How Long Is Your Retirement Runway?

by: George Schneider


How much distance is there between where you are now and your ultimate retirement?

Measuring that distance can determine the approach you take to your investments today.

We'll discuss a method to assure your retirement today and for the future.

Subscribers to "Retirement: One Dividend At A Time" got an early look at this material and receive instant text message trade alerts, which often produce lower entry price points and higher yield and income.

Are You Ready For Take-Off?

Wednesday, on a day when the Dow sunk 1.7%, or 373 points, and the S&P 500 cascaded lower by 1.8%, some investors' minds might be wondering if there are ways to protect income meant for an impending retirement. The mind gets more concentrated on these worries when it realizes the Dow is now off about 4% from recent highs, or 800 points. The anxieties are intensified by recent developments as it seems the country careens daily from one scandal to the next and the word "impeachment" in regard to the new leader of the free world is heard more frequently and growing louder by the day. It's not the stuff that inspires investors to have confidence that proposals for tax reform, reduced regulations and infrastructure and health reform will ever get done.

Is Your Retirement Ready For Take-Off?

Your flight into retirement has been cleared. Are you ready for take-off? Your path to retirement might be visualized as an airport runway.

Young investors just starting out in their work careers have a very long glide path. Their retirement planes are just idling at the gate. Older investors on the other hand can be seen as much closer to the end of that runway, closer to final lift-off to their retirement journey.

Long runways give younger investors more flexibility in their plans. If they wished, they could take a flight in the latest high-flyer. Think in terms of Tesla, Inc. (NASDAQ:TSLA), Facebook, Inc. (NASDAQ:FB) or Snap, Inc. (NYSE:SNAP). Youngsters have 30 to 40 years ahead of them, plenty of opportunities to get up to the plate and take a swing. It affords them plenty of time to strike out plenty of times.

The near-retiree? Not so much. Time for lift-off would appear to be running out. The runway is running out. Important decisions can no longer be put off. Preparation is paramount in order to avoid crash and burn.

If you're within five years of retirement, it might make sense to start taking actions today that will assure a comfortable retirement tomorrow.

Strategy: Buy Just Enough Bonds

You might consider selling off just enough of your equity shares to raise a sufficient amount to redeploy into long-term Treasurys at 5% to guarantee future retirement income comprised of bond interest plus Social Security payments.

This is how the math might play out:

  • $400,000 X 5%= $20,000 Treasury bond interest
  • Average couple's Social Security benefit = $28,800
  • $20,000 + $28,800= $48,800 total retirement income

The remaining dividend growth stocks in your portfolio can be relied upon to supply inflation fighting buying power in retirement.

Long-Term Treasurys Yield Only 3%

Fair enough. It's true that long-term Treasury bonds yield only 3% today. However, with promised interest rate increases by the Fed, it might not be too long till they approach 5% again.

While waiting for interest rate increases to reach 5% on the 30-year bond, the investor can invest in four-year CDs for now from Synchrony Bank (NYSE:SYF) and get a 2% yield.

If you want to go further out, you can get an FDIC five-year CD from Goldman Sachs (NYSE:GS) today and get 2.25% on your money.

Barclays Bank (NYSE:BCS) and Ally Bank (NYSE:ALLY) offer the same rate on the five year (Source:

Dramamine For Near-Retirees

The tonic to reduce the anxiety and turbulence of the inevitable bear market and to assure you have enough to pay the bills in retirement is simply to swap some of your equity for fixed income products that are federally guaranteed either by the FDIC or the U.S. Treasury.

To take the smallest haircut in current income, consider selling off some of your stocks with low current yields.

We discussed this concept in a recent article, which over 33,000 readers viewed and 200 comments were made on: "Sell Your Triple Crown Winner To Ride This Faster Dividend Horse." This treatise was about selling off enough shares in a winner to make it into a free ride for the investor, then redeploying the remaining balance into another company's stock to increase income.

