$3/Day Can Buy $192,000 Annual Tax-Free Income Using This Strategy

 |  Includes: IVV, SPY, VOO
by: Richard Berger

Executive summary:

  • $1000 per year invested annually in a Roth IRA from age 18 to 67 into an S&P 500 ETF can be expected to grow to $2,400,000 at retirement.
  • Use of covered call writing on selected dividend income equities can generate yields of 8%+ while lowering market risk and providing income security to ride out downturns.
  • The Super Tortoise Portfolio converts your $3/day savings into $192,000 annual tax-free income forever!
  • This installment looks at the reasons and criteria for building a Super Tortoise Portfolio.


In part 1 of this series, Why You Should Invest Like A Tortoise, Not Like A Hare, I showed that historic data indicates a statistical certainty of achieving about 12+% annual yield rate if a person makes a single investment in the S&P 500 market basket of companies for a period of 25 years or greater (as given in the chart by J.D. Roth below)

A 12% average annual yield will double an initial investment about every 6 years.

(click to enlarge) (chart by author)Click to enlarge

Simply using an S&P 500 ETF and $1000 annual investments can be expected to grow from a start at 18 years old into a portfolio worth $2,400,000 at age 67. The Tortoise Strategy is as simple as buying an S&P 500 index fund such as the SPDR S&P 500 ETF (NYSEARCA:SPY), iShares Core S&P 500 ETF (NYSEARCA:IVV), or Vanguard S&P 500 ETF (NYSEARCA:VOO) and letting it grow for 49 years.

The annual income from this nest-egg of $2.4 million will continue to work for you in retirement if you simply live off the returns it generates. A very conservative 4% annually, as recommended by many investment professionals today, provides an income of $96,000 to cover yearly needs. By using covered option writing, as discussed in part 3 of this series, an 8% annual rate of return should be readily achievable. This gives an annual income of $192,000 in retirement.

Perhaps you will prefer to retire early like I did. At age 60, you should have a nest-egg valued at about $1,081,000. At 8% annual yield, your expected income is $86,480. Other variations by contributing more than $1000 annually can be used to target other income goals and retirement ages. $1000 per year, less than $100 per month, that is less than $3.00 per day! Yes you can, and you don't need government to help (except by staying out of your way - be sure to use a tax deferred or tax exempt account so all your money grows for you). In fact, $2.74/day supplies your $1000/year and the taxes owed on it. Just save $3.00 per day and invest in an after-tax Roth IRA which not only grows tax-free but will remain tax-free when you draw out your money, even for your heirs.

$3.00 per day saved to invest $1000/year in a Roth IRA, and pay the taxes on it, can create a perpetual tax free income of $192,000 per year for you and your heirs, forever!

I have presented a statistical analysis of the historic performance of the total U.S. Stock Market and S&P 500 returns, variability of returns, and a portfolio strategy built on those foundations. Next, we will explore the basis of why and when to consider the Super Tortoise Portfolio Strategy, including:

  1. An outline of the Super Tortoise Portfolio strategy.
  2. How and why it uses covered options.
  3. Discuss why it is useful to consider as an adjunct or replacement for the Simple Tortoise S&P 500 ETF Portfolio.

Introducing the Super Tortoise:

I have used the first article in this series to show you how a simple and conservative portfolio (the Tortoise) can help you build wealth. You may be asking yourself about now just why anything else should be considered or might be needed. There are several reasons a Super Tortoise makes sense for many people.

Investing To Fund Shorter Time Horizon Goals:

Young investors may have excess available funds beyond $1000/year which they want to target a greater return on and are willing to accept somewhat elevated risk. Having established your Tortoise portfolio, secondary portfolios accepting greater variability and risk may be considered for your discretionary dollars.

First Time Home:

A home buyer fund, or a child's college fund, or other special target fund may have a shorter term focus. Greater yield with faster compound growth may be sought for some of these shorter term goals. The lack of a long-term horizon extending out 25 or 30 years and more is inherent in these types of midlife goals. Super Tortoise attempts to maintain the philosophy of low risk and measured returns offered by the Tortoise but shifts strategy somewhat to boost yield and insulate from excessive downward volatility.

