Tim's Retirement Strategy: Social Security And Dividend Income Retirement Plan For A Soon-To-Be Expat

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Includes: AAPL, ABBV, ABT, ADM, BA, BMO, BTI, CALM, CM, CMI, CVS, D, DUK, ETN, F, GIS, GPC, HD, HP, IBM, IRM, JNJ, KO, LB, LMT, LXP, MMM, MO, NSC, NVDA, O, ORI, PM, PPL, RS, RY, SO, SPG, T, TGT, TROW, TXN, UTX, VZ, WMT, WPC, XOM
by: Matthew Utesch

Summary

Tim approached me after reading one of my articles and hoped that I could review his portfolio to make sure that he is "on track."

Tim has chosen to build a house in Thailand (which he will own free and clear) and has determined that he can live a very comfortable lifestyle on $3k/month.

With another two years left to work, Tim is concentrating on building up his dividend income as the best method of filling the gap between SSI and his $3k.

We will dig into Tim's MOTIF account and break down his investments to get a better picture of his overall risk and opportunities.

At the end of the article, I provide four possible methods for Tim to approach his retirement.

I have had the privilege of writing several portfolio review articles for a number of individuals, including people I've met in person as well as readers of these works on Seeking Alpha. This newest article was requested by an SA subscriber who wanted to see if he was on track to meeting his retirement goals. What makes Tim's situation unique is that he currently works out of the country and intends to retire in Thailand. While this will not change Tim's investing strategy and goals, it does offer the benefit of needing less money on a monthly basis to retire on.

What makes Tim's situation unique is that he currently works out of the country and intends to retire in Thailand. Fortunately, Tim has spent a considerable amount of time preparing himself and his portfolio for this exact scenario.

The goal of this article is to review an actual portfolio and determine whether or not it meets the following conditions:

  1. Is it diversified?
  2. Does it provide adequate yield and strong enough growth needed for Tim to retire in the next 2-3 years?
  3. What type of additional capital investments and sacrifices will Tim need to make in order to make his retirement portfolio achieve the level of income he desires for retirement?
  4. At what age should Tim start to draw his social security? (Hint: It's all dependent on points 1,2, and 3!)

I want to emphasize that this is a real person and although some of the details have been altered, it is intended to help Tim reach his financial goals in retirement.

Reasons to Retire In Thailand

Deciding to retire in another country can be a big deal, but Tim has already begun spending a significant amount of time in Thailand when he is not working. In fact, Tim is about halfway done building a house that will be owned free and clear by the time it is done and his wife is there managing the project.

Tim estimates that he will need approximately $3000 a month of income in retirement in order to sustain the lifestyle that he wants for him and his wife. At present, the majority of this will be generated by Social Security (we will cover what he will receive depending on what age he accepts it in the next section). The remaining income will need to be generated by dividends from stocks held in a Roth IRA and a taxable account. This article will still focus on the same principles that I suggest to most of my clients, it is best to plan a retirement that is based on the cash flows generated by your securities and to never sell them unless absolutely necessary.

I was recently talking with a few friends the other day who lived in Thailand for an extended period of time and I asked them what they think it should cost to live an extremely comfortable lifestyle and ironically they both stated that a person would have a hard time spending more than $3000 per month.

Let me elaborate on the quote above because I can see how someone would be confused by the idea that it would be hard to spend more than $3k/month. The reason why this quote is important is that a $3k/month retirement in Thailand would afford you the following:

  • Being able to eat out for practically every meal (Low-cost meals are $1, higher-end meals are $4)
  • A housekeeper (As low as $15 for 4 hours of cleaning)
  • Regular massages (as low as $8/visit)
  • Inexpensive health club memberships (think Yoga, Bicycle Riding)
  • Regular travel around the country.
  • Doctor visits are as low as $20, seeing a specialist is as low as $50.

So when I say a person would have a hard time spending $3000, I literally mean that. Unless you love shopping in high-end stores and indulging in 5 Star Restaurants, then there should be little difficulty staying within a $3k budget.

Because of this, I will present the rest of this article from the framework of:

  1. Tim's best case scenario: $3,000/month.
  2. Tim's worst-case scenario: $2,000/month.

One of the reasons I want to consider the $2000-a-month scenario is that Tim will end up owning his house out right and based on my research of housing costs (both to rent or purchase) suggests that this thousand dollar difference would be the equivalent of his mortgage/rent if he was to live in a modest home outside the city. (For the record, I would like to point out that foreigners are not allowed to own land in Thailand; however, Tim's wife is Thai and therefore able to own property. The exception to this rule is that foreigners can purchase a unit in an apartment or condominium project so long as at least 51% of the building is owned by Thai citizens.) Based on Tim owning his home outright, $2000 is a reasonable income a month and it may be worth retiring early.

