Almost a year ago, I wrote an insanely popular Seeking Alpha article, Retirement Strategy – How to have enough and which stocks to own. Today, I revisit many of those stocks to see how they have fared. In addition, I revisit retirement lifestyle options and choices.
As many of you know, I found myself 'retiring' two years ahead of plan. That was about a year ago. Honestly, at that time, I really had no idea what I was going to do with my time. I’m not a ‘sit and watch TV’ kind of person. Rather, I like to be active and feel like I’m making a difference.
I always knew that I wanted to 'retire' as soon as I could be comfortable and get out and do something different. There is no reason to work in a job until you die. Like me, you probably have had friends die that were going to retire after 'just one more year' or die soon after retirement. I definitely did not want to be in that club.
Fast forward a year, we have traveled, re-energized old friendships and made new ones. More importantly, we have found our niche in writing and volunteering around the world – from Columbia for a month to Israel for two months to domestically with those in need. For example, we deployed on an awesome trip to the Florida panhandle to help Hurricane Michael victims with roof tarping, tree removal, and mud-outs (removal of wet debris including the walls from a flooded home is called mud-out because everything flooded is saturated with muddy water). We are going back again soon – it really helps the people that need it the most, the volunteers get blessed, and it is great exercise.
I tell you this to give you, if you were like me, comfort to try something new. Sure, you will not have the comforts of getting up each day, driving the same paths, sitting at the same desk, dealing with a mountain of tasks and emails... yuck... When you can set sail and try new things. By all means, don’t be afraid of the time after work that some call retirement. Find your way in new ventures using the skills you cultivated your entire life or, better yet, learn new ones.
Which Stocks Might Be Part of a Retirement Portfolio?
Let's take a quick look at the stocks I mentioned a year ago and how they have fared in the last year, including the down markets of October and November.
There is a lot to be said for building a portfolio of stocks for the long haul. As you get older, your time horizon is reduced and would tend that one should allocate more to lower beta stocks and 'safer' investments that pay dividends. Stocks like the following should be reviewed as part of a portfolio: Johnson & Johnson (JNJ), Medtronic (MDT), Coca-Cola (KO), Colgate-Palmolive (CL), Procter & Gamble (PG), and Walmart (WMT).
Johnson & Johnson
Even with the recent down markets, JNJ has returned 5.7% along with a 2.44% dividend for a total return of approximately 8.2%
JNJ recently raised their dividend for the 56th consecutive year. With such a well-diversified portfolio, JNJ will do well in any economic market.
JNJ generates almost 50% of their sales overseas and this brings currency risk. A strong dollar could continue to have a negative effect on the earnings of the company (without proper hedging techniques).
MDT has returned 16.2% along with a 2.16% dividend for a total return of approximately 18.4%
Just today, MDT’s earnings topped quarterly expectations for its fiscal second quarter and the medical technology giant raised its full-year guidance. It now sees 5%-5.5% organic sales growth, up from its prior view for 4.5%-5%.
KO has returned 11.1% along with a 3.14% dividend for a total return of approximately 14.2%
While this has been a good return for KO. I think at this point, KO is overvalued and I would like to see a pullback before entering into a new position. If you are long already, think about taking a portion of your gains.
CL has struggled for much of the year returning a negative 12.5% along with a 2.68% dividend for a total return of approximately -9.8%.
Dividends have increased for 55 years. CL has the strength and diversification to thrive under adverse economic conditions.
CL is trading near 5-year lows and is offering a 5-year high dividend yield. However, their growth prospects are subdued. Recently, CL noted a difficult pricing environment and higher costs, and said it expects a single-digit sales decrease in the current quarter due to foreign exchange.
If the rumors of Kraft Heinz (KHC) resurface, the stock is likely to rebound quickly – I would not count on that as a reason to invest in the stock.
Procter & Gamble
PG has returned 3.37% along with a 3.11% dividend for a total return of approximately 6.48%. While the returns are lackluster, I believe there is a brighter future for PG. For one, they are restructuring to decentralize their various businesses and give their various sector CEOs more accountability.
