Retirement Strategy: Preparing For The Unknowns

Includes: JNJ, KO, PG, WMT, XOM
by: Regarded Solutions


Investors can plan for the future, but only prepare for the unknowns of the future.

Dividend income growth is the key to a more secure financial future, but is it the answer to all monetary needs?

We probably will never dodge all the bullets of our retirement years, but we can do our best to prepare for them.

For many years now, I have been preaching about dividend growth investing to just about any investor who cared to listen. The foundation for a more secure financial future can be found by investing in mega cap, blue chip, dividend growth stocks. While no investment strategy could ever be perfect for everyone, dividend growth investing certainly has been shown to produce increasing income during just about any economic cycle.

If there has been anything I have tried to convey by offering to closely follow a myriad of portfolios, it is that there are two constants that are indisputable.

  • Save as much as you can for as long as you can as soon as you can.
  • Spend less than you have coming in forever, and you will never run out of money.

While it truly does boil down to these two disciplines, the best we can do for our life, as well as our financial security is to plan for the known and prepare for the unknowns of financial uncertainty.

Planning For Your Financial Future Doesn't Need To Be That Difficult

Aside from the two key elements I noted above, the rubber meets the road so to speak when we, as investors, actually do sit down and plan for the future. Investors can choose from a variety of strategies that they personally feel is suited for their needs, and no one can offer the perfect strategy for everyone.

While I might feel that dividend growth investing is right for myself, it might not be right for you. That being said, anyone can do an internet search of the best dividend growth stocks of all time, and I believe by simply having a basic portfolio of the best of the best stocks that have consistently raised dividends year in and year out, an investor can develop a stream of income that will more than simply supplement a small pension and Social Security.

I have been following our newest portfolio, Buy The Dips Portfolio, or BTDP, for just 5 months now, and it has begun to reap the benefits. The younger you are when you launch your own portfolio of this nature, the better off you will be, even though there is nothing ever risk-free.

While the BTDP portfolio consists of AT&T (NYSE:T), Exxon Mobile (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Altria (NYSE:MO), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL), General Electric (NYSE:GE), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), Pfizer (NYSE:PFE), Annaly Capital (NYSE:NLY), American Capital (NASDAQ:AGNC), and BGC Partners (NASDAQ:BGCP), an even more basic portfolio could be the answer for many investors preparing for retirement.

One could carry a simple portfolio of just JNJ, XOM, KO, PG, and WMT, and have the historical knowledge of these 5 companies, no matter what the share price has been on any given day or what the economy has done through just about every recession of several generations (and in a few, even a Great Depression), and feel more confident that a regular stream of income can be built, at whatever level that might be, to last a lifetime when combined with a budget that never exceeds that income.

By simply holding these core stocks, an investor will own company shares that have generated increased income for more than 25 consecutive years.

The BTDP could be used as a potential format to literally see what can be achieved at any investment dollar level. While I began the portfolio with about $110k (which is below the median retirement savings of the top 20% of all those nearing retirement), those investors who have been fortunate enough to save 2, 5, or even 10 times the amount I started this portfolio with will have the advantage of being able to use those funds as a multiplier to what this single portfolio can produce for you in income starting right now.

Since we already have the portfolio in place, let's take a look and see how this "multiplier" could work at 3 different portfolio values:

My investment as of 8/1/2014: $120k

A 2x investment "multiplier" of: $240k

A 5x investment "multiplier" of: $600k

A 10x investment "multiplier" of: $1.2m

By inserting these amounts of current savings as of right now, here is what the BTDP could produce in income as of today:

