Excuses, excuses, excuses...
We've all made them, at one time or another. We procrastinate. Why not put off now what we can do later?
Sometimes, it's hard to get started on any new project. It's simply easier not to think about it. Put it out of your mind, it'll take care of itself. All of these things may be true, or not. But one thing I know to be true, for sure; planning and preparing for retirement is hard work sometimes, and it simply won't happen by itself.
When things intervene and come in between us and our grand plans, we like to think it's something beyond our control. Maybe we get laid off at the job and there's an interruption in our savings plan.
The Best-Laid Plans of Mice and Men
Big expenses, like repair of the roof or fixing the car come along when we least expect them. The stock market goes into a steep correction or bear market a few months before we have decided to begin our retirement. A car accident, or slip and fall at work lays us low and puts us out of work. A serious illness does the same.
Here are some other instances, a bit more within our control that can sabotage our retirement success.
1. I can't afford to save now, but I will definitely get serious in the future. You procrastinators out there; you know who you are. Why not put off today what you can do tomorrow, right? Wrong!
Harvard psychologist Daniel Gilbert found that, based on a survey of more than 2,500 people there was a gap of six years between younger people saying they should start saving at age 26 on average, and the older people who had actually begun their savings effort at age 32. He discusses this in a T.V. commercial for Prudential Insurance. On Mindful.org, he discusses these concepts and others in an interview on his book, Stumbling on Happiness. In other words, talk is cheap and can lead to a great big savings failure.
A 26-year-old who makes $40,000 a year, gets 2% annual raises, saves 15% of yearly pay and earns 6% annually on his savings can accumulate a nest egg of just under $1.2 million by age 65. Waiting six years until age 32 to get started, his nest egg would total roughly $855,000. That's $345,000, or almost 30%, less for missing just those initial six years. Should this 26-year-old hold off 10 years until age 36, the nest egg shrinks to $685,000, some $515,000, or nearly 45%, less than with the early start.
Gilbert says "This gap between when we should start saving and when we do is one of the reasons why too many of us aren't prepared for retirement."
2. If I fall behind, I'll just make up for it with higher investment returns. This sounds good at first till we examine the premise a bit further. It implies we have firm control over how much our investments earn but we don't. We can shoot for an expected return but rarely are those expectations met to our satisfaction. Discussed on Market Watch in a recent interview with Morningstar's personal finance editor Christine Benz, John Bogle, the creator of the Vanguard mutual funds with $3 trillion under management believes we're in store for perhaps 4% annual returns. This is a far cry from the 10% to 12% many of us are used to.
Some investors might channel larger amounts of their portfolio allocations towards higher yield investments. Of course, we know that this usually entails a higher degree of risk which may backfire and cause the investor to fall further behind in his goals. These investments could end in income failure if the companies cut or eliminate unsustainable dividend amounts in the future. Cuts or eliminations of the dividend usually lead to quite drastic reductions in stock price as income investors jump ship and sell their stock at the first announcement of such a cut. This double-barreled effect would leave the investor even further from his goal.
3. I don't need to monitor my investments. Once I buy a stock, I set it and forget it. I don't need to check in on it every so often to make sure company fundamentals are still strong. I'm confident my investments will continue pumping out and growing their dividends in perpetuity. No need to waste my time with any of this. I ball-parked in my mind what I'll need to pay the bills in retirement and my investments will take care of themselves.
Sorry, Charley, but checking in with one of many available retirement calculators, online, will aid in identifying future costs in retirement and income amounts, adjusted for expected inflation. This will be necessary to make that retirement budget balance. Failing to do this on a fairly regular basis can simply lead to retirement plan income failure, again.
Edward Jones makes a retirement calculator available here. Money.cnn provides another type of retirement calculator derived from data from the Social Security Administration, the Federal Reserve of Philadelphia and the Department of Labor, here. There are many to choose from. Find one that works well for you and visit it often.
Doing it on a regular basis will give you an idea if you are moving in the right direction. Should you find that you're not on course, you'll have the knowledge you need to make changes to amounts saved, how often you save, and where you place your investments to achieve your goals.
4. If everything else fails, I'll just continue to work in retirement. Seemingly plausible, here's the catch. Though the Employee Benefit Research Institute's 2016 Retirement Confidence Survey reports that 67% of workers are planning to work for pay in retirement, this doesn't match up well with what actually happens, in real life.
The EBRI survey finds that only 27% of retirees have actually worked for pay in retirement. Survey says - disconnect between intention and actual behavior.
Citizens Bank discusses the Social Security/Income Gap, noting that according to the Social Security Administration, Social Security income typically comprises of only 21% of an individual's retirement income. What other sources of income will you have to fill the gap? The other 79% will have to come from savings, investments, employment earnings, pensions, and other sources.
What Can We Do About All This?
How many instances of excuses did you find yourself identifying with? I'll posit that if you're being honest with yourself, most readers will identify with at least a few. Feel free to share, in the comment section below, some of your favorite excuses and how it affected your own saving and investment outcomes over the years.