The idea here was for the investor to reward himself for his good analysis by taking his capital gain, such that when the remaining funds were invested in a higher-yielding stock, his gain in income overnight was 54%.

The point here is that some of our equities bought near the end of the financial crisis of 2008 have appreciated greatly since then. The current yield on AT&T (NYSE:T), for instance, was 7.55% because its price had fallen so far. Today, its yield is closer to 5% and this is due to two factors. Its price has risen from the floor of 2009, and it has also continued to increase its dividend paid to shareholders.

So, today, if we'd like to minimize the hit to income when we swap to a CD, we might look to our portfolios for those equities that have lower current yields.

One that comes to mind, found in many investors' portfolios, is 3M Company (NYSE:MMM). It pays an annual dividend currently of $4.70. On Wednesday's price of $195.23, this represents a current dividend yield of 2.40%.

So, if you sold your 3M shares and invested the proceeds into a CD earning 2.25%, you'd suffer a very small loss of current income:

2.40%- 2.25% = .15%

.15% X $400,000 = $600.00

Swapping your 3M shares for a five-year CD would cost you only $600 per year in lost income. This might be considered a small insurance premium being paid to lay in wait till 30-year Treasuries rose to that more prodigious 5% level. When that occurs, you'll be swapping your CD for the long-term Treasury, and your income will rise from 2.25% to 5%, more than doubling your annual income on the fixed income portion of your portfolio.

As another example, if you happen to have a dividend aristocrat like Chubb Ltd. (NYSE:CB) in your portfolio, its current yield is only 2%. Swapping from Chubb to a five-year CD will actually give you a raise:

2.25% CD rate - 2.00% Chubb dividend rate = .25%

Your income on that $400,000 stake converted to a CD will give you an immediate boost to annual income of $1,000.00.

You can see the current list of Dividend Aristocrats here.

These are companies that are members of the S&P 500 that have also raised their dividends for at least 25 consecutive years.

When you consult that list, you'll discover that a great many of them are paying a current yield in the 1% to 2% range. If you own any, or a few, these are possible candidates you might consider swapping out of now.

Doing so now will not only get you a raise in your current income, but also you will be preserving equity value before the next bear eats it up. That means that instead of waiting to improve your income, you'll get a boost right now and have much more capital available to redeploy at much higher rates down the road.

Remember, while you're waiting for higher yields from long-term Treasuries to further improve your income in retirement, you'll have higher income now, and you'll be preserving 100% of your current stock value now.

The Penalty From Delay

If you don't act now, the results might not be pretty down the road. If we suffered a vicious bear market, causing a 50% loss to stock values in the broad markets, your $400,000 might turn into just $200,000. Remember how so many investors' 401(k)s turned into 201(k)s during the 2008 financial crisis?

Then, if you were lucky to get 5% on the 30-year Treasury, your income from the remaining stock value, if you swapped then, would look pretty ugly in comparison:

$200,000 X 5% = $10,000.00

It's clear that your income would be slashed in half because you hesitated. Instead of garnering $20,000 annual income from your current stake, you'd only be able to generate $10,000 of annual income on the diminished value of your liquidated stocks.

Dividend Cut Penalty

Then, there is the possibility that one or a few of your portfolio constituents might cut or completely eliminate the dividend for some undetermined period of time. While you were hesitating to liquidate stock proceeds to buy a CD, you might also be losing further annual income due to possible dividend cuts.

Tax Impact

This strategy is most tax-efficient if carried out in your tax-deferred account like an IRA. In that case, no taxes of any kind would be due on the sale of securities and no current tax would be due on the CD or bond interest.

In a regular, taxable account, the investor needs to be aware that if he sells appreciated equities and has no capital losses to offset that appreciation from that sale, he will owe capital gains tax on the sale. In addition, if those sale proceeds are deployed into a CD or Treasury bond, in a regular account, he will owe taxes on his interest. However, no state taxes will be due on Treasury bond interest.

