Can We Ever Really Retire? Why Americans Stink At Math

by: George Schneider


In a recent Seeking Alpha article, the author puts forth his contention that you can have as few as 3 companies in your retirement portfolio and sleep well at night.

A recent New York Times article illustrated Americans' growing insufficiency in math skills.

I will seek to illustrate these 2 trends are related and dangerously leading Americans towards ultimate dependency on government benefits rather than responsible self-sufficiency.

The Evidence of Innumeracy

The New York Times, July 27, 2014, "Why Americans Stink at Math"

"One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald's Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W's burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it.

"Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald's. The "4" in "¼," larger than the "3" in "⅓," led them astray."

Math proficiency continues to wane. Two-thirds of 4th and 8th graders on the math proficiency test in 2013 could not accurately calculate temperature on a thermometer with clearly marked bold hash marks representing 2-degree increments. They consistently incorrectly reported results, interpreting each mark as only one degree instead of two.

A Little Help From My Friends

It becomes obvious then, that in our sphere of investor education here at Seeking Alpha, we must bear the responsibility of guiding the financially illiterate towards a better path leading to financial independence and planning for self-sufficiency in retirement.

Without such assistance, too many Americans will fail to properly prepare for this eventuality and fail the biggest test of their lives; self-reliance in retirement. Failing that, we risk a large and growing burden on the government (our taxpayer dollars) of dependency and failure.

Three is All you Need

Last week, a Seeking Alpha author contended that, even though in the past he had lost large sums in previous market collapses on concentrated bets, he now felt confident, after doing due diligence, that he could count on just three names in his retirement portfolio to yield consistent income for the future, and would still be OK if they subsequently cut his income by 30%.

I suppose that if your retirement income is around $300,000, and you don't live in the highest-cost areas of our country, you'd probably be able to weather a 30% cut, down to $210,000 in annual dividend income.

How Would Average Joe Fare?

But what about the average investor, who retires with somewhere in the range of $50,000 in assets today? Perhaps he'd be able to garner income of 4% to 8%, on his stake, yielding a total of up to $4000 on his retirement assets in an IRA or 401K. Add in an average total of $20,000 in social security for him and his wife. If he has no pension income, his total retirement income is now about $24,000.

Could this average Joe withstand a 30% cut in dividend income as the author so blithely posits in his article for himself? I think not. Instead of $24,000, this hapless Joe would now only have $22,800 in annual income and would certainly need to look seriously for ways to cut his budget expenditures. Cat food, anyone?

In addition to the loss of annual income, average Joe would probably see a 30%-50% hit to his capital invested (the average market collapse is usually in this range). Such a $15,000-$25,000 haircut to his life savings would probably cause him to panic and liquidate his portfolio, leaving him with no income aside from Social Security. Now, how would average Joe feel about having concentrated his retirement portfolio into just three names?

The Fool on the Hill

Leading the average Joe, or the new young investors on Seeking Alpha, to believe it is fine to rely on such a concentrated bet for retirement is highly dangerous, irresponsible and naive. It goes against all of the accepted norms of diversification that keeps most of us from losing unacceptable amounts of capital and dividend income for our retirement needs.

My Attempt at Rule #1: Diversification of Sectors

In the interest of illustrating more commonly accepted principles of diversification, I share my dividend growth portfolio, constructed from the liquidation in March, 2009 of mutual funds previously held, reinvested in dividend growth names near the bottom of the last market collapse, and continuing to the present. All dividends have been reinvested over the 5 1/3 years duration of the portfolio. No additional capital has been added.

Yield on original cost is now 12.3%. Overall portfolio beta is .65 and unrealized capital gain to date is 146%.

Investment Roster

Security Ticker Sector Current Yield %
Apollo Investment AINV BDC 9.6
Ares Capital Corp. ARCC BDC 8.8
Breitburn Energy BBEP MLP 9.1
Bristol Myers BMY PHARMA 3.0
Calumet CLMT MLP 8.8
Conoco Phillips COP OIL 3.2
CenturyLink CTL TELECOM 5.9
Enterprise Products EPD MLP 3.8
Energy Transfer Eq. ETE MLP 2.6
Energy Transfer Part. ETP MLP 6.6
Hospitality Partners HPT REIT 6.5
Kinder Morgan Part. KMP MLP 6.9
Legacy Reserves LGCY MLP 7.7
Line Energy LINE MLP 9.3
Main Capital Corp. MAIN BDC 6.3
Martin Midstream MMLP MLP 7.7
Magellan Midstream MMP MLP 3.0
Altria MO TOBACCO 4.5
NuStar Energy NS MLP 7.5
Realty Income O REIT 4.9
Plains All American PAA MLP 4.3
Phillip Morris PM TOBACCO 4.1
Pennant Park PNNT BDC 11.0
Prospect Capital PSEC BDC 12.8
Phillips 66 PSX OIL 2.3
Reynolds American RAI TOBACCO 4.3
Resource Capital RSO REIT 13.8
Suburban Propane SPH MLP 7.4
Stonemor Partners STON MLP 10.0
Sun Communities SUI REIT 5.1
Integrys Energy TEG EL.UTILITY 4.5
Vector Group VGR TOBACCO 7.5
Verizon VZ TELECOM 4.3
Windstream WIN TELECOM 9.9
Average equal weighted yield 6.5