Buy The Dips Portfolio Shares Dividend Annual Income 2x 5x 10x
AT&T 200 $ 1.84 $ 368.00 $ 736.00 $ 1,840.00 $ 3,680.00
EXXON 50 $ 2.76 $ 138.00 $ 276.00 $ 690.00 $ 1,380.00
Johnson & Johnson 100 $ 2.80 $ 280.00 $ 560.00 $ 1,400.00 $ 2,800.00
Coca-Cola Co. 200 $ 1.22 $ 244.00 $ 488.00 $ 1,220.00 $ 2,440.00
Proctor & Gamble 100 $ 2.57 $ 257.00 $ 514.00 $ 1,285.00 $ 2,570.00
General Electric 300 $ 0.88 $ 264.00 $ 528.00 $ 1,320.00 $ 2,640.00
McDonald's Corp. 100 $ 3.24 $ 324.00 $ 648.00 $ 1,620.00 $ 3,240.00
Chevron Corp. 50 $ 4.28 $ 214.00 $ 428.00 $ 1,070.00 $ 2,140.00
Apple Computer 75 $ 1.88 $ 141.00 $ 282.00 $ 1,205.00 $ 1,410.00
Altria 100 $ 1.92 $ 192.00 $ 384.00 $ 960.00 $ 1,920.00
Ford Motor Co. 400 $ 0.50 $ 200.00 $ 400.00 $ 1,000.00 $ 2,000.00
Microsoft Corp. 200 $ 1.12 $ 224.00 $ 448.00 $ 1,120.00 $ 2,240.00
Wal-Mart 100 $ 1.92 $ 192.00 $ 384.00 $ 960.00 $ 1,920.00
Pfizer Inc. 200 $ 1.04 $ 208.00 $ 416.00 $ 1,040.00 $ 2,080.00
Annaly Capital 500 $ 1.20 $ 600.00 $ 1,200.00 $ 3,000.00 $ 6,000.00
American Agency 300 $ 2.60 $ 780.00 $ 1,560.00 $ 3,900.00 $ 7,800.00
BGC Partners 500 $ 0.48 $ 240.00 $ 480.00 $ 1,200.00 $ 2,400.00
Totals x x $ 4866.00 $ 9,732.00 $ 24,830.00 $ 48,660.00

For most of you, these are rather realistic numbers to deploy into this sort of portfolio to generate immediate annual income. Those who have saved more will have more. Those who have saved less will have less. The math works out exactly the same, and the only plan that needs to be put into place is a budget, not to spend more than you have coming in.

A couple retiring at age 66 right now will probably (on average) have a combined Social Security benefit of roughly $36,000, which then can be added to the income stream that is derived from the 4 initial investment dollars:

1) $40,866 combined

2) $45,732 combined

3) $60,830 combined

4) $84,660 combined

The only plan that must be put into place is an expense budget not to exceed your various income levels. Notice I have not added a pension, or one single share price. The share price is way down on the list of my priorities when developing a more than reliable income stream from investments, and pensions that pay a fixed amount from an employer are few and far between, and if you have one, consider yourself very fortunate.

Any investor who has roughly the amount to invest in each scenario WILL receive the annual income noted immediately. It is not rocket science, it is simple and achievable by anyone who has the discipline to stick with this strategy.

Obviously, the longer time horizon you have could exponentially increase your income when you need it by simply reinvesting all dividends right back into each stock. The sooner you start, the more financially secure you could be.

It IS that simple, period.

Preparing For The Unknowns Of Our Financial Future

This is where it becomes tricky. There are a few things that we simply will have no control over when it comes to our financial future. I think you would agree with my following points:

  • We have no idea how long we will live.
  • No matter what our health is right now, it could be vastly different tomorrow.
  • While I believe Social Security will be there in some shape or form for the foreseeable future, the continuance of the program is virtually out of our control.

An investor cannot plan for these life events. The best we can do is try to do is to prepare the best we can, in the event any or all of these unknowns befall us.

As most of you know, I am not a fan of annuities. I feel that the average investor can replicate quite easily the monthly income received from an insurance company by investing in dividend growth stocks, while maintaining access to all monies in the event of an emergency.

That being said, as I have gotten older, I have taken another look at a few annuities that could help in bridging the gap between the known and unknown of our own potential futures. While my opinion of annuities remains the same; expensive insurance policies that keep your money and pay your money back to you each month, with a little added "interest", I now believe that there are instances that these insurance policies should be included in any prudent financial plan.