Getting Stuck: Afraid To Make A Change

Some investors get stuck or married to their stocks. This is one of the mistakes I discussed in "Which of These 6 Investing Mistakes Will You Make?". It is so painful for the loss-averse investor to admit a mistake, or come face to face with a faulty decision, that he'd rather sit passively and watch the ship sink, sometimes all the way to zero. Applied to this scenario, many investors will cling onto their shares and watch them lose tremendous value and possibly suffer cuts to their income due to dividend eliminations.

If the investor wished to assure that this didn't happen to him and wanted to assure himself that he would have sufficient income in retirement, he might consider switching some of his equity value today for fixed income products to seal the deal.

Here's how long-term Treasury rates reacted in past instances when the Fed raised rates and the economy was humming:

You can see that only 10 years ago, while the economy was doing well and rates were elevated, the long-term Treasury was yielding above 5.25%.

We began a new regimen months ago when the Fed first increased rates for the first time in many years. We've experienced three raises in rates to date, and the Fed has signaled that two or three more were in the cards for 2017. So, it isn't too far from the pale to suggest that a 5% long-term Treasury within the next few years is entirely possible.

From 2009, when the Fed commenced its huge quantitative easing program to push rates down in order to support the economy, the price of the 30-year long-term Treasury rose from a bit over $800 to $1,600, doubling in value.

30-Year Long-Term Treasury Price

As yields go down, prices go up on bonds issued earlier. As the Fed continued to pressure rates lower by shoveling large amounts of money into the economy, rates came down and forced prices of existing bonds much higher.

Once the investor has committed his money to Treasuries at the 5% yield level, this is what he can expect to happen to his bond investment. With the next recession and bear market, the demand for money will decrease once again. The Fed will do its thing and try to pump the economy back up again by purchasing bonds for its own account, once again. Investors will accept a lower yield in a depressed economy to lend to the government. The combination of these two forces will cause older bond prices to rise.

That being the case, if the bond investor wished to make use of some of his new capital gains, he'd be afforded that opportunity. He could cash out a portion of those gains to use as he wished.

He might even chose to re-start his investment cycle by swapping some of those gains for stock that had fallen during the bear market to much cheaper prices. Buying depressed names at artificially, accidental high yields might find him buying AT&T again for that 7.55% yield.

AT&T Yield And Price Over 10 Years

The orange line, representing the arc of yields that AT&T has traversed over the past 10 years, is our guide to how we can make the switch, once again, if we chose to better our income in the next bear market.

To aid our processes of making swaps for income enhancement, diversifying our equities, choosing entry prices and monitoring stocks that we add to our portfolio, we use the Real Time Portfolio Tracker.

Real Time Portfolio Tracker

We have highlighted AT&T here because we recently made another investment in this name at a lower price to enhance our dividend picture, and with further price compression, another purchase may be in the cards, yet again.

We monitor our original buy price of AT&T (circled in red) at $33.20 and new target prices for future purchases compared to the current market price updated in real time throughout the day and can see changes in market value of the stock and our other positions in dollar and percentage terms. Current dividend yield and our yield on cost are also depicted. Because we paid $33.20 for our original position in T, our yield on cost is depicted as 5.9% in column L.

Our next targeted purchase achieved in the beginning of May at $38.18 per share is giving us a yield of 5.13% as shown in column L and will contribute yet another $513.52 to annual portfolio income as shown in column M. Column O tells us what percentage of portfolio income each position will represent. This helps us to balance our income positions to deter total portfolio income failure. Column P lets us know where we stand in relation to capital gains on each of our positions as well as the whole portfolio, whereas column I reveals our capital gains in percentage terms, shown as value % change.

Column P shows our capital gain in dollar terms for each equity and gives us a portfolio total at the top of the column.

