Ever wondered how you'd convert your portfolio from a capital growth mode to a monthly ATM machine in retirement?
Many baby boomers have spent their careers saving and investing, building their wealth. Most don't have a clue how to safely draw it down and make it last throughout retirement without running out of funds and running to the kids for support. In fact, this is the greatest worry of a majority of boomers today.
It's pretty obvious to most of us that converting our stocks to safe CDs, or Treasurys just won't do the trick anymore. This is not your father's economy!
2 year CDs yield anywhere from .25% to 1.20% today.
Treasurys yield not much more:
When our folks retired, 20 or 30 years ago, they did just that; they sold their riskier assets, and lent the money to Uncle Sam or the local bank and received decent interest income. At that time, rates ranged anywhere from 7or 8% for long maturity bank CDs, up to 10-12% on 30 year long term treasury bonds.
As long as inflation did not rear its ugly head (and it didn't very much during this period), our folks could comfortably draw down interest from this fixed income investment at the recommended rate of 4% per year, selling off bits of these holdings each year. In addition, they were able to live out their retirement without fear of their capital running out before the lights went out!
The 30 year bull market in bonds has witnessed a boom in the price of bonds with a consequent collapse in the yield that these instruments pay (the price of bonds and their yields move inversely to each other). As Uncle Ben (Bernanke), our Fed chairman, carries out round after round of quantitative easing to re-inflate the economy, his buying of treasurys and mortgage securities has put a continued squeeze on all interest rates. They are now down to record levels.
This is wonderful for borrowers, who want to buy houses with the lowest rates in history, car buyers who receive loans of .9% or better, and consumers of most goods. This is Mr. Bernanke's plan to lift the economy off the mat and get people buying again and taking more risk to achieve higher yields on their money.
His plan is working. This is why the markets are hitting new highs daily, and finally set a new Dow Industrials record on March 5th, almost 4 years exactly from the crash low set on March 9, 2009. This scenario is fantastic for the buyers and borrowers in our economy, but terribly difficult for the boomers who are retiring at the rate of 10,000 per day. For them, it feels like they're being squeezed in a vise. They are wrestling, daily, with the dilemma of how to safely monetize their portfolios and make them throw off dependable monthly income to see them through their retirement years. Well, it can be done, and without too much sweat and tears.
- Convert your current cash and portfolio holdings to safe, strong, dependable dividend payers with a long history of not only paying dividends, but preferably also regularly increasing them.
- Buy 30 or 40 names, in diverse industry sectors.
- Buy approximately equal amounts of each name.
Choose stocks that pay either monthly or quarterly dividends, spaced out so that you will receive approximately equal amounts each month. You can determine dividend payment dates at TDAmeritrade.com, Schwab.com, or Yahoo, or your broker's website.
Let Dependable Dividend Payers Pay Our Bills
Become an owner in dependable payers such as AT&T (NYSE:T), Verizon (NYSE:VZ), Duke Energy (NYSE:DUK), Integrys (NYSE:TG) and monthly payers such as Realty Income (NYSE:O) and Prospect Capital (NASDAQ:PSEC). Let your monthly dividends roll in, and use them to pay your phone bills, electric bills, rent and mortgage payments. Buy some oils like Conoco (NYSE:COP) or Phillips 66 (NYSE:PSX) and don't fret so much when gas prices rise at the pump; you'll be an owner now, and you'll share in the profits of any price increases by receiving higher and growing dividends.
This type of portfolio, with its characteristics of stable and ever-growing dividend payments, will keep you comfortably ahead of inflation. If you start with a large enough portfolio, and if you use the 4% draw down rule, heck, you'll have more income than you need to pay all your bills, and never have to touch your principal.
Now there's a happy ending to a bedtime story that any of the millennial kids (our children) would love to hear; not to be a burden to them, and leave a pot of gold to them at the end of the rainbow.
Being Responsible to Ourselves and Our Kids
The pundits keep saying that the boomers are burdening the millennials with huge piles of debt that they will have to deal with. Well, if we're smart and responsible we can write a new chapter and a much better ending to this story, for the sake of us and our kids.
My next article will delve deeper into the mechanics of this strategy and recommendations on how to set up your portfolio.
Disclosure: I am long COP, PSX, T, VZ, DUK, TEG, O, PSEC. 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.