Supplemental Income:

An investor who has been able to fund their Tortoise beyond the needs of their retirement goals may find they have reached a sufficient value position prior to the planned retirement age so that they can begin using part of the portfolio to generate supplemental income while they continue to work.

Early Retirement:

Through good planning, luck, or an inheritance, some of us are fortunate to be able to retire early. Upon abandoning a traditional earned income stream, it is important to restructure your portfolio(s) into layers, both for volatility risk and time horizon so as to be able to rely on your investment income to fund your lifestyle choices.

Planned Retirement:

Having reached your planned retirement age, hopefully your targeted nest-egg goal has been reached or exceeded also. At this juncture, as in early retirement, it is time to layer your portfolio(s) for volatility and time horizon. For Layer 1, I suggest a minimum of 1 or 2 years living expense budget held in cash or cash combined with government bonds of short-term maturities.

Beyond that, Layer 2 is five (5) years of funds that should be in solid dividend income equities with strong dividend reliability from rock solid companies and diversified through 15 to 30 such tickers. This will provide dividend income (boosted by covered option writing) to live off of even if the markets and/or your individual shares take steep plunges. Like rental properties, you should focus on the stable monthly income from this slice of your portfolio and simply ride out negative markets without any great concern for your underlying portfolio performance. After all, if you aren't selling anyway, the market price is irrelevant.

A good news bonus: Market crashes are often followed by great volatility. High volatility equates to higher option premium prices. Thus, volatility is your friend and leads to greater option yields.

Layer 3 of your retirement portfolio(s) should be built for the 5 to 20 year window. These are funds you will not need to access the principal from in the near term and can rely on the longer time window to smooth out volatility somewhat and recover from most bear markets. I suggest dividend income equities with a focus towards those with growth potential also.

Finally, there is your long horizon retirement Layer 4. Actuarial statistics reveal that more than 50% of those of us living today will live past age 100. Therefore, the portions of your retirement portfolio(s) not required to fund Layers 1 through 3 are allocated for growth just as your original Tortoise portfolio was. If you have created, funded, and successfully grown a Roth IRA, this 4th layer will be perpetual and form the endowment of a permanent tax-free income vehicle for you and your heirs and their heirs, ad infinitum. As such, it should follow the same conservative, low risk Tortoise strategy, taking advantage of the reliability of long time horizons to smooth out volatility and turn risk into statistical certainty.

Congratulations, you have now risen to the status of Ancestral Progenitor, founder of a dynasty built on the wealth and security you created from your $3/day. It is now time to turn our attention to the details of the Tortoise Portfolio strategy.

Building the Super Tortoise:

To offset the variability of shorter time horizons, we narrow our focus to a sub-group of stocks that provide yields from both dividends and covered option premiums. Further, the option strategy allows the investor to buy at prices below retail market, obtain an attractive yield (in excess of 12% annualized and up to 40%) on cash waiting for the "right price" to establish a position in the shares, boost dividend yield by writing covered calls on shares held to obtain 6%+ additional annual yield rates over and above the dividend while selecting strike prices, insuring a significant gain on the share price itself over the cost basis value, thus insuring a profit on every such option contract if your shares are called away. Don't worry if you are not familiar with option contract terms and procedures, I'll be taking it step by step with concrete examples in the next installment, part 3, of this series, Understanding The Role Of Covered Options Writing In Portfolio Development & Management.

In part 3 , I will discuss covered option writing and how they are used to lower market risk and increase yield on a conservative portfolio. Part 4 will discuss three specific real ticker examples as they are currently priced. These will be identified and dissected in detail, step by step. Each subsequent part of the series will identify and evaluate an additional 3 current market candidates for building your Tortoise on Steroids portfolio.

I hope you will join me as I detail the use of covered option writing on quality dividend income equities to develop a model portfolio for the Super Tortoise. Simply click on the bold link labeled FOLLOW above the title at the top of this article to get an email notice of my new articles when they are published.

Disclaimer: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.