A Retirement Calculator For The Covered Option Writer

by: George Acs

Every reputable financial web site has a retirement calculator. Luckily, I don't carry the burden of being reputable, but I am hyper-focused on surviving retirement.

I hate retirement calculators. They tend to make me feel somewhat diminished, much like having watched a pornographic movie. How do you measure up? Of course, it's easy to delude yourself and change some of the basic assumptions, like that metric ruler is actually in inches. By the same means of delusion there's no reason why you couldn't get a 25% yearly return or there's no reason that you have to live beyond the age of 60, for example.

Having used Intuit's (INTU) Quicken Retirement tool for years, I know that I was certainly able to sleep easier by just altering my projected annual rate of return whenever the market went down or on those days that I was older than the previous day.

My philosophy on retirement begins with putting aside as much as you can and as early as you can. It's for that kind of advice that I can justify getting the big bucks. How you invest the money is up to you, but I wish I had started selling covered options at a much earlier stage in life, instead of just thinking about it and watching all of those premiums evaporate month after month and year after year.

After that, my next step is retiring as early as possible and putting stock investments to work to create the income stream that used to come from gainful employment. But even if you don't retire before the age at which your eligible to receive benefits, there's absolutely no reason why you can't boost the building of your assets, because once you do retire, there's a surprise waiting for you and it's not likely to be a good one.

The real issue with retirement is not a singular one. In fact, the two main issues are whether you will have enough for your own needs and whether you will have enough for the legacy to your heirs.

I know, there's so much more to that legacy than just money, but let's assume that there isn't and instead you are your money.

The real challenge is to not draw down your nest egg or to have a significantly shortened life expectancy. I propose you go for the former and use whatever money you generate to help pay for the therapy you clearly need if you even considered the latter.

At least all financial retirement calculators recognize that it's a good idea to not outlive your savings. The strategies for having enough retirement funds may consist of a traveling back in time and spending less during your retirement.

Good luck with either of those. Although, you could be one of the lucky ones and enjoy your vocation enough to not mind having to keep working until your temperature drops well below 98 degrees.

As I'm getting older, I've begun to think of retirement in terms of how much money I want to leave behind to my heirs when the eventual time comes to pack it all in. Over the past few years I have, in fact, given up "working", only occasionally doing the "consulting" thing and soaking subscribers for every cent they have.

The world of covered option writing can do that if there is a large enough portfolio. However, even if the portfolio isn't large enough to fully replace more formal employment, reinvesting option premiums can grow the portfolio very efficiently, in a manner similar to that touted by proponents of Dividend Re-investment Plans. (See "Dividends? Forget DRIP and Go PRIP"). But from a retirement perspective, the covered call option strategy provides a stream of income to help offset expenses and slow down the erosion of investment assets as they are drawn upon.

Essentially, it's never to late to start to take those steps that can help you reach your goals.

It starts with a rigorous approach to investing and conservative predictions of performance paired with aggressive projections for life expectancy. It also helps to have a realistic sense of what your living costs are going to be through sickness and through health.

That means avoiding fads, momentum, speculation and thinly traded positions. It also means being well diversified and actively guiding your portfolio for as long as you are capable.

As an inveterate covered call writer, for me, actively managing a portfolio has become somewhat of an obsession, but that was a personal choice. You don't have to watch the ticker throughout the trading day or look for every dip upon which to capitalize. I prefer selling weekly calls, but can easily make a case for someone else selecting monthly calls or even longer term LEAPS. In fact, as my own capabilities may start getting increasingly taxed, those longer term options may start looking far more appealing, despite offering somewhat less in monthly income in return for the chances at greater appreciation of underlying shares.

For purposes of illustrating this article, the retirement spreadsheet includes income projections from selling monthly options, as well as from selling longer term positions. The positions used to illustrate the role of recurring income in a retirement planning strategy are those used in the "Annuitize This" article, only updated to represent the August 2012, January 2013 and January 2014 option premiums, as well as the share closing prices as of July 20, 2012.

The specific stocks, Boeing (BA), DuPont (DD), Philip Morris (PM), Verizon (VZ), British Petroleum (BP), American Express (AXP), Merck (MRK), Home Depot (HD), Microsoft (MSFT) and UPS (UPS) are meant as guides and represent a diversified portfolio of dividend paying large cap stocks, all of which are either in the Dow Jones Industrial Index or the S&P 500. At the moment, I don't own a single one of these positions, but have owned each and every one in the past year. Not surprisingly, each and every one has been lost to assignment and frequently replaced with a sector appropriate alternate or itself. The individual investor need only substitute their own positions for the samples chosen. The Retirement Spreadsheet utilizes the projected annual income generated from selling calls of various durations and may easily be customized to reflect specific stock holdings, strike prices and term lengths. The most conservative estimates derive from using longer length contracts and add the benefit of requiring less active maintenance, as your incessant drooling may damage your laptop.

In a truly complete retirement calculator you would also consider the value of all of your assets. For someone at the latter stages of their life, deciding whether it makes sense to rent versus own isn't really a factor anymore. However, for the investor at an early stage of their earning cycle, the spreadsheet also can demonstrate the difference between owning and renting, with regard to whether an asset class, such as a home, contributes more to one's heirs than would the mortgage to rental differential if used to offset other living costs or supplement investments. That's especially meaningful if you believe that quantity of assets is far more important than quality of life. Obviously, that kind of decision could be made at any stage of life, such as deciding to sell a home, using assets for other pursuits and renting instead, until reality strikes and time for assisted living and its attendant expenses comes knocking on your rented or mortgaged door.

Looking into the future with a financial tool shouldn't be a process that frightens or discourages. If your dual goals are to be kind to yourself and to your heirs, start by reducing stress today, knowing that you can generate income tomorrow.

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