What I found particularly interesting was the notion that Social Security can be viewed in the context of an "annuity" that, based on the amount an individual receives as part of his benefits, can be "capitalized" and where a value can be placed on the monthly benefit to be received.
David shares a John Bogle quote that explains this notion:
Once you get Social Security, think about how that fits in to target-date environment.
You can do this a lot different ways, but let's suppose that the capitalized value of Social Security at age 65 for most people is, say $300,000 to $350,000. Let's use $300,000. And it's going to be exhausted at the end of life expectancy….So you've got a $300,000 fixed-income position and probably the best fixed-income position you will ever have in your life. It's got a cost-of-living adjustment; the payouts are good. The payouts are as close to certain as things can be in this world. So you're sitting there with that $300,000.
Now let's look at you've accumulated $300,000 in your investment side, your personal portfolio or in your 401(k) plan. So if a 100% of that is in equities, you are 50-50. [Emphasis added.]
It's that 50-50 notion that got my interest. An investor who has accumulated an investment portfolio of $300k and who has an equivalent amount in Social Security would, in effect, have a $600k retirement portfolio.
Now, Nusbaum expands Bogle's ideas when he says this in his article:
Bogle goes on to say that the money you accumulate in a 401k or anywhere else would be the equity portion of a diversified portfolio. The example he used was $300,000 accumulated outside Social Security which following his train of thought would make for a 50/50 portfolio. And with the 50% in equities he is suggesting dividend paying stocks. It was not clear from what I read whether he meant individual stocks or some sort of index fund tilted toward dividend payers one way or another.
Either way Bogle's focus was about creating an income stream from both sides of the ledger. Obviously 3% on a $300,000 equity portfolio is $9,000 and if your total Social Security benefit is somewhere between $20,000 and $30,000, then is that enough to get it done? For some people it would be, but it doesn't leave much for one-off expenses that we discuss here regularly like new tires or vet bills or anything else that will come along.
Now one of the things that an older person like myself understands about Social Security is the fact that ever since I began working, I've been contributing to Social Security. In the beginning, that contribution was not a lot of money, but as my career blossomed and my earnings increased, more money was put into the Social Security system.
Today, having visited the Social Security website, I've learned that if I decided to begin taking benefits today at age 64, I'd be getting $2054 a month. By waiting until age 70 that benefit would increase to $3191 a month.
Now, the other side of this equation is the equity portion of the retirement portfolio. Here's where things can get a little confusing. This question will invariably come up, "How am I going to ever have a portfolio or a pile of cash to invest that will be $300k?"
And, even if you suddenly were given $300k from an inheritance or from some other source, then as Roger points out, investing it in equities that yield 3% is going to only give you $9000 a year in additional income over and above Social Security.
I decided to take a look at one of my portfolios. I've written about it in a number of articles and we have named the portfolio, "The Perfect Portfolio." It was created to provide an income stream for my mother when interest rates that were available for her CD investments no longer offered the yields that she had been previously available. So we created a portfolio of Dividend Growth stocks with each 100k CD as they matured in 2009, 2010, and 2011.
A total of $300k was invested and the income stream for this $300k portfolio delivered $14515.92 in dividends in 2012. That is a little better than Roger's example, but this portfolio has been in existence for a period of time and is not being started from scratch.
But even when we look at a portfolio constructed with Roger's criteria in play, the results moving forward can be quite impressive for the equity side of the 50-50 retirement portfolio.
After attempting to run these numbers myself and with a lot of help from a fellow SA member, who goes by the name "spielerman" (and while I know his name I did not get permission to use it) he provided a very detailed Excel worksheet that while very accurate and accounts for stock appreciation as well as dividend growth, the spreadsheet was to large to put into an article.
So I searched the internet for an appropriate calculator that might give me similar results and offer a format that would be in keeping with the format of article content at SA. I found a calculator at a website: www.buyupside.com and that site provided me with the calculator that I was looking for. Here is a link to that calculator so you can plug in numbers that are relevant to your situation: http://tinyurl.com/mo7vr5k
In the example, we've assumed that an investor has a portfolio valued at $300k with investments in Dividend Growth stocks with an average yield of 3% (some more, some less).
These stocks have a history of growing dividends by 6% annually (some more, some less) for the 1, 3, 5, and 10 year periods.
We also recommend that dividends be reinvested and that our investor in this example will fund either his Roth or IRA with $5500 a year over the next 20 years. Now we understand that depending on your particular age, you can invest more than $5500 (age 50 and above) and that you can plug in your own numbers at the calculator.
At the end of 20 years, based on this example, the investor would generate $102,163 with those dividends having been reinvested. When you add that dividend income to the expected Social Security, there is a bit more of a comfort level as the investor approaches retirement.
I understand that arriving at a 300k portfolio is not an easy task. I understand that many investors are no where near having a 300k portfolio. Where the comparison has meaning is when we go back to the premise of the original two articles by Van Knapp and Nusbaum.
When we capitalize Social Security we can see that our benefits seem to fall into a 300k model. Social Security as Bogle points out is an "annuity" that has a cost of living adjustment clause in it and grows, much as DG stocks can grow income. It's when we marry the two investments--Social Security and our DG stock portfolio that we attain what I like to call "critical mass" (a term stolen from Bob Brinker's Marketimer).
When I look at Dividend Champions, there are a number of companies that meet our metric of having 3% dividend yields an that are growing their dividends by 6% a year. Some that you might consider are:
Conoco Phillips (NYSE:COP), Lockheed Martin (NYSE:LMT), Hasbro (NASDAQ:HAS), Harris Corp (NYSE:HRS), Altria (NYSE:MO), Chevron (NYSE:CVX), Procter and Gamble (NYSE:PG), McDonald (NYSE:MCD), Kimberly Clark (NYSE:KMB), Clorox (NYSE:CLX), Johnson and Johnson (NYSE:JNJ), Emerson Electric (NYSE:EMR) and Coca Cola (NYSE:KO).
A good starting point to find your own stock choices, a good place to begin is at David Fish's site: www.dripinvesting.org
Whatever your particular situation, young or old, a large or small portfolio; take the time to increase your retirement income and put together plans to achieve your own "critical mass."