I am retired and 70 years old, my investment goals have changed. I’m now in the “distribution” phase of my financial plan, I no longer have a paycheck. I use my Cash Machine IRA account to “fill the gap” between our Income and Expenses. My goal is a reliable, reasonable monthly cash flow. Our Income includes Social Security (I waited till 70 to build its value) and pensions. My Expenses includes a comfortable life style that my wife and I chose and enjoy, financial help for family members and charitable contributions. It just so happens that my “fill the gap” requirement is almost the same as my IRA Required Minimum Distribution. I withdrawal about half of my Cash Machine dividends to “fill the gap”, the other half or so gets reinvested in more of the same dividend stocks. I will never add any new cash to the Cash Machine account, won’t need to. The final balance of my Cash Machine will go into my Estate Plan when I pass away.

I developed some rules that I continually reference so that I don’t get side tracked by watching CNBC or the “noise” of the days to day stock market. This plan takes a lot of discipline for sure. I want to sleep well at night and not have money worries.

My Cash Machine Rules:

1. Portfolio value, capital gains and % yield are not my goals, highly predictable monthly income is my goal.
2. I only look at my monthly cash flow, I don’t watch the portfolio value.
3. I only buy and hold stocks (minor adjustments are OK), I don’t trim shares for income, only add as I wish.
4. I only invest in higher yielding stocks or ETF’s that pay 3%+ in dividends. I own equity and debt(bonds, loans).
5. I diversify to spread my risks.
6. The principle value of the Cash Machine account should never be much less than it is today in my 25 year plan. It may actually grow substantially.
7. In an up market or with stocks that outperform, I will add more. Known as the “beat and raise” concept.
8. In a down market when my portfolio value drops I’ll switch to “buy on the dips”.
9. I try and remember that market changes do not take away my shares or income, just “perceived value”.
10. The higher the yield, the lower the growth rate, overall growth is not a goal, monthly income is.

This Cash Machine portfolio and plan has been at least 5 years in the making, it took a complete change in mindset and a lot of patience. It consists of 32 stock, divided up among sectors I’m familiar with. I don’t invest in anything I don’t understand. 

I go with the higher yield investments, 3% or more, and the dividends that do get reinvested are generating more income. This method will generate more overall consistent income than a “dividend growth” strategy where say a 1-2% yielding company  might have 20% dividend growth. If that company can sustain the dividend growth for a number of years then it may work out, but I’ll still be ahead because I will still be adding to higher yielding companies. The math of compounding dividends is quite significant. In recent years the entire value of this portfolio has grown nicely.

I can also sleep at night, knowing that when (not if) we have a market down cycle and my portfolio value decreases, my dividends will be coming my way every month. This  will add balance and actually prevent my portfolio value from dropping as low as the market does. The more dividends you have coming in every month, the more balance that is being added to your account. Some of my stocks have been paying uninterrupted dividends for over 10 years.

So far my experience has been that the longer I’ve owned this Cash Machine the fewer positions I have, 30 or so positions is enough. Over time I have companies that perform very well and some that don’t, and I have found that owning more of what is working is better than owning less and having that money tied up in non-performing companies. So I sell weakness and buy strength. It often takes time to determine strength from weakness. I never feel under pressure to make all my changes at once. I try and stick with my plan and build on it. Patience is difficult.

Further disclosure. In addition to my Cash Machine account I have a taxable account that I view as my legacy account. I started this account in my 20’s and have consistently added to it. In that account I hold high growth stocks, most of which don’t pay dividends. This account is the core of our Estate Plan that will someday pass to my family and charities. In addition, we maintain ROTH accounts and a cash emergency reserve of about 3 years. My goal in retirement is to carefully plan and enjoy my volunteer work. Giving back to the world for all of my blessings is important while I still have my health. 

Building a Cash Machine is not difficult. You might want to try it. 

My Cash Machine investments are shown below.

The most hated bull market ever! Sit back and just enjoy it!

Summary:

1. The overall global economy is good. Corporate revenues and profits are strong.
2. Worldwide events have caused spikes in volatility but the market keeps climbing.
3. Tax reductions have yet to be really felt yet.
4. Trump has been good for business and the market.
5. Everyone benefits in one way or another as the “pie” gets bigger.

This bull stock market has been the most hated ever! The above chart shows the S&P 500 Index plotted against a measure of anxiety. The anxiety measurement is the VIX index divided by the 10 year treasury yield. Notice the spikes, or lack of spikes for geopolitical events that have taken place. 

So even with the background noise of the 10 year treasury rising above 3%, North Korea, inflation, Trump tariff’s, China and other distractions we are all making money if we have invested wisely.

The reason for this is simple, the economy is pretty strong AND corporate profits are rising. See the chart below for corporate profits.

Summary:
Due to long term conditions in the workforce, you just are never going to get a raise. After reading this you’ll understand why and what choices you have if you want to make substantially more money.

Why No Raises:
Most Americans improve their economic status based on their salary at work, not through their investments or any social programs. Going back to the 1970’s wages, adjusted for inflation, for the typical worker have been flat as a pancake, rising only .2% a year. That’s not 2% but .2%, as in an increase of $100 a year for a $50,000 salary!

Have all worker’s been effected? Absolutely not. Since the late 1970’s large salary increases have been distributed to the workers at the top of the salary scale, whereas the bottom workers have seen a loss or at least stagnation. Better educated workers have seen their rate of increase improve over lesser educated workers.