Now that we've covered some of the major obstacles we create for ourselves, what are some steps we might take to turn this ship around and put her on course for a more comfortable and secure retirement?
Let's Turn This Ship Around!
1. We might choose to delay retirement for a few years if we haven't yet amassed the capital and/or annual income from investments that would make retirement possible today. Continuing to work past the NRA (normal retirement age, 66 for most boomers today) works several ways in our favor.
a. It allows the worker to accumulate more savings.
b. It puts off the time when savings will be drawn down for living expenses, allowing those investments to compound further and grow for us.
c. If the worker continues working past age 66, the full benefit age, he will accumulate 8% extra monthly Social Security benefits for each year up to age 70 that he defers collecting his benefit. If he lasts working till that maximum of 70, he will have found a guaranteed method of increasing his monthly benefit by 32%.
2. Do, in fact, start saving and investing as early as possible. Don't be the procrastinator discussed above who thinks he has good intentions to start but never does. Investing as soon as you get your first job will put you way ahead in your quest to accumulate wealth and income for when you need it later in life.
3. Take advantage of any and all 401(k) plans offered at work and matches that are offered in those plans by your employers during your working life. Today, in a traditional 401(k) plan, a worker can squirrel away a maximum of $18,000 each and every year and pay no current income tax on that amount. A taxpayer in the 28% tax bracket thus saves $5040 on his tax bill. A worker over 50 years of age is entitled, in addition to the $18,000 contribution, to make a catch-up contribution to his 401(k), deducted from his salary, of $6000. This total of $24,000 in pre-tax contributions from salary saves this taxpayer $6720 (even more, when State and Municipal income taxes are figured in). Additional matching amounts by employers can add several thousands of dollars per year to these totals. Sadly, most employees do not, or find they are not able to, contribute these maximums and therefore do not receive the full advantages these plans afford.
4. Similarly, for workers not offered a 401(k) plan at work, the traditional IRA is available with a maximum, pre-tax contribution of $5500, or $6500 for those over 50 years of age. This deferral of income will save the 28% bracket taxpayer $1820 per year on his tax bill. Double that amount if both husband and wife work and earn at least $5500 each at work per year. Some investors prefer using a Roth IRA to save for retirement. This plan uses the same dollar limits, but in the case of the Roth, the worker is contributing after-tax dollars. This means he is not getting any tax write-off now for the contribution, but he receives the tax benefit in retirement when his monies are withdrawn tax-free. No taxes are due at withdrawal because he paid them all along on those contributions.
It is up to each investor to decide which suits his plans best. My personal preference hews toward the traditional IRA and 401(k) approach. This is because the tax deductibility of the traditional IRA leaves the investor with his tax-saved dollars as extra dry powder that he can use to compound investments his entire working life in a taxable account.
In the case of a working couple who choose a traditional 401(k) plan, they are able to defer taxes on a total of $36,000 of salary until they are 49 years of age, then a total of $48,000 from the age of 50 and on till retirement (these amounts have been rising through the years, possibly allowing for even higher contribution amounts in future years). The tax savings and amount left for investment will come to $10,080 each year in the early years and $13,440 in the years beginning at age 50. These are substantial extra sums that can go a very long way to accumulating wealth and income needed in retirement.
Though preparing for retirement might not be the picnic some had hoped for, with some study, time and effort devoted to learning the ways of investment, the task can actually be enjoyable.
Especially for those who chose dividend growth investing. The pleasure of seeing annual income increasing with each passing year gives the investor the empirical evidence he needs to continually reinforce his behavior and spurs him on to further reinvesting of dividends in order to compound his income over time. When retirement finally arrives, the big brass ring at the end of the long ride is finally in his grasp as he has achieved the wealth and income he'll need to get him through retirement.
Staying On Top Of My Positions
In an effort to stay connected to our portfolio dividend income and the growth of that income, I'll enter our positions in both the public Fill-The-Gap Portfolio and subscriber portfolio into the Dividend Growth and Income Spreadsheet. It keeps me focused on my bottom line of producing income. When dividends are raised, I'll enter that into the assigned column. My algorithms then compute for me my new income on each portfolio constituent, the new income when a raise occurs, the yields, the increased percent of income and total portfolio income. This focus helps keep me on track toward my goal of building and growing income.
Dividend Growth and Income Spreadsheet
The Wealth Effect For The FTG And RODAT Participants
Because we stay focused on income production, April was another in a series of 16 good months for us.
April Dividend Payment Dates And Amounts
The above table also helps keep focus on dividend production. Throughout the year, we have 99 payments hitting our account giving us a continuous store of dry powder to draw upon whenever good opportunities present themselves.
This month we received dividends from seven of our portfolio companies totaling $1,863.91. Three of them gave us nice raises. Realty Income (NYSE:O) raised the dividend 0.2% from last month's payout, giving us $3.90 additional annual income. W.P. Carey (NYSE:WPC) raised the dividend 1% from last quarter's payout, resulting in $12.21 additional annual income. The big winner this month was Reynolds American (NYSE:RAI), coming in with a 16.67% dividend raise which added a substantial $252.96 to our annual income.