We had set our first target entry price to monitor at $39, which is about a 2.3% discount to last week's price closing price and a 6.5% discount from pricing the week before. The next target we've chosen to watch for is $36.00 per share, circled in red in column E as the buy price. If this trade gets executed, we'll be getting about a 10% discount from pricing of about two weeks ago, and the yield we'll obtain at that price is shown in column L as 5.44%.

Because AT&T lost the bidding war this week for Straight Path Communications (NYSEMKT:STRP) to Verizon Communications (NYSE:VZ), its price began to firm while investors worried about the increasing debt that VZ would take on to complete the purchase of STRP, and VZ's price weakened further.

Row 4 reveals our totals. Reading across, we can see what our portfolio positions cost us, what they are valued at throughout the day in real time, the value change percentage wise, our current dividend yield, yield on cost, our annual portfolio income and total portfolio capital gain. This gives me a bird's eye view of the entire portfolio, all in real time, all day long. It serves as a real-time dashboard.

If we choose to employ the dollar-cost average method, I can easily input prices paid over longer periods for each position in AT&T as they occur. This gives me perspective on the impact that price paid has on the dividend yield of each successive position taken.

It has been my goal to share with readers over more than two years how to build a portfolio of dividend growers to close that crucial gap between the Social Security benefit and the retiree's actual funding needs in retirement. Here's where the FTG portfolio currently stands.

The Fill-The-Gap Portfolio At A Glance

Two years ago, 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 19 companies, including AT&T Inc., Altria Group, Inc. (NYSE:MO), Consolidated Edison Inc. (NYSE:ED), Verizon Communications, 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 (NYSE:O), Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO), The RMR Group (NASDAQ:RMR), Southern Company (NYSE:SO) and Chatham Lodging Trust (NYSE:CLDT).

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 6.89% since launch on November 1, 2015. Current portfolio income totals $28,346.

Here is how we focus on the growth of income in the Fill-The-Gap Portfolio:

FTG Portfolio Close, 5/15/17

Your Takeaway

Nervousness has begun to creep back into the marketplace. Investors getting closer to retirement wonder if there are ways to protect the income stream they'll need to fund their impending retirements.

We discussed a method that meets this requirement.

You can sell off some of your lower-yielding stocks such that a temporary redeployment of these funds into four- or five-year CDs will not represent much difference in your income picture one way or the other.

This is an intermediary step taken to generate current income while waiting for a higher income opportunity to develop in long-term Treasury bonds down the road.

This strategy has the potential to preserve income and can assure the near-retiree of a comfortable retirement, free from the anxiety that will befall him otherwise if he kept all his money in stocks and watched them lose 50% of their value in the next bear market. He'd also be liberated from the anxiety of possible dividend cuts or eliminations.

Having achieved a modicum of retirement comfort, the investor will be in a position where he will not be compelled by need or fear to sell any of his high-quality stocks that remain in his equity portfolio.

Thus, freed from these earthly, rough and tumble considerations, he will be able to enjoy his retirement in peace. Once recovery comes, his stocks will blossom once again, and he'll have gotten the best of both worlds; dividends, Social Security payments and U.S. government-guaranteed bond interest to keep a roof over his head and pay the bills, and capital appreciation of his remaining stock assets that always comes with a recovery.

As always, I look forward to your comments, discussion and questions. Please share your thoughts. Have you begun to contemplate ways to protect and assure your retirement income? Please share with us, in the comment section below, what steps you have taken?

If you'd like to receive immediate notification whenever I write new content, simply click the follow button at the top of this article next to my picture, then click "Follow in real time."

As part of our premium subscription program, all subscribers receive a free Portfolio Income Tracker to track income production in the subscriber portfolio and stay focused on income production in their own portfolio. For two days only, new subscribers can also choose another tool of their choice for free. To learn more about this premium service, see Retirement: One Dividend At A Time.

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 T, MO, ED, VZ, CTL, MAIN, ARCC, RAI, VGR, EPR, O, SUI, OHI, W, GOV, GEO, RMR, SO, CLDT.

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.