Investments

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Retirement Planning Part 4 – What Should I Invest in While in Retirement

In Part 3 we discussed how to determine how much money you’ll need or have in retirement. In this post we’ll discuss what type of investments you should have in your portfolios.

Let’s start with the premise that your retirement plan calls for you to withdraw 4% a year from your investments to cover your expenses. This is a common benchmark used by many planning tools. A common recommendation is that you maintain an allocation of stocks vs. bonds that match your age, for example if you are 65 years old you would have 65% invested in bonds and 35% in stocks. We’ll look at your investment options.

What should I invest in?

  1.  First of all these general recommendations were pretty good when we had a “normal” market environment. 65% in bonds or any fixed income was not a problem since the US 10 year Bond yields from 1996 to 2006 ranged from 5% – 16%. If you wanted to withdraw 4% and were making 5%+ you were in pretty good shape. Today 10 year Bonds yield under 3%, with Bond prices surely headed down. Therefore you are stuck with a rapidly depreciating asset. Furthermore, you are withdrawing more than you are earning. Bonds today are safe, but not the best investment.
  2. Stocks, by comparison have had a pretty good run since the 2009 market lows. For the smart people (brave) people who hung on to their solid stock investments through the recession, they are now back to all-time highs. The poor people who were panic struck and sold at the bottom of the market and stayed in cash for a year or so, they are financially stuck.
  3. Given the current market conditions investors should look to overweight stocks, especially those with solid dividends. Many of these stocks have “bond-type” yields and have the possibility of both increased yields and growth in value. I’ll cover some of these possibilities in a separate posting, including stock preferred shares, MLP’s, BCD’s and REITS. For your general investment pick household names that have a solid track record of dividend growth such as:
    1. Verizon 4.37%
    2. Altria 4.23%
    3. American Electric Power 3.49%
    4. Proctor & Gamble 2.80%
    5. Microsoft 2.57%
  4. All of these recommendations need to be adjusted on an annual basis, just like rebalancing your portfolio. Some of these investments might be “buy and hold” but not “buy and forget” as I explained in a prior article. Some people think this is like day-trading, a risky practice if you’re not properly trained, but it isn’t. There are a few individual stocks you can keep forever, but many need to be swapped out. One good practice is to set goals when you buy a stocks, you need a purchase price and a sale price, before you buy. Don’t buy at the top and sell at the bottom.
  5. Many people may not feel like picking individual stocks, they are better off buying Exchange Traded Funds (ETF’s). ETF’s are usually better than Mutual Funds because they are more transparent and easier to understand. ETF’s trade like stocks, Mutual Funds trade based on a NAV, Net Asset Value, this is calculated at the end of each day.
  6. So what about bonds? It’s OK to have a small bond position today, just make sure they are of “short duration” and keep an eye on the core price. High quality corporate bonds are OK. As prices drop over the next 6 months get out and sit in cash or high dividend stocks until bond yields climb above 4 or 5% then start buying on a “ladder” basis.

In summary, you can’t withdraw 4% on an investment only yielding 2-3%, you’ll run out of money sooner than later. In the current market high quality, high dividend stock or stock ETF’s  are a safe bet.

In our next post we’ll discuss how some specific investments will help you grow your portfolio to meet your retirement needs.

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Retirement Planning Part 3 – How Much Income will I Need/or Have in Retirement

In Part 2 we discussed some actionable items that can help you prepare for your retirement. In this post we’ll discuss how to determine how much money you’ll need or have in retirement.

Now that you are planning to retire and you understand there are no more “paychecks”, you need to determine how either how much money you’ll need in retirement. Of course we’ll also examine how much money you will actually have access to based upon your current savings, investments, pensions and Social Security.

How much will I need?

  1. First of all the common recommendation is that you will need about 80% of your pre-retirement income in order to retire without a major life style change. Therefore if you (your household) were making $100,000/yr. you should be able to live on $80,000/yr. in retirement. However, this may not meet your needs, for example if you currently make $100,000/yr. but carry significant debt or have other financial responsibilities you may need a lot more than 80%.
  2. The very best way to determine how much you’ll need is to develop a start from scratch, realistic expense budget. Be sure to include the cost of future healthcare insurance costs of buying cars, replacing appliances, vacations, etc. Also set aside a healthy emergency fund.
  3. You can now search on line for retirement planning calculators to help you determine how much money you’ll need to actually retire. I found that T. Rowe Price recommended 11x your retirement income, Fidelity 12x, and so forth. All of these have varying assumptions. Here is another examples:

BTN Research estimates that, assuming 5% average annual investment returns, for every $1,000 of monthly income you want over a 30-year retirement, you need $269,000 in the bank. Let’s consider that same household making $75,000 a year. To replace the commonly recommended 80% of income in retirement — or $60,000 in this case — the household would need $5,000 a month. In this calculation, this household’s number is $1.35 million, or 18 times final pay. A higher investment return would bring the numbers down.

 Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits. Let’s take that same household, which spends every penny of its $60,000 income in retirement. Say this household collects $20,000 a year in Social Security. That leaves it spending $40,000 from other sources. So this household still needs a nest egg of $1.32 million, or just shy of 18 times final pay

 In summary, you need to use on-line tools to start building retirement plans that cover both your expenses and available income.

In our next post we’ll discuss how some investments will help you grow your portfolio to meet your retirement needs.

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Retirement Planning Part 2 – Pre- Retirement Planning

In Part 1 we discussed some of the financial challenges many people face as they prepare to retire. In this post we’ll discuss some actionable items that can help you prepare for your retirement

One of the biggest shocks in your life will be the 1st day you retire and realize that you will no longer get a pay check next week. There will be no more “pay checks”. If you have a good plan in place you’ll be celebrating instead of fretting.

Here are some things you can do when you are within a few years or so of retiring.

 

  1. Accelerate your investments. We assume that as you are getting closer to retirement you’ll be in your peak earning years, and hopefully not peak spending years. Now is the time to max out all possible avenues of investments. Take full advantage of both employer 401K contributions and the maximum contributions you can make including all “catch-up” amounts. If you qualify contribute a maximum to your IRA or even better a Roth IRA. If you have the option of a healthcare HSA account, take it and fund it to the max. Unless you are a great stock-picker put this money into low fee S&P Index Funds or ETF for now.
  2. Substantially reduce then eliminate debt. Many people can’t afford to retire not because of their core daily survival expenses but their payment on debt. Parents might still owe on college education for their children. Some carry massive credit card debt, car loans, home equity loans, etc. You just can’t afford to retire with this debt overhang. Why, because the interest expense say 8 – 20% far exceeds any investment growth one can count on. What to do: develop a plan to completely eliminate all debt ASAP. Stop spending on all non-critical items until all debt is paid off.
  3. House mortgage payments need some discussion. The best situation is to retire with no house payments. Typically mortgage payments are your largest monthly expense. If you are carrying a large mortgage seriously consider downsizing to reduce or eliminate your mortgage. Consider moving to a much lesser cost of living location that will allow you to get much more value and maybe a meet your retirement dreams. For example, we moved from Philadelphia area to Tampa which eliminated our local and state income tax, substantially reduced our property tax and meet our retirement dreams.
  4. Build substantial cash reserves. Once debt is gone you’ll need to build cash, completely separate from your accelerated investments. You should have one full year of expenses in cash at the time you retire. You need an emergency fund and really don’t want to start withdrawals from your investments immediately upon retirement.
  5. Start building a retirement budget that considers you no longer have a “pay check”. The old adage is that you’ll need 80% of your former annual income to live on in retirement. However you may not have this money available to you for the next 30 years.

In summary, in the years leading up to retirement it is time to eliminate debt, accelerate investments and build cash.

In our next post we’ll discuss how much you’ll need in investments, pensions and Social Security to retire.

you’ll need in investments, pensions and Social Security to retire.

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Investment of a Lifetime – Guaranteed 8% yield, Tax Free, Backed by US Gov’t

Many of us are looking for great investments, opportunities where we can make money while minimizing risks. In an environment where US Treasury’s are yielding 1-3% and CD’s about 1% where can you get a risk-free, tax-free 8% yield along with an annual cost of living increase that is guaranteed by the US Gov’t?

It’s real simple, just delay getting Social Security from age 66 to age 70. That’s right, here is how it works. If you haven’t set up an on-line Social Security (and Medicare) account yet and over 62 years old you should do so immediately. You’ll have to at least have your account set up 3 months before reaching 65 to sign up for Medicare, even if you are employed and don’t need benefits.

If you were born between 1943 and 1954 your Full Retirement age is 66. If you start Social Security at age 62 you’ll get 76% of your monthly benefit, if you start at age 65 you’ll get 93% of your benefit. However, if you start at age 66 you’ll get 100% of your benefit.

So how do you get the 8% yield, tax free, simple, just delay Social Security payments until you are age 70. You will get an additional 8% a year for those 4 years on top of your normal monthly benefit. Another benefit is that if you wait till age 70, in general survivor benefits will also be based upon this higher amount. Spousal Benefits however will be capped at your Full Retirement age 65 amount.

If you just started getting Social Security within the last year you can stop payments, pay back the amount you’ve been paid and then wait until you are age 70.

Where else can you get this kind of guaranteed return?