Portfolio and Financial Overview

Here are a few details about Tim that will help paint a better picture about his current situation:

  • Tim makes in excess of $100,000 per year, and other than travel costs, all of Tim's living expenses (housing, laundry, food) are paid for by the company he works for. Tim's travel costs are incurred when flying back to Thailand, but he works in an undisclosed country in a compound that is managed by his company and overseen by the U.S. Military. Tim has chosen to exercise extreme frugality (which is supported by his work requirements of 12 hours/day, 7 days/week) and spends his money on very little while he is working because everything is paid for by his company.
  • Because Tim spends a significant amount of time outside the country, he is able to qualify for the Foreign Earned Income Exclusion which reduces his personal taxes to approximately $2000 per year (social security is still deducted from his paychecks).
  • Tim's monthly expenses are absolutely minimal with his only significant monthly bill being $140 for two storage rooms in the US. The only other notable monthly expense is $60/month for his company's health and dental.

Tim's current allocation of capital is broken down into the following categories:

  • Cash-on-hand $50,000
  • Taxable Investments: $145,000
  • Roth IRA: $27,000

Social Security

After receiving a detailed email from Tim I could tell that he has been diligent about trying to figure out what retirement will look like. One way Tim has done this is by researching the amount of Social Security he will earn based on the age he chooses to take the money. For the record, Tim just turned 62 in August.

  • At age 62, Tim would earn approximately $1398 per month.
  • At age 63, Tim would earn approximately $1534 per month.
  • At age 64, Tim would earn approximately $1712 per month.
  • At age 65, Tim would earn approximately $1904 per month.
  • At age 66 and two months, Tim would earn approximately $2127 per month.

At this point, I cannot yet tell Tim what age he should begin to take Social Security because we need to look at what his investments are earning in order to see if he is meeting his $3000 per month criteria.

Taxable and Roth Investments

Here is a chart that breaks down Tim's investments in the taxable and Roth IRA accounts.

Source: Consistent Dividend Investor, LLC.

Source: Consistent Dividend Investor, LLC.

To establish these accounts, Tim has been using Motif which is a service that allows you to buy up to 30 stocks at the time for a low execution cost of $9.95. Motif Investing is an excellent tool for investors that would prefer to be more hands off and are comfortable with choosing high-quality stocks that require little to no monitoring.

As a side note, I would like to add that my only issue with Motif is that it can lead an investor to make purchases of stocks when they are overvalued if they are not closely paying attention. My support for Motif only goes so far as to use it as an automated method of purchasing high-quality and consistent stocks.

Here are a couple observations I have after reviewing Tim's portfolio (many of which Tim seems to be aware of himself):

  1. Cal-Maine Foods (CALM) is a huge drag on the dividend income in his portfolio. At this point in time, I would suggest selling all shares of CALM and simultaneously selling an equal dollar amount of shares from Nvidia (NVDA). I would also suggest that he sell all shares of British American Tobacco (BTI) and sell additional shares of NVDA to make the capital gains a wash. The reason for this trade is that it will balance out capital gains and losses while rebalancing his portfolio to a much more healthy level. These funds can be used to purchase some of the strong dividend paying stocks mentioned below. Although I expect NVDA to continue making healthy dividend raises for years to come they do not currently provide enough yield to justify their weight in Tim's portfolio, especially considering that Tim would like to retire in two years.
  2. Considering Tim is not a financial professional, he has done an excellent job of diversifying his portfolio across industries. With that said, I believe that Tim's portfolio is light on financials (such as banks) and utilities (Duke Energy (DUK) is his only position). Tim's portfolio would benefit from positions in these due to their consistency and for banks at least, the attractive potential of higher income.
  3. Given the current stocks that Tim owns, I would highly suggest that he stop contributing into the following stocks (if he already hasn't): Apple (AAPL), NVDA, Abbvie (ABBV), Boeing (BA), and AT&T (T). I am not suggesting that the stocks are poor choices (in fact, I believe there are some of the highest quality securities Tim has), but each of these positions represents more than 5% of his outstanding portfolio and have a fair amount of capital appreciation, are close to or at their 52-week highs, and several offer yields too low for what Tim needs. I believe that some good alternatives for the stocks include: Verizon (VZ), Old Republic (ORI), General Mills (GIS), PPL Corporation (PPL), Southern Company (SO), Dominion Resources (D), Bank of Montreal (BMO), Royal Bank of Canada (RY), and Canadian Imperial Bank of Commerce (CM). Many of these stocks have yields in excess of 5% and almost all have yields close to 4%. I personally believe that these stocks can be regarded as "companies that have a reason to exist" which make them sound investments even though they come with higher dividend yields.
  4. In Tim's Roth, I would like to see him continue contributing the $6500 maximum ($5500 + $1000 catch up contribution) every year he is working. Creating a dependable income stream from his Roth is important because it's tax-free status makes his dividend income go that much further. I agree with Tim's decision to largely hold REITs in his Roth, but this will become less important as he gets closer to retirement and his income drops to a much lower level than is currently. (Remember, REITs are taxed at the income level and not at the dividend rate.) A few REITs I think Tim should consider are Iron Mountain (IRM), Lexington Realty (LXP), Realty Income Corp (O), WP Carey (WPC), and Simon Property Group (SPG). You can find articles that I've written on IRM (Here), LXP (Here), and SPG (Here). Tim's portfolio is currently heavy on healthcare and retail REITs, although some of my suggestions qualify as retail REITs all of the above are considered to be high-quality and well diversified.

