA before age 59-1/2, but you’re also making it harder to reach your retirement goals. When you leave your savings untouched for decades, compound interest — which is essentially when you earn interest on your interest — allows your money to grow exponentially. But if you dip into your retirement savings, you’re missing out on any potential growth that money could have seen over the next few decades.

For example, say you withdraw $2,000 from your 401(k). If you’re earning a 7% annual return on your investments, that $2,000 could have turned into around $15,225 after 30 years. So you’re missing out on not only the original amount you withdrew but also all the potential gains you would have received by leaving your money alone.

This is where a good emergency fund comes into play. When you have plenty of cash tucked away for unexpected expenses, you won’t need to tap your retirement savings (or go into debt, skip paying your bills, or plead with friends and family to lend you money) to cover those expenses.

Getting started building an emergency fund

It’s a good idea to have enough cash to cover at least three to six months’ worth of expenses, but if you’re nearing retirement age, you might want to save a little more. The last thing you want when you’re just a few years from retirement is to have an unexpected cost eat away at your retirement account — especially since you don’t have much time to recoup your earnings.

Also, unexpected expenses don’t go away once you retire, and it will be tougher to replenish your emergency fund when you’re retired and living on a fixed income. To avoid overspending (and risking running out of savings too soon), it’s smart to have a robust emergency fund that can cover any financial challenges life throws at you.

Once you have a goal in mind for how much to save, the next step is to actually start building your emergency fund. If you’re strapped for cash with multiple financial priorities pulling your wallet in different directions, it might be a challenge to find more money to put toward your emergency fund. The key, though, is to simply get started saving what you can. You don’t need to come up with six months’ worth of savings overnight or even in a few months. But every little bit counts, and even a few hundred dollars socked away is better than nothing.

Saving for retirement isn’t easy, but it’s even more difficult when you have unexpected expenses threatening to throw off your retirement plans. With a healthy emergency fund, though, you can avoid raiding your retirement account and give your savings the best chance at lasting through your golden years.

There are a lot of rules surrounding retirement saving telling you what you are and aren’t supposed to do with your money. Do start saving early, don’t rely too much on Social Security, do contribute as much as you can to your 401(k), etc.

There’s one “don’t,” though, that is less obvious but just as important: Don’t take money from your retirement fund before you retire. Withdrawing your money too early comes with a host of consequences and can potentially irreparably damage your retirement savings — yet those risks don’t stop more than half of Americans from doing it.

Why Americans are raiding their retirement funds

Approximately 52% of Americans have withdrawn money from their retirement savings before reaching retirement age, according to a survey from MagnifyMoney. The reasons vary, but nearly a quarter of those who have withdrawn from their retirement fund did so to help pay off debt. Another 17% needed cash for a down payment on a home, 11% pulled money to help with college tuition, and 9% used the cash for medical expenses.

It’s understandable to want to raid your retirement fund when you need cash. After all, you likely have at least a couple decades left to save for retirement, whereas these other expenses are more immediate. What’s the harm in pulling a few thousand dollars from your savings when you have so much time to pay it back?

In reality, even relatively small retirement fund withdrawals can significantly affect your savings. First, early withdrawals have an immediate effect on your bank account because you may owe a penalty. If you withdraw from your 401(k) or traditional IRA before age 59-1/2, you could owe a 10% fee on the amount you withdraw. Depending on how much you withdraw, that could be a serious chunk of change. In addition, you’ll owe income taxes on that money, which also eats away at your cash.

Second, withdrawing too early can also have significant long-term effects on your retirement fund. Compound interest allows your savings to grow exponentially the longer they sit untouched in your retirement fund, so when you lower your balance by making a withdrawal, it has long-term consequences. Sometimes withdrawing even a couple thousand dollars can ultimately cost you 10 times that much down the road.

The damaging effects of early withdrawals

To see just how much these early withdrawals can affect your savings, let’s look at a hypothetical example. Say you’re 40 years old with $50,000 in your 401(k), and you withdraw $5,000. Let’s also say you were saving $250 per month earning a 7% annual rate of return on your investments, and you continue saving at that rate even after you make your withdrawal.

First off, you’d immediately be hit with a 10% penalty for withdrawing before age 59-1/2, which in this case would be $500. But you could end up losing a lot more than just $500 over the long term. Here’s what your total savings would look like over time if you had or had not withdrawn from your account:

Age	Total Savings If You Did Not Withdraw From Your 401(k)	Total Savings If You Did Withdraw From Your 401(k)
40	$50,000	$45,000
50	$139,806	$129,971
60	$316,471	$297,122
70	$663,995	$625,934

In other words, that $5,000 withdrawal can potentially cause you to miss out on nearly $40,000 in savings over a few decades. If you repeatedly withdraw money from your retirement fund over the years, it could cost you even more.

Is it ever OK to withdraw from your retirement fund?

If you’re in a dire financial situation — whether you’re drowning in debt or slapped with an expensive unexpected cost — withdrawing from your retirement fund may seem like your only option. But pulling money from your savings should be your very last resort, and it’s a better idea to consider other options first.

For example, if you’re saddled with loads of debt and paying high interest rates, try to get creative when paying it down. If you’re burdened with credit card debt, try opening a balance transfer card to take advantage of the low introductory rate — which will help you pay off your debt faster. Or if you’re buried in student loan debt, consider refinancing your loans for a lower interest rate.

If you truly have no other options, consider taking a loan from your retirement account rather than withdrawing. You can borrow up to $50,000 or 50% of your total balance (whichever is the lesser amount), and you generally have to pay the money back within 5 years with interest (which just goes back into your account). While you still stand to lose some money in potential earnings over the years, it likely won’t be as drastic as if you were to withdraw it completely. Keep in mind that this option should only be used as a last resort, and it’s best to avoid touching your retirement money if at all possible.

Withdrawing money from your retirement fund may not seem all that bad on the surface, but the long-term consequences can be significant. Before you take money from your savings to put toward other financial needs, consider whether you have any other options. If you leave your retirement fund alone, you’ll be in much better financial shape come retirement age.