The economy has grown substantially, the stock market has skyrocketed. The Dow Jones Industrial Average was $4,931 in January 1970, in 2018 it hit $26,000! Your retirement plan has benefited just not you real earnings.

So why haven’t real wages increased over the last several decades? There are a whole list of reasons.

1. Wages typically increase as overall worker productivity also increases. Except for the time period around 200 – 2004, real worker productivity has been stagnate. All the computers and technology is already in place, workers are no longer more productive.
2. Up until just recently minimum wages have been flat for many, many years. For example the current Federal minimum wage of $7.25 has been in place since 2009! State minimum wages haven’t done much better.
3. Our good old fashion manufacturing jobs are a small percentage of the overall workforce. These jobs were exported to other countries. Unions no longer carry the weight of prior years. Today’s heavy industry is being dominated my robots and technology. We gave up manufacturing for a services economy.
4. People no longer are mobile, they won’t take a risk of leaving their current job for a new job, even for a raise. In addition, people no longer relocate geographically as a means to earn more money.
5. The 2007 recession forced management to reduce expenses and they haven’t lost that mindset 10 years later. With little or no real inflation, there is no reason to increase wages.

How to Get a Higher Salary:
It’s pretty simple, to get a higher wage, become more valuable to someone who is interested in profits. Businesses pay people more money when they can directly align the employee’s performance to an improvement in the bottom line. If you work for the government, school system or a not for profit, this just won’t work.

Suggestions:

1. Learn a new skill that is worth more than your current skill, even in your existing business. Your company pays more as you advance up the “value chain”.
2. Become the strongest supporter of the company, the best employee, the hardest worker. You get the idea, a business pays more for these people.
3. Go into sales or become billable. Sales and billable people can get paid based on their contribution to profits. Sales has always carried a negative connotation, however professional sales is a very important and rewarding experience.
4. Take a job that includes travel if you can. These employees are more valuable and get paid more.
5. Work for companies that are growth oriented or have high profit margins. Technology and healthcare come to mind. Also profitable businesses like mid-large size law firms can afford to pay well. Low margin and small businesses just might not be able to pay more.
6. Become a manager and keep moving up in your business or another one. If you have leadership skills use them at work. Most businesses thrive on leadership skills.
7. Always be competitive, if you don’t tell your boss or company how valuable you are and what you contribute no one else will tell them either.
8. If none of these appeal to you consider starting your own business, maybe part-time at first. Many small businesses are what I call “job replacement” businesses.

If none of the above work for you, just be happy to have a job and don’t expect a raise anytime soon!

Summary:
Although I don’t believe in providing a “guaranteed wage” as a social program, I do believe there is a simple way to increase the income of lower wage WORKERS! Expand the Earned Income Tax Credit program. Reward those that work and file taxes as a way to reduce poverty. EITC actually encourages working, the higher your income the more EITC you get within various ranges.

Details: 
I usually don’t write about this topic but as we end tax season some things have become pretty apparent to me. There are many lower income workers that are struggling to make ends meet. These are couples with small families and single mom’s, they struggle to provide a living and a better future for their children. These are workers that are stuck in the lower paying jobs, many under $15/hr. Even workers making $15/hr, about $30,000 a year (about 2,080 work hours per year), find it quite difficult to cover healthcare, rent, food, transportation and basic essentials.

There is however a potential answer to help along these lower wage earners, a system that is somewhat already in place. Our new tax law taking effect in 2018 provides low wage earners with additional increases in valuable tax credits like Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). As valuable as these tax credits are they can be enhance and distributed in a far more meaningful way. I’ll explain the distribution after this example.

Example: A single mother, we’ll call her Mary, has one dependent and is filing her 2017 tax return as Head of Household. Mary earned $26,000 (about $13/hr) in 2017. After standard deductions, 2 exemptions and the Child Tax Credit, Mary would currently owe NO Federal taxes. She would be entitled to about $2,100 in Earned Income Tax Credit and an additional $100 in additional CTC. A $2,200 refundable credit PLUS the withholding tax taken from her paycheck, let’s assume 10%. This refund to Mary of $4.600 is a major event in her life. Under the new 2018 tax law she would get a slightly bigger refund. By the way, the EIC encourages workers to earn more money, not less. This is not food stamps or welfare, you need to work to get these credits.

So, how can this process be enhanced to better accommodate low income workers like Mary and her family?

A Simple Solution:

1. Allow all employer’s to identify their low income employees with family members and change the IRS withholding tables to allow for $0 Federal tax withholdings. As in Mary’s example, she won’t owe Federal tax anyhow. Her monthly cash flow would improve by over $200!
2. Allow the same employers to advance fund the Earned Income Credit to employees like Mary in her paycheck. This might sound difficult, but it may be simple. We’ll assume that the employer is already making quarterly withholding payments (form 941) along with Social Security and Medicare. There should be plenty of cash here to pre-fund employees like Mary’s EITC.
3. We’ll assume Mary would prefer to have an extra $400/mo in cash instead of a one-time refund check a year later.
4. Congress should further improve the Earned Income Tax Credit calculations maybe even double it.
5. We need to plug the gap where a single wage earner, working full-time, year round at the federal minimum wage currently does not qualify for EITC.
6. More individual states should adopt an EITC at the state level. Currently 29 states and the District of Columbia have EITC’s. However, a few of these states make their EITC “not refundable”. Meaning that you can only apply their EITC against actual state taxes.
7. It was estimated that in 2016, 20% of eligible workers did NOT claim their EITC.

Moving the working poor out of poverty makes sense for all of us. It’s hard to cheat this system.