Current yield % courtesy Yahoo Finance

Sector Diversification

It can be seen from the above table that my investments are diversified amongst 37 different names, and 5 major investment sectors. (Business Development Companies, Master Limited Partnerships, Utilities, Real Estate Investment Trusts and Tobacco)

Some are dividend aristocrats, like ConEd (NYSE:ED), AT&T, Inc. (NYSE:T), S&P 500 constituents that have raised their dividends for 25 years or more.

Represented also are Master Limited Partnerships, like Magellan Midstream Partners (NYSE:MMP), Plains All American (NYSE:PAA), Kinder Morgan Partners (NYSE:KMP) and Enterprise Products Partners (NYSE:EPD), which pay distributions that are mostly return of capital, giving the benefit of tax deferral. If you never sell these, you never pay taxes on the distributions, rendering them tax-free income. Your heirs will inherit them and get a new step-up tax basis, which will be the price of the units at your death. If your heirs choose to sell them that day, they too will owe no tax on them.

Many electric utilities such as Integrys Energy (NYSE:TEG) and Consolidated Edison, and telecommunication names like AT&T and Verizon (NYSE:VZ) have been the stalwarts of many DGI investors for many profitable decades.

Real Estate Investment Trusts (REITs) commonly occupy a place in many retirement-oriented portfolios for their usually dependable payout of most of their earnings to shareholders. This club is represented in my portfolio by companies like Realty Income (NYSE:O), Resource Capital (NYSE:RSO) and Sun Communities (NYSE:SUI). Some of these companies pay monthly dividends, making it easier to quickly compound our dividend income by reinvesting every month instead of quarterly.

Business development companies, (BDCs) like Prospect Capital Corp. (NASDAQ:PSEC), Apollo Investment (NASDAQ:AINV) and Ares Capital (NASDAQ:ARCC) allow us to participate in debt and equity investments of many companies and derive the higher yields often accompanying these investments. Some also pay monthly dividends.

In the interest of full disclosure, I monitor this portfolio throughout the day, always alert to developing opportunities in these names and always at the ready to take advantage of temporary disruptions that adversely affect them. This affords the opportunity to buy at discount any name I wish to balance upward. Buying at discount automatically increases the yield and income.

Feel free to read any of my previous articles in which I detail the many strategies I've employed to consistently increase yield and income, including the very conservative yet lucrative practice of selling covered calls and buying at discounted prices when secondary issues in my stocks are announced.

Math Will Find the Way

For the less actively engaged investor, the power of math always works in his favor when the portfolio is sufficiently diversified. If one holds a good amount of names as I do, and one of them crashes and burns to zero overnight, if the portfolio is evenly weighted, then the loss incurred to the total portfolio value would only be 2.7% in my case of 37 holdings. This could certainly be tolerated, as opposed to the investor who had only 3 names and never opened his monthly statements. His loss on just one crash-and-burn security would be a devastating 33%.

My loss of annual income on one total flame-out might be around 3% of current annual income. The 3-name concentrated investor would lose around 33% current income, if all had similar annual yields and were weighted equally.


It would seem obvious to some of us investors approaching, planning or in retirement, that that stage in life is the absolute worst time to throw the dice and throw caution to the wind. Betting the farm on a concentrated bet could be truly devastating.

Sadly, the majority of Americans suffer innumeracy. Average Joe investor requires assistance and needs to learn self-sufficiency in investing for retirement. Diversification is the key and should be rule #1.

Rule #2- see rule #1.

As always, I look forward to your comments and discussion.

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: The author is long AINV, ARCC, BBEP, BMY, CLMT, COP, CTL, DUK, ED, EPD, ETE, ETP, HPT, KMP, LGCY, LINE, MAIN, MMLP, MMP, MO, NS, O, PAA, PM, PNNT, PSEC, PSX, RAI, RSO, SPH, STON, SUI, T, TEG, VGR, VZ, WIN. 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.