Portfolio Management In Action
Never one to let money burn a hole in my pocket for too long, we deployed our April dividends to accomplish efficient compounding into additional shares of Government Properties Income Trust (NYSE:GOV). The new purchase of 105 shares of GOV added another $180.60 to annual income. The total of these four April events added $449.67 to our annual income.
Government Properties Income Trust Announces First Quarter Results
On Thursday, Government Properties reported normalized FFO of $0.62 per share for the first quarter increased 6.9% year over year. Same property cash basis NOI for the first quarter increased by 2.4% year over year. Same property occupancy was 95.1% at first quarter end, up 30 basis points year over year.
You can read the entire 4/28/16 press release here.
Reducing Risk By Weighting Positions To Equal Income Production
In keeping with my foundational principle of reducing risk to portfolio income, we continued to build our GOV position to bring it closer to parity with the other portfolio constituents as regards to income contribution.
The closer we hew to this principle, the more we de-risk the portfolio for any future, possible dividend cut. Our diversity of sectors and number of constituents imparts some level of risk mitigation. Should one or two components reduce their dividend at any point in the future, our income would temporarily decline by perhaps 5% or so, depending upon the severity of the cut.
When stocks fall to better-timed entry points, we buy shares in order to grow portfolio income. In order to gain some of these better-timed entry prices that enable me to receive higher yield and income, I used the Watch List Real Time Tracker to alert me when GOV approached the $17.80 level. As it came within 3% of my target price, the alert turned green (this alert distance is customizable). The order was placed and executed. We were able to buy this position for $1.52 less per share than our starting cost, for an 8% discount. The $1.72 annual dividend rate got us the 9.66% yield we had targeted.
The tracker told me I would receive $180.60 in annual income if the target price was reached on that 9.66% yield. The "Day Price Range" let me know I could get a 3% discount from the high and a 12.84% discount from the 52-week high. The ex-dividend date displayed as 4/21/16, meaning I would have had to have made the purchase the day before, on 4/20 to be entitled to the next upcoming dividend.
Watch List Real Time Tracker
I used the other digital utility tool I built, the Real Time Portfolio Tracker, to help highlight that GOV needed to be bulked up in share count in order to bring its annual income closer to parity with the other positions in the portfolio. Column O on the extreme right of the sheet clearly indicates what percent of portfolio income each component contributes, so a quick glance delineates the positions that need fattening.
Real Time Portfolio Tracker
The Fill-The-Gap Portfolio At A Glance
I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.
The beginning article was entitled "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 18 companies, including AT&T, Inc. (NYSE:T), Altria Group, Inc. (NYSE:MO), Consolidated Edison Inc. (NYSE:ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (NYSE:MAIN), Ares Capital (NASDAQ:ARCC), Reynolds American, Inc. (NYSE:RAI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation, Sun Communities Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), StoneMor Partners L.P. (NYSE:STON), W.P. Carey, Inc., Government Properties Income Trust, The GEO Group (NYSE:GEO) and The RMR Group (NASDAQ:RMR).
Because we bought all of these equities at cheaper prices since the inception of the portfolio, the yield on cost that we have achieved is 6.59%.
FTG Portfolio close, April 28, 2016
Currently, the FTG is throwing off $27,140 in annual income. When added to the average couple's Social Security benefit of $28,800, we have, in only 16 months' time, significantly exceeded our goal of filling the gap between SS income and a comfortable $50,000 retirement. In fact, our total income, between these two sources, is now $55,940 which is $450.00 more than last month's income. This is due to the dividend increases we received this month and our reinvestment of dividends into more GOV shares and the new dividend income attendant to this purchase. It may be only a few more months till our dividend income exceeds Social Security benefit income.
We have experienced no cuts, no freezes and no elimination of dividends in 16 months of portfolio management. On the contrary, we have enjoyed a regular stream of dividend increases, more than enough to keep us comfortably ahead of inflation.
With its beginning value of $411,600 and the addition of a $6500 IRA contribution for 2015 and a $6500 IRA contribution for 2016, total asset contributions come to $424,600. The portfolio has grown to a value of $485,501. This represents capital appreciation of 14.34%.
$485,501-$424,600=$60,901 capital appreciation
$60,901/$424,600= 14.34% percentage gain
This year alone, the FTG has grown $34,837 in value, or 7.73%, while the Dow is up only 2.33% and the S&P 500 is up just 1.56%. Accordingly, the Fill-The-Gap Portfolio has effectively more than tripled the return on the Dow Jones Industrial Average and more than quintupled the return of the S&P 500 Index.
At Thursday's close, even as the Dow tumbled 211 points, or 1.17%, and the S&P 500 index fell almost 1%, the FTG managed to close in the green, up 0.09%.
MY FTG Mirror Calculator
After doing their own due diligence, readers wishing to proportionately emulate FTG Portfolio trades for their own portfolios use the "My FTG Mirror Calculator" or the "My RODAT Mirror Calculator" to simplify their task.
Author's note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
As always, I look forward to your comments, discussion, and questions.
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Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am/we are long ALL NAMES MENTIONED IN THE FTG PORTFOLIO.
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.