When Should Tim Take His Social Security?

My answer to this isn't necessarily complicated, but my answer is fairly long-winded because there are many variables as to when Tim should take his Social Security. Given Tim's current portfolio, he stands to make approximately $5700 per year (or approximately $475 per month). If we combine this with his potential timeline for taking Social Security we come up with the following numbers (assuming an extremely pessimistic scenario where Tim does not contribute any more money nor do any of these companies give dividend increases and only managed to continue paying out what they currently do):

Given Tim's current portfolio, he stands to make approximately $5700 per year (or approximately $475 per month). If we combine this with his potential timeline for taking Social Security we come up with the following numbers (assuming an extremely pessimistic scenario where Tim does not contribute any more money nor do any of these companies give dividend increases and only managed to continue paying out what they currently do):

  • At age 62, Tim would earn approximately $1873 per month.
  • At age 63, Tim would earn approximately $2009 per month.
  • At age 64, Tim would earn approximately $2187 per month.
  • At age 65, Tim would earn approximately $2379 per month.
  • At age 66 and two months, Tim would earn approximately $2602 per month.

I always like to look at the most pessimistic scenario to know what the absolute baseline is. I like to live by the belief that if you set the bar low then everything above it is icing on the cake. This belief is especially helpful in retirement when you are attempting to maximize the benefit of limited resources. I think Tim will be surprised to see that he could retire at age 63 and still live comfortably (although he would still need to consider the cost of medical insurance) in Thailand.

Let's look at a more optimistic scenario in which Tim's current holdings continue to grow their dividends at a portion of their five-year average growth rate. Here are the rates I used:

  • High Growth - 9%
  • Medium Growth - 7%
  • Low Growth - 5%

I feel that these assumptions are reasonable given the 13% 5-Year Growth rate of both his taxable account and Roth IRA. Below is a chart depicting what this growth would look like:

Source: Consistent Dividend Investor, LLC.

Because Tim doesn't have time on a side there is only one solution for coming up with the additional income needed to live the comfortable lifestyle that he would prefer, and that is to generate more income by adding additional capital to his taxable account and Roth IRA. If Tim waited to take Social Security and we assumed the low-growth scenario of 5% annual dividend increases he would be making approximately (without adding any more capital than he currently has):

  • At age 64, Tim would earn approximately $1712 SSI + $523 Dividends (Year 2, Low Growth) per month. Total Income = $2235/mo
  • At age 65, Tim would earn approximately $1904 SSI + $550 Dividends (Year 3, Low Growth) per month. Total Income = $2454/mo
  • At age 66 in two months, Tim would earn approximately $2127 SSI + $577 Dividends (Year 4, Low Growth) per month. Total Income = $2704/mo

Without adding any additional capital Tim would need to lower his lifestyle expectations to the minimum range in order to retire at age 64.

As mentioned before, Tim has exercised extreme frugality while working overseas. Although Tim and I did not discuss specifics, I would estimate that a significant portion of his income is going towards building his house that is 50% complete and will be owned free and clear (to be reasonable, let's assume that this number is approximately $30,000 per year). Because Tim must pay for his own travel expenses to Thailand, I also want to consider that $15,000 per year is associated with these expenses. After deducting his taxes ($2k/year), Social Security Tax ($10,250/annually) and his monthly expenses of $140 for storage and $60 for health/dental ($2400/annually), we can conservatively assume that Tim has approximately $42,500 of income available to invest in the market.

If Tim were to contribute $40,000 per year towards his taxable account ($33,500) and his Roth IRA ($6500) and continue building a portfolio of strong dividend payers, his income stream would look something like this:

  • $80K @ 3% = $2400 Annually
  • $80K @ 3.5% = $2800 Annually
  • $80K @ 4.0% = $3200 Annually
  • $80K @ 4.5% = $3600 Annually

Based on some of the stocks I suggested, achieving a 4% annualized dividend rate is not unreasonable. For the next chart, I'm going to add $3200 of dividend income into the existing income of $5700 to get a better idea of how this money will grow.

