Why Social Security Is Not Enough In Retirement

Includes: DVY, PID, SDY
by: Joe Eqcome

There are 77 million Baby Boomers (born between 1946 and 1964). Many of them are on the cusp of retirement with the balance hopefully planning for it. The first of the Baby Boomers turned 65 January 1st, 2011. Every day subsequent to that day 10,000 additional Baby Boomers will turn 65 for the next 19 years.

Importance of Supplemental Retirement Income: Many financial advisors suggest that retirees will need anywhere from 70% to 80% of pre-retirement income to afford a comfortable retirement life style. Social Security replaces only about 40% of pre-retirement income for the average worker.

Unfortunately, more than a third of retirees (35 percent) receive 90 percent or more of their income as a monthly payment from the Social Security Administration. That is why it is important to have pensions, savings and investments, as well as to consider the option of working into retirement.

Dividends as an Important Investment Component for Retirees: Given the importance of providing stability to investment portfolios for those in retirement and those approaching retirement, investors should seriously consider the value of dividend paying stocks. Dividends have long been part of a prudent investment strategy. According to Forbes, since 1926, about 40% of the total return of the S&P 500 has come from dividends.

More Recent Confirmation: More recently, over the past 12 months, large-value funds landing in the top 25% of returns carry an average yield of nearly 4%, well above the roughly 2.3% dividend yield on the Standard & Poor's 500-stock index and a paltry 2.0% yield for 10-year Treasuries. Funds posting returns between the 25th and 50th percentiles are yielding an average of 2.0%. Funds in the bottom 25%, meanwhile, sported an average dividend yield of zero.

Dividend Reinvestment Option: For those earlier in the retirement cycle that want to build-up their capital base, they can make the decision to reinvest their dividend through a company’s dividend reinvestment program (“DRIP”), that takes the amount of the dividends and buys additional shares of the stock for the investor — sometimes at a discount and typically without brokerage or DRIP fees. Shareholders can opt out of the program when they need the cash flow of the dividend distributions.

Automatic Pilot: While there are many individual dividend growth stocks, there are 19 ETFs in our data base that are equity-income oriented ETFs that yield on average 3.4%. These ETFs provide diversification and liquidity at a very low expense ratio.

Favorites: Two that we have traditionally favored are iShares Dow Jones Select Dividend ETF (NYSEARCA:DVY) at a current yield of 3.5% as well as the SPDR S&P High Yield Dividend Aristocrats (NYSEARCA:SDY) at a current yield of 3.2%. Most of the major corporations have excess cash on their balance sheets, so there is a source of comfort that the dividends appear well-secured. There are also ETFs that focus on international dividend paying companies, such as the PowerShares International Dividend Achievers ETF (NASDAQ:PID) currently yielding 3.9%.

Social Security Foundation: As a planning tool for retirement, individuals should become familiar with their Social Security benefits because this will typically provide a foundation on which an individual will be able to build a retirement program. There are numerous options regarding Social Security Benefits with which an individual should become acquainted.

Individuals can use the Social Security’s on-line personal retirement estimator of retirement benefits. Additionally, you can call Social Security toll free at 1-800-772-1213.

Illustration of Social Security Benefit Options: The chart below is a rudimentary chart illustrating the various benefit options available to a potential Social Security beneficiary. While due care was exercised in the construction of this chart, and conversations were conducted with representatives of Social Security to confirm some of the key points, its accuracy cannot be guaranteed nor should it be solely relied on when making decisions regarding election of Social Security benefits.

It is provided as an illustration to provoking thinking about an individual’s Social Security benefit options. We strongly recommend you contact Social Security directly at the contact information noted above prior to election of your retirement benefits.

(Click to enlarge)

Disclosure: I am long DVY, SDY, PID.