Investment

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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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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.

Capture

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 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.