Source: Consistent Dividend Investor, LLC.

With this additional income considered, we can see that the scenario becomes much more optimistic about reaching the high-quality lifestyle that Tim wants to live in retirement. If we consider the low growth numbers with the additional $80,000 of capital earning a 4% yield Tim's retirement income would include $9800 of dividends annually ($816/month). Therefore, if Tim retired but waited to take Social Security at the following ages he would be making approximately:

  • At age 64, Tim would earn approximately $1712 SSI + $817 Dividends (Year 2, Low Growth) per month. Total Income = $2529/mo
  • At age 65, Tim would earn approximately $1904 SSI + $858 Dividends (Year 3, Low Growth) per month. Total Income = $2762/mo
  • At age 66 in two months, Tim would earn approximately $2127 SSI + $901 Dividends (Year 4, Low Growth) per month. Total Income = $3028/mo

Again, these figures above assume a low growth scenario with average dividend increases of 5% annually (average weighted across all stocks).

Time To Make A Choice

One thing that I truly love about investing is that the end of the day it's all about choices. Sometimes the choices can be difficult but at the end of the day, we get to choose our own version of freedom. Using Tim's situation as an example, let's talk through a couple of these choices:

  1. If Tim can't stand working any longer than necessary, he may choose to live at a lower standard of living in exchange for an early retirement. I would say that Tim could retire at age 63 and contribute no more money to his existing investments and he would be able to live off of approximately $2000 per month.
  2. If Tim can't stand working any longer than necessary but he still wants to live at a higher standard of living than it would be necessary for him to save more money or figure out a way to earn more money in order to generate the capital necessary to retire earlier. (This is obviously the more difficult option because it would require freeing up more cash than he already has.)
  3. If Tim enjoys what he does and would prefer the financial security and higher quality of living versus an earlier retirement, then he would need to contribute no less than an additional $80,000 of capital over the next two years in order to live at the level of comfort he desires (close to $3k/month).
  4. If Tim enjoys what he does and would prefer to have even more financial security and a higher quality of living versus an earlier retirement age, then he could choose to continue working until age 66 and two months in order to maximize his Social Security benefit and contribute even more capital while also enjoying annual dividend increases.

One reason why Tim approached me about writing this article was that he wanted a reality check. For the average person, a reality check can be difficult to handle, but I feel that Tim is the exception to this rule because he has made a better effort to understand where he needs to be in order to retire. At this point, Tim really has four options, and it doesn't matter whether or not he likes them, as much as it is a question of which option offers the most fulfillment. I believe that more investors need to be like Tim in this sense because the average person would prefer to ignore the problem until it blows up in their face.

Conclusion

When compared to the average American, Tim's scenario is pretty optimistic. If Tim were trying to live off the same funds in the United States he would find life significantly more difficult and in many ways completely unreasonable. Because Tim wants to retire in Thailand, this will improve his quality of life without the need to increase his retirement income to do so.

I believe that if Tim implements some of the changes discussed in this article and continues to invest additional capital in strong consistent dividend paying stocks he will be able to achieve a very comfortable retirement lifestyle.

Final Note: If you enjoy my articles, please take the time to follow me. While I enjoy performing analysis, following me is the best method for showing me that SA subscribers are finding my work useful.

If you have any suggestions to improve my articles or if you would like me to perform analysis on a stock please feel free to message me and I will do my best to make it happen. I truly appreciate thoughtful feedback and would love to create content that is truly meaningful.

Stocks mentioned in this article include: Abbot Laboratories (ABT), Archer Daniel Midland (ADM), Cummins (CMI), CVS Corp (CVS), Eaton Corp (ETN), Ford (F), Genuine Parts (GPC), Home Depot (HD), Helmerich Payne (HP), IBM Corp (IBM), Johnson & Johnson (JNJ), Coca-Cola (KO), L-Brands (LB), Lockheed Martin (LMT), Wal-Mart (WMT), Altria (MO), 3M (MMM), Norfolk Southern (NSC), Phillip Morris (PM), Reliance Steel (RS), Target (TGT), Trowe Price (TROW), Texas Instruments (TXN), United Technologies (UTX), Exxon Mobil (XOM).

My other clients currently hold long positions in some of the stocks mentioned, including ADM, T, MO, CINF, IRM, O, SPG, VZ, ORI, and GIS.

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

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.

Additional disclosure: This article reflects my own personal views and is not meant to be taken as investment advice. It is recommended that you do your own research. This article was written on my own and does not reflect the views or opinion of my employer.

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