Why a Rising Stock Market is Bad for Retirement

It’s a wonder how bloated our stock market is lately.  In fact, the US is up almost 15 percent since President Trump’s election.  But that’s a good thing right?  After all, our growing investments are causing our net worths to expand to new highs.  But what if I told you that this recent surge in wealth is actually slowing down our journeys to retirement?

That’s right, a rising stock market doesn’t mean a quicker road to retirement for investors.  It means a lower stream of steady income for prospective retirees.  To illustrate, consider the example below.

You buy 30,000 shares of index fund X for $10 per share with a total investment of $300,000.  Index fund X pays $1.00 in dividends per share each year.  So at the end of the first year, you’ll get $30,000 in dividends automatically reinvested into the fund.  If the price per share for fund X stays at $10 at the end of Year 1, your $30,000 reinvestment will get you 3,000 new shares.  You now have a total of 33,000 shares (worth $330,000), and your next dividend payment for Year 2 will be $33,000.

Let’s take a look at what happens after 15 years:

Year Number of Shares Price per share  Balance Per Share Dividend Total Dividends
1 30,000.00 $10.00  $300,000.00 $1.00  $30,000.00
2 33,000.00 $10.00  $330,000.00 $1.00  $33,000.00
3 36,300.00 $10.00  $363,000.00 $1.00  $36,300.00
4 39,930.00 $10.00  $399,300.00 $1.00  $39,930.00
5 43,923.00 $10.00  $439,230.00 $1.00  $43,923.00
6 48,315.30 $10.00  $483,153.00 $1.00  $48,315.30
7 53,146.83 $10.00  $531,468.30 $1.00  $53,146.83
8 58,461.51 $10.00  $584,615.13 $1.00  $58,461.51
9 64,307.66 $10.00  $643,076.64 $1.00  $64,307.66
10 70,738.43 $10.00  $707,384.31 $1.00  $70,738.43
11 77,812.27 $10.00  $778,122.74 $1.00  $77,812.27
12 85,593.50 $10.00  $855,935.01 $1.00  $85,593.50
13 94,152.85 $10.00  $941,528.51 $1.00  $94,152.85
14 103,568.14 $10.00  $1,035,681.36 $1.00  $103,568.14
15 113,924.95 $10.00  $1,139,249.50 $1.00  $113,924.95

Wow.  By year 15, you’ll start receiving a “paycheck” of over $110 grand a year if you stop reinvesting your dividends.  And you’ll have a net worth of about $1.1 million.

But now let’s consider another scenario.  Fund X grows in value by 15% each year.  So after the first year, the price per share becomes $11.50 and after the second year, the price becomes $13.23 and so on.

Now let’s see what happens after 15 years:

Year Number of Shares Price per share  Balance Per Share Dividend  Total Dividends
 1 30,000.00 $10.00  $300,000.00 $1.00  $30,000.00
 2 33,000.00 $11.50  $379,500.00 $1.00  $33,000.00
 3 35,869.57 $13.23  $474,375.00 $1.00  $35,869.57
 4 38,581.82 $15.21  $586,781.25 $1.00  $38,581.82
 5 41,118.64 $17.49  $719,167.53 $1.00  $41,118.64
 6 43,469.61 $20.11  $874,329.09 $1.00  $43,469.61
 7 45,630.82 $23.13  $1,055,468.51 $1.00  $45,630.82
8 47,603.56 $26.60  $1,266,264.22 $1.00  $47,603.56
9 49,393.16 $30.59  $1,510,947.95 $1.00  $49,393.16
10 51,007.83 $35.18  $1,794,392.27 $1.00  $51,007.83
11 52,457.79 $40.46  $2,122,210.11 $1.00  $52,457.79
12 53,754.46 $46.52  $2,500,868.09 $1.00  $53,754.46
13 54,909.88 $53.50  $2,937,815.94 $1.00  $54,909.88
14 55,936.19 $61.53  $3,441,634.69 $1.00  $55,936.19
15 56,845.30 $70.76  $4,022,206.51 $1.00  $56,845.30

Yikes.  After 15 years, your net worth is a lot higher at $4 million but if you retire right away, you’ll receive a paycheck of only $57 grand.*

The key here is that a high net worth doesn’t mean high income (e.g., dividends).  And the goal to investing for financial independence is to maximize income, not net worth.

*This example assumes that price per share is entirely unrelated to dividend yield.  In reality, there is some relation between the two but in many cases, companies may continue to pay the same dividend regardless of changes in share price.   




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