We might be sharp as a tack at age 66, but find it impossible to manage our financial assets after the age of 75, or 85, or whenever. Illness can strike anyone at anytime that we never expected and wipe out our entire portfolio if not prepared for. We also might live to be 120 and spend 30 years in a "facility" of sorts.

We simply do not know. We can only prepare, and not plan.

What I have come to see as an important part of financial planning for myself, and many others, is that having insurance policies, while never perfect, could help in preparing each of us for life's unknowns.

As with health insurance, an annuity of a particular kind could add to a more secure financial future by taking into account some, if not all, of the unknowns we might face.

Longevity annuities is a fancy word for deferred annuities; however, if one were to look at these insurance products under a different light, many folks might find that these insurance products might help mitigate many of the unknowns we might face.

Longevity annuities are contracts between an individual and an insurance company. The insured party deposits a premium payment into the contract today and in exchange, receives a guaranteed income stream for life beginning at a pre-determined future date.

The income stream will be based upon the premium deposited, the age of the contract owner, their life expectancy and the date/time frame in which the income will be paid. Market fluctuations will not impact the income payments received. In some cases, contract owners will be permitted to make additional contributions to their annuities. These additional payments will impact the income received... In most cases, the income payout will be significantly higher with a longevity annuity than with an immediate annuity. There are two commonplace situations future retirees consider with regard to these 2 annuity options. The first option involves placing capital into a longevity annuity, deferring payments for 20 years. The second situation involves waiting until the retiree's later years to deposit funds into an immediate annuity. If the retiree invested $100,000 in either scenario, they would receive more income from placing premium into a longevity annuity and waiting 20 year to begin receiving it.

Perhaps one of the most appealing of these products could be found in this report, with various scenarios, at various ages. The following chart will offer you a quick glance at what might be expected. Keep in mind that using my multipliers could dramatically change the numbers within this sort of insurance policy as well.

The amounts are approximate, of course, based upon when you might buy this type of insurance; but as a general rule of thumb, for right now, these figures are quite accurate.

Note the various ages that a policy might be considered with a lump sum purchase. Once again, time horizons will differ, and like saving and dividend investing, the sooner you begin, the more you will have.

Take note at the age of 55 with a $50,000 purchase. As we get older, most of us will have a more difficult time in navigating the intricacies of individual investing. My own mother, who is 87, could not handle her finances after the age of 80. I now handle all of it for her, while she is in a facility; I have calculated her money to "last" until the age of 110, but having absolutely nothing left.

If we had the knowledge of how we might prepare for the unknowns, had she purchased a longevity annuity at age 55, for $50k and deferred payments until age 85, she would have an additional income stream of roughly $28,000 annually to offset much of the costs of her facility when combined with her Social Security, and income from savings and or investments.

Everyone is different, of course, and you must consider your own circumstance and do your own best to prepare for the unknowns. Of course, if one were to purchase a contract for $100k, the multiplier of 2x would double the income received at each of the various age levels.

Add to this a potential long-term care policy if you can qualify, and you can mitigate the unknowns even further. My mother has a long-term care policy that is now 30 years old, and while at the time it was taken out was rather generous, inflation has eroded a solid chunk of the benefits it pays, and still needs to be supplemented.

The point is, we simply do not know everything, and exploring these other options are yet another prudent way of preparing ourselves for the unknowns.

That being said, the first step to preparing for these unknowns is to plan for the known. That all boils down to saving as much as you can for as long as you can, as soon as you can. Invest in dividend growth stocks that have proven themselves to be more reliable in producing income than any other investment product, and spend less than you have coming in forever.

It all starts with saving and an investment strategy, as well as being prepared for life's uncertainties.

Are you prepared?

Disclosure: The author is long AAPL, BGCP, CVX, F, GE, JNJ, KO, MCD, MO, MSFT, NLY, T, XOM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.