PG has benefited from the ‘flight to quality’ recently. Here is an interesting video on PG.
Finally, we look at WMT. WMT has returned a negative 4% along with a 2.2% dividend for a total return of approximately negative 1.8%. Disappointing, but I’m still bullish on WMT and expect holiday sales to beat estimates.
How Much Money Do You Need?
Circling back to the original question of how much money do you need to retire - the problem for most of us, but especially me, is that we're driven by fear and greed far too often. That goes for investing and living. While made popular by various movies and the media, those emotions are not what life is about.
There must be a way to be frugal and retire from the rat race and to be able to rewire yourself to follow your desires, work for yourself, give back to the community. But how? With over 30 years of investing and saving, I have a number of strategies to share below and in future articles.
The big question is, 'how much do I need to retire?' It really depends two main things: how long will you live and how much you will spend, net of earnings.
From the below stats, it's clear that we do not save enough. And most, do not have enough money to ever retire. Of course, Seeking Alpha readers tend to be more astute and mindful of retirement and the financial needs they will have, but this gives you a view of the ‘typical’ American.
1 In 3 Americans Have Less Than $5,000 In Retirement Savings
The report found that 33% of boomers have $25,000 or less in retirement savings. It appears from the above that most of us will not retire with a seven-figure portfolio. Will most people keep working forever? Is there a way to save more for retirement?
Guidelines & Portfolios
How can you know if you are spending in retirement at the right level?
The 4% Rule
There are a number of 'rules of thumb'. One is the four percent rule which is a rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. This rule seeks to provide a steady stream of funds to the retiree, while also keeping an account balance that allows funds to be withdrawn for a number of years. Simply put, if you plan on spending $50,000 a year in retirement, you will need (according to this rule) $1,250,000 (50,000/.04).
I wanted to find a study that tested and back tested the 4% rule using inflation adjusted spending and entering retirement at various points over the last several decades. Fortunately, I found such as study.
The chart below shows the progress of retirees’ spending as a percentage of total assets based on the amount of inflation-adjusted spending halfway through their estimated retirement period. This chart shows the retiree’s then-current withdrawal rate as both the portfolio went up and down as well as shows inflation-adjusted spending requirements continuing to rise each year.
In this chart, lower numbers are better as it denotes the withdrawal rate is low and spending is modest relative to wealth. As Kitces states, someone that retired in 1966 found that they were, half way through the retirement period, the current withdrawal rate was above 10% with 15 years still to go. Fortunately, he states that the primary reason the 1966 retiree was able to finish retirement at all with such a high withdrawal rate was that their half-way point was 1981 when the stock and bond markets had gotten so cheap (yields had gotten so high) that the superior returns (and declining inflation) made it possible to finish successfully.
Looking at the 2000 or 2008 retiree, their results above continue to hover in the 4-6% range. The 2000 retiree is still only at a 6.2% withdrawal rate today (with just 15 years to go), while the 1966 retiree was over a 10% withdrawal rate at this point. And in the case of a 2008 retiree, the withdrawal rate is at the 4% initial withdrawal rate the retiree began with.
Of course, all of this depends on timing, spending, inflation, etc. The future does not always follow the past. However, it is reassuring that historically through markets ups and downs, that one can retire and live reasonably well.
Living on income alone
Source: Fidelity Investments
While many view the 4% rule as too conservative and that retirees should be spending more. I disagree. As an alternative to the 4% rule, many people are even more conservative by attempting to live on just income such as social security, dividends, and interest. While this is much harder to do and it will mean living with less. You will almost never run out of money in this scenario and you will be able to leave more to your heirs.