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A Conservative Method to Earn Extra Income – Sell Call & Puts

Investors are always looking for ways to enhance their income without taking unnecessary risks. As you get older the more conservative you become. We just can’t afford to risk our retirement income. One way to achieve additional income in your investment portfolio is to Sell Calls and Puts.

Most investors have no idea what Options are and therefore immediately believe they must be risky. The fact is, Selling Cover Calls and Cash Secured Puts is a very safe, easy and conservative way of enhancing the returns for your investments.

Selling a Covered Call – This pays you an immediate premium (Premium) for giving someone the right to buy your shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium. Covered Calls allow you to enhance gains instead of just “buy and hold”. For example, today you buy 100 shares of Facebook (FB) at $53.81/share $5,381 total cost. You then sell (write) a Covered Call for FB, get an immediate premium of $1.17/share and agree to sell your 100 shares on January 10, 2014 at $56.50/share. Therefore if FB hits $56.50 on January 10th you will have made $269 on the stock, $117 Call Premium, total $369 or 7%. A 7% return in  less than 1 month is a pretty good return.

You can learn more about Covered Calls from the CBOE, the world’s largest Options Exchange:

http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/part1.aspx

Selling a Cash Secured Put – This pays you an immediate premium (Premium) for agreeing to buy shares at a future date (Expiration Date) at a specific price (Strike Price). You cannot lose the premium. The Put allow you to buy your favorite stock at a lower price and get paid until it hits your price. Using our FB example above, lets say you would like to buy FB at only $50/share. You would Sell a Put for a January 18th $50 Strike Price and immediately get a $1.04/share premium. Let’s say that on January 18th FB is selling at a price higher than $50, your Put Option expires and you still get to keep the $104 premium. Your return was 2% ($104/$5000) for about 1 month, that’s 24% annualized.

In future postings I’ll give you some helpful tips on how to use Calls and Puts while protecting yourself from losses.

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Building a High Yielding Retirement Portfolio – Part 5 MLP’s

In my previous posting I discussed the need to include high-yielding securities in a retirement portfolio, in Part 2 I reviewed Preferred Stocks, in Part 3 BDC’s, in Part 4 REIT’s. In this article we’ll discuss MLP’s (Master Limited Partnerships).

A MLP is a partnership that generates income from real estate, natural resources and commodities. MLP’s are a major factor in the transportation and storage of oil and natural gas. MLP’s, similar to REIT’s and BDC’s pay little or no corporate income tax and must distribute at least 90 percent of taxable income as dividends or return of capital to investors. This results in many cases in both capital growth and high-yields. When you buy stock (units) in an MLP you become a “partner” in that MLP. The distributions are not taxed when you receive them, instead, they are considered reductions in the investment’s cost (return of capital), and you don’t have a tax liability until you sell the MLP. Your income from the MLP is reported to you on a K-1 each year.

If you are looking to get into the booming energy market and don’t want to worry about the volatility of oil and low prices of natural gas, the MLP’s that provide the pipelines and storage facilities might be your best choice. You see, these MLP’s charge for distribution and storage they aren’t effected by the price of the commodity. I’ll also warn you that like all other high-yielding investments that are subject to the volatility of changing interest rates. Many of these were heavily sold earlier this year as the talk of Fed tapering surfaced and the 10 year bond yield jumped overnight. Once interest rates calm down these can be great investments.

Here are some of my favorite MLPs you might consider:
UBS E-TRACS 2x Leveraged Long Alerian MLP (MLPC)  9+% yield
Linn Co (LNCO)   9% yield
Magellan Midstream Partners (MMP)   3.6% yield (stock is up 50% this year alone)

Check out the performance of MLPL in the past year. Not only has it out performed the S&P 500 index, but it also delivered > 9% dividend yield.

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By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.

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Building a High Yielding Retirement Portfolio – Part 4 REIT’s

In my previous posting I discussed the need to include high-yielding securities in a retirement portfolio, in Part 2 I reviewed Preferred Stocks, in Part 3 BDC’s. In this article we’ll discuss REIT’s (Real Estate Investment Trusts).

A REIT is a company that owns and operates income generating real estate. REITs can own commercial properties from office and apartment buildings to hospitals, retirement homes, warehouses, hotels, shopping centers, hotels and timberlands. REITs are also a major factor in financing housing. REIT, similar to BDC’s pay little or no corporate income tax and must distribute at least 90 percent of taxable income as dividends to investors. This results in many cases in both capital growth and high-yields.

There are a lot of different types of REIT’s, agency and non-agency etc., I won’t get into all of these here. I’ll also warn you that like all other high-yielding investments that are subject to the volatility of changing interest rates. Many of these were heavily sold earlier this year as the talk of Fed tapering surfaced and the 10 year bond yield jumped overnight. Once interest rates calm down these can be great investments.

