How To Retire: Don't Go To College

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Includes: AAPL, AGG, AVB, BND, BSV, DIS, EQR, F, FPE, FRT, GILD, GM, INTC, JNJ, LLY, MCD, MO, MRK, PFF, PGX, PM, QQQ, REG, SCHD, T, TGT, VDC, VIG, VNQ, VYM, VZ, WMT
by: Colorado Wealth Management Fund
Summary

Many future retirees plan to delay filing for Social Security benefits, yet many end up seeking benefits sooner rather than later.

Readers frequently ask about the steps for reaching retirement with a healthy stock portfolio. Can you handle them?

One of the most controversial techniques concerns college. There's a way to avoid student debt.

Once investors decide not to drown themselves in student debt, there are a few investing options to maximize the value of their stock portfolio.

Think you’ve got the perfect retirement plan? Think again. We’ve found many new retirees end up modifying their plan after they retire. No plan is perfect, so investors need to remain open to considering alternatives. We’re going to cover:

  1. The reality of drawing Social Security benefits.
  2. How to build a portfolio for retirement.
  3. Which common activities sabotage future retirement plans.

Social Security Benefits

Many future retirees expect to begin drawing Social Security around 65. Like most beliefs about retirement, the actual results tell a different story.

Those who are already retired had an average starting age of 62:

Source: Nationwide

It would be reasonable to conclude that many people begin drawing Social Security earlier than they intended to.

If the investor is terminated for any reason within 1 or 2 years of their retirement date, they may not wish to endure a job hunt. Even if they found a new position, they would still need to get through the orientation. Workers go through that process every day, but most are planning to continue working for many years.

Waiting on Social Security

However, the retirees who are not drawing Social Security were not included in the averages. If we factor in those people, the story looks a little different. 19% of new retirees are still planning to wait for full retirement age. That's down quite a bit from the 29% of future retirees who state that goal.

Source: Nationwide

It is worth pointing out that the sample sizes were pretty small. Perhaps the numbers would change with larger sample sizes. We suspect the trend would still hold true, but the precise figures might change a little