One might also consider a bond fund or bond laddering which attempts to match cash flows with the demand for cash using varying maturities that diversifies bond holdings within a portfolio. There are several good resources for developing a portfolio of bonds to provide you with the income that you need in retirement. I personally like what Fidelity Investments offers in this space. In short, laddering seeks to avoid reinvestment risk by not reinvesting a large portion of assets in an unfavorable interest rate environment. Each "rung" of the ladder represents a specific bond with a specific maturity rate and yield.
Source: Fidelity Investments
Get Ready for Retirement
Below are a few basics for those not quite at retirement:
- Remember the value of compounding - save as much as you can as early as you can.
- Always spend less than you make (some of my mom's best advice).
- If you use credit cards, pay them off every month. No exceptions.
- Make sure your investments work hard for you.
- Put as much as you can into investments automatically each month.
- Have a plan for healthcare. You might have to purchase a health insurance plan on the market or under the Affordable Care Act. Medicare generally doesn’t kick in until age 65.
In retirement, there are a number of lifestyle changes that you might be able to make, but they take more effort:
- Budget. We budgeted for the first several years of our marriage. We started to budget again when we retired. Determine what your expenses are - what's fixed, what's variable and adjust accordingly.
- Income Strategy. In conjunction with creating a budget, you will need to determine what your income will be and where your spending money will come from. When you enter retirement, your spending money will come from various sources instead of a paycheck. Part time job, social security, pension, investment income are all potential sources. More on this in the next section below.
- Downsize. We have lived in big houses and small houses. There are several advantages to living in a small house. It's less costly to heat and cool. Taxes are most likely less. It is easier to maintain. The catch - let's get real here - it might not be something that people will drive by and envy. Isn't that why most of us live in a big house - to show others how successful we are?
- Pick the best state. More on this later, but where you retire makes a big difference in cost and enjoyment.
- Medical. This is one of the biggest expenses and you really need health insurance. Unfortunately, good insurance is expensive. Shop around. Analyze the risk of over and under insuring. Use generic prescriptions whenever possible.
- Walk. We all need the exercise, so walk rather than driving. It will save gas.
- Fewer cars. Do you need two or more cars in retirement? If not, sell one. Cut your insurance and maintenance costs in half.
- Keep that car. Keep that car longer. Who are you trying to impress with a new, expensive car every couple of years?
- Clothes. Have nice looking clothes, but don't go overboard. You are not going to the office anymore. Shop secondhand.
- Communication. Apparently, everyone else stopped landline phone service years ago. Cut it. Shop for the mobile phone plan that you need and keep those phones longer.
- Travel. With visiting almost 100 countries in my life, I'm all for traveling as much as possible. There are ways to see the same things everyone else does for a fraction of the costs - shop airline specials, book hotels that are safe and clean but not expensive. Why pay top dollar for a fancy reception counter and a pool. If you vacation right, you won't be spending much time at the hotel anyway.
- Food. Eat at home more and cut back on eating out. Drink less booze. If you smoke, stop. It's better for your heath and wallet.
- Shop. Shop around for the best prices. Buy what you need. Determine what is a need vs. a want.
In summary, diversification is key. Keep your eye on the goal, but think about today - how you interact with people and how you can better others' lives. Invest in companies that are well diversified and can weather the storms of choppy markets. Enjoy retirement by giving back to your neighbors on the planet and spend within your means even though retirement.
Thank you for your time in reading the above article. I read and write on a wide range of companies on a regular basis. If you would like to stay informed with articles like these, please click the "Follow" button at the top of this report and select "Get email alerts." If you have additional insights on the topic or contrasting views, please kindly share them in the comments section.
Disclaimer: This article is intended to provide educational information to readers and in no way constitutes investment advice. Investing in public securities is speculative and involves risk, including possible loss of principal. The reader of this article must determine whether any investments mentioned in this article are suitable for their portfolio, risk tolerance and accept responsibility for their decisions. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer or a recommendation to buy, sell, or dispose of any investment or to provide any investment advice or service. An opinion in this article can change at any time without notice.
Disclosure: I am/we are long WMT.
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: I might take long positions in any of the stocks noted in the article in the next 72 hours.