Here are some of my favorite REIT’s you might consider:

  • W P Carey (WPC)  5% yield
  • Hospitality Properties Trust (HPT)   6.50% yield
  • American Capital Agency (AGNC)   13% yield

Check out the performance of W.P. Carey in the past year. Not only has it out performed the S&P 500 index, but it also delivered > 5% dividend yield.

REIT-1

By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.

 

 

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Building a High Yielding Retirement Portfolio – Part 3 BDC’s

In my previous posting I discussed the need to include high-yielding securities in a retirement portfolio, in Part 2 I reviewed Preferred Stocks. In this article we’ll discuss BDC’s (Business Development Company).

BDC’s are companies that function like Venture Capital or Private Equity funds however they allow smaller investors like you and me to invest in their companies. VC and PE funds are often closed to all but wealthy investors. BDCs, on the other hand, allow anyone who purchases a share to participate in the open market.

BDCs have become popular since they pay little or no corporate income tax and must distribute at least 90 percent of taxable income as dividends to investors. Many BDC’s distribute 98 percent of their taxable income to avoid all corporate taxation. This results in many cases in both capital growth and high-yields. Returns to the stock holder matches the on the type of income earned by the BDC. Ordinary income to the BDC is taxable to us as ordinary income and their capital gains is generally taxable to us as capital gains.

Here are some of my favorite BDC’s you should consider:

  • Prospect Capital Corp (PSEC)  11.50% yield
  • Ares Capital Corp. (ARCC ) 8.41% yield
  • Hercules Technology Growth Capital (HTGC) 7.03% yield

Check out the performance of Hercules Technology Growth Capital in the past year. Not only has it out performed the S&P 500 index, but it also delivered > 7% dividend yield.

BDC-1.jpg

By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.

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Building a High Yielding Retirement Portfolio – Part 2 Preferred Stocks

In my previous posting I discussed the need include high-yielding securities in a retirement portfolio. In this article we’ll discuss Preferred Stocks.

Preferred stocks are positioned between common stocks and bonds. Most commonly preferred shares carry no voting rights but have a higher claim to earnings than common share and are usually less volatile than common. When the S&P 500 fell 37% in 2008, for example, the iShares preferred fund fell only 24%. Preferred shares are next in line to bond holders in the capital chain of any company. Investors can easily choose from preferred stock ETF’s or individual stocks. Investors should also understand that most high-yield stocks are affected by rising interest rates, similar to bonds.

Here are some examples of ETF’s you should consider:

  • iShares U.S. Preferred Stock ETF (PFF) 5.6% yield
  • PowerShares Preferred Portfolio (PGX) 6.8% yield
  • SPDR Wells Fargo Preferred Stock (PSK) 6.7% yield

Many of the high-yield preferred stocks are in the financial sector, including REIT’s.  Here are a few that I either currently own or have owned in the past:

  • Privatebancorp Capital Trust IV (PVTBP) 9.7% yield
  • Magnum Hunter Resources Corp (MHR/PC) 10.1% yield
  • SandRidge Energy (SDRXP) 8.2% yield

If you are a first time investor you should research a little more on how preferred stocks are priced before adding them to your portfolio. For example, SandRidge Energy (SDRXP) has a Face Value of $100, its original selling price when issues. Today it is selling for $103.75, a slight premium. The preferred pays an 8.50% “coupon rate”, however since the stock sells at a premium, you will only get paid the current 8.2%. In addition this preferred stock is “callable” at the option of the company. I wouldn’t worry too much about this, the fact is you will earn a nice yield on your investment.

By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while
waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.

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Building a High Yielding Retirement Portfolio – Part 1

It’s never too early to start planning for your retirement. Many of us who are just beginning our retirement need to plan on having enough cash flow to cover our living needs for the next 20 – 30 years. We will have Social Security and possibly a pension to help us along; however a substantial portion of our retirement income may need to come from the investments we’ve made over our lifetime.

One issue many face is how to generate retirement income from dividends. Today’s ultra-safe investments like Treasury Bonds pay a paltry 2-3%, Money Market accounts and CD’s are paying 1% or less. We might need investments that pay a lot more than this to be able to withdraw say 4% per year while still maintaining a substantial nest-egg for our loved ones.

Wise investors will have an allocation strategy in their portfolio that includes both high-yielding stocks and other investment to help cover any shortfall.

Here are some choices for investments and a sample range of yields:

  • Preferred Stocks – 4% to 10% Yields
  • Business Development Company (BDC) – 6% to 10% Yields
  • Real-estate Investment Trusts (REIT’s) – 5% to 13% Yields
  • Master Limited Partnerships (MLP) – 5% to 15% Yields

By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.