Protected Principal Retirement Strategy: Retiring Without A Million-Dollar Nest Egg

by: Akaralph

I continue to see article after article addressing how to withdraw funds from non-taxable accounts (as is required) beginning at the age of 70 1/2. Trouble is, most of these articles seem to begin with the premise that everyone has $1 million (or more) invested.

If one does further research you will find that only a small percentage of retirees have more than $100,000 saved. I am rapidly approaching the age where I too will have to begin required mandatory withdrawals, and being somewhat better off than those at the low end of the savings spectrum, but certainly not in the range of retirees addressed by the aforementioned articles, I find myself in need of a more realistic strategy.

The financial planning pundits espouse the "four percent withdrawal strategy," whereby at attainment of age 70 1/2 one begins the good life by withdrawing four percent of the funds in non-taxable accounts, to be followed by subsequent annual withdrawals, each of which is adjusted for inflation. This strategy is excellent if one has savings that fall into the "magic" $1 million (or $1 million-plus) realm.

What about the rest of us, the vast majority of newly retired, or semi-retired individuals whose savings resources do not approach these lofty heights? Between Social (in)Security payments, a pension (if one has such a vehicle) and investments, a four percent withdrawal just doesn't translate into the "good life."

In this, and subsequent articles I would like to share my approach to a strategy that I will use to maximize investment income for my golden years. I believe that this approach can be a fit for anyone that has not attained the level of savings necessary such that a four percent annual withdrawal provides adequate living expenses.

I must begin by stating that I do not personally believe in retirement - we should be productive as long as we can and are still able to make a contribution.

For people like myself who have not quite attained the million-dollar investment plateau, the traditional ultra-conservative reliance on a portfolio overweighted with lower-yielding fixed-income investments doesn't cut it. I am heartened to see that of late many financial advisors are straying from typical retiree portfolio that is overweight with lower-yielding fixed-income investments.

The strategy that I have devised is based upon withdrawing only dividend income from both taxable, and non-taxable accounts, leaving the principal as untouched as possible. My strategy seeks investment vehicles that offer on average a yield of seven percent at minimum. Needless to say, this approach requires slightly more risk than does a four percent withdrawal based upon a million dollar nestegg.

As you will see, it is possible to attain these levels of return with significantly lower risk than with a more speculative portfolio by allocating our investment resources among a combination of real estate investment trusts; master limited partnerships; business development companies; royalty trusts (domestic and foreign); and closed-end funds combining foreign stocks, income vehicles, precious metals and commodities.

Allocating your investment funds to include each of these vehicles will afford adequate diversification across a fairly wide range of sectors, each of which typically returns a higher yield than typical large cap, dividend growth stocks. Not that there is anything wrong with a strategy encompassing dividend growth stocks, provided one has an adequate amount of capital to invest to garner the three to four percent yields that this approach offers.

My approach, which for lack of a better name, shall be termed the "Protected Principal Retirement Strategy." Specific investment categories are as follows:

Master Limited Partnerships - primarily midstream assets - "the toll collectors," moreover, those with a long track record of increasing quarterly distributions, even in times of poor market conditions.

Real Estate Investment Trusts - primarily equity REITs, either individual stocks or a combination of domestic and foreign REITs attainable through closed-end funds. I tend to shy away from all but a select few mREITs, as I well remember their 2008 debacle.

Royalty Trusts - a combination of U.S. and Canadian oil and gas trusts. I look specifically for Canadian exploration and production trusts that have survived the Halloween Canadian Trust Debacle with dividend payments intact, and U.S. Trusts where I can divide my investment between oil, natural gas, and natural gas liquids.

Business Development Companies - I consider the BDCs a riskier component of my strategy, since their dividends tend to fluctuate more with market conditions. Therefore, my allocation to this sector will be much smaller than to others. The key here is to stick with those that have not reduced dividends during bear markets, to the maximum extent possible.

Closed-End Funds - I prefer closed-end funds over mutual funds for two primary reasons: 1) you can purchase shares at a discount to net asset value, and 2) they typically pay higher dividends. Diversifying among foreign stocks, emerging market stocks, precious metals and commodities can accomplished using CEFs much easier than by purchasing individual stocks. In addition, CEFs afford opportunities to secure fixed income investments much easier than buying individual bonds. I especially like senior loans, readily available through several CEFs.

In future articles I will discuss how I would suggest allocating funds among each of these investment vehicles, and will also cover each type of vehicle in greater detail (evaluative criteria, dividends and distributions), and share my current recommendations for investments on a category by category basis.

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

Disclaimer: I am not a registered investment advisor, nor do I believe that the stocks and funds that I will discuss in future articles are the "only means to an end" when using this strategy.