Retirement Strategy: How Long Will Your Portfolio Last?

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 |  Includes: BKCC, BMY, CSCO, CSX, GD, GE, INTC, JNJ, KKR, KO, LNCOQ, MCD, O, PG, T, WMT, XLV, XOM
by: Regarded Solutions

The most dynamic question every retired investor faces is if they will outlive their money. Obviously, one of the ways to avoid that catastrophe is to have your investments continue producing enough income for the rest of your life.

The Team Alpha portfolio does that for most investors. As long as the strategy is monitored, changes made when needed, and one's expenses are kept in line with income, we should be fine.

Our Team Alpha portfolio consists of McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), General Dynamics (NYSE:GD), and CSX Corp. (NYSE:CSX).

How Much Can Be Withdrawn Every Year?

Too many experts stick to their cookie cutter recommendation of a 4% withdrawal rate for your nest egg to last throughout your retirement. I say "too many," because I believe too many of the pros take the "by the book" approach, and apply it to many (if not most) of their clients. That does NOT mean that the industry as a whole is awful. What it means is that as individual investors steering our own financial ships, we have a greater vested interest in our own financial security than anyone else could ever have.

I believe that once an investor has their expenses below their income, and has a strategy of sound, dividend producing investing during retirement, they can toss the 4% withdrawal rate out the window, and begin taking control of their needs, wants, and aspirations.

Even with the Team Alpha portfolio, without touching the principal at today's current dividend yield, an investor can withdraw 4.60% right off the bat!

Take a look:

Stock #Shares 11-30-PPS TotValue
XOM 100 88/shr 8800
JNJ 125 70/shr 8750
T 250 34/shr 8500
GE 500 21/shr 10500
BKCC 300 10/shr 3000
LNCO 200 39/shr 7800
PG 100 70/shr 7000
KO 100 38/shr 3800
XLV 200 40/shr 8000
INTC 200 20/shr 4000
O 200 40/shr 8000
KFN 300 11/shr 3300
WMT 100 72/shr 7200
CSCO 400 19/shr 7600
GD 100 67/shr 6700
BMY 175 33/shr 5775
MCD 100 87/shr 8700
CSX 200 19/shr 3800
Cash Rsvs x x 4186
Tot Value x x 125411
Click to enlarge

This chart is from the last update, plus the addition of CSX. The current dividend yield is 4.60%. Based on $121,000 of invested assets, it will generate $5,560 per year. (Review the latest Team Alpha update now.)

If you are a retired couple with a yearly Social Security income of $30,000 combined, and expenses of $29,999 each year (both amounts increased yearly for inflation), you will have an EXTRA $5,560 to spend just by withdrawing the dividend income you have received from your investments.

Your standard of living can increase (increase spending) if you so choose. You can choose to reinvest the dividends to grow your portfolio for the next year, or you can take a vacation and have a great time! All the while, your investments are still working FOR you and have not been depleted.

If your expenses are $40,000 per year (with the same $30k in Social Security and $5.5k in dividends), then you have some decisions to make. You can either cut expenses and live within your means (my personal choice), or you can proceed to withdraw a percentage of funds from your principal.

Keep in mind that as you withdraw from your principal, your investment portfolio will be reduced if there is no capital appreciation. Then the issue would be: If you continue at the pace of withdrawing an additional $5,000 per year just to cover expenses, THEN how long will your nest egg last?

If your portfolio does not grow more than inflation, withdrawing $5k each year from a $125k portfolio would mean that your nest egg will last roughly 25 years, by simple calculations. Keep in mind that as your portfolio decreases (if there is ZERO capital appreciation), your dividend stream will become less each year. This will mean that you will need to withdraw MORE from your principal just to stay even.

That would reduce the number of years the nest egg will last, based upon the capital appreciation (or dividend increases) of the overall portfolio. This is why I advocate having a portfolio that has plenty of dividend winners, that have increased dividends year in and year out.

Dividend Investing Will Make Your Portfolio Last A Long Time

Consider taking this approach for your own financial future. This mix of stocks can help many investors find their own "Alpha."

Stocks like XOM, JNJ, KO, PG, O, WMT, MCD, BMY, GD and GE, have very strong track records of giving us a "raise" every year (yes, GE had a few rough years, but it is also back on track), and I would suggest that a sizable allocation in these stocks will give investors a higher income stream each year.

I love charts like this:

This one is fine also: (Yes, I know about the GE cut three years ago.)

Dividend "opportunity" stocks like BKCC and KFN can tweak a solid dividend portfolio to ramp up the income stream. Dividend "winner potential" stocks like CSCO, INTC, and LNCO can offer an even greater foundation for dividend growth in the years ahead.

  • BKCC: 10.5% yield.
  • KFN: 7.5% yield.
  • LNCO: 8.2% yield.
  • INTC: 4.65% yield from virtually zero back in 2004.
  • CSCO: Went from no dividend to a 3.0% yield within a tad over one year.

All of this combined makes up the Team Alpha strategy of dividend growth investing, with added spice, so that we can take more from our portfolio value each year to have a better retirement. By taking the dividends of 4.60%, plus 4% of principal, we are actually taking roughly 9% from our nest egg each year to support our retirement.

If the markets return the historical averages of almost 6% per year (without dividends), then the 25-year time frame is easily reached.

Here is a look at the returns since 1973:

Historical S&P 500 Index Stock Market Returns
Year Return
1973 -14.7%
1974 -26.5%
1975 37.2%
1976 23.8%
1977 -7.2%
1978 6.6%
1979 18.4%
1980 32.4%
1981 -4.9%
1982 21.4%
1983 22.5
1984 6.3%
1985 32.2%
1986 18.5%
1987 5.2%
1988 16.8%
1989 31.5%
1990 -3.2%
1991 30.5%
1992 7.7%
1993 10.0%
1994 1.3%
1995 37.4%
1996 23.1%
1997 33.4%
1998 28.6%
1999 21.0%
2000 -9.1%
2001 -11.90%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%
2006 15.9%
2007 5.5%
2008 -37.0%
2009 26.5%
2010 15.1%
2011 2.1%
Click to enlarge

Eight "down" years and 30 "up" years. After each down year, the following year(s) have had significant snap backs for those who have not run away and sold out of fear. With the same scenario into the future, a well-balanced, well-diversified portfolio of dividend producing large cap stocks will continue to be one of the most secure ways for an investor to have more financial stability during retirement.

The Bottom Line

As we head into another new year, it is always a good idea to sit down and review where we are with our investments, and where we stand with expenses and our income. Then we need to make any adjustments that we feel are appropriate, and make sure we are spending less than we are taking in.

By doing just those few things, we will continue to be masters of our financial future and keep our future prospects bright.

Disclosure: I am long XOM, JNJ, GE, T, KO, GD, WMT, XLV, BKCC, KFN, INTC, CSCO, BMY, CSX, O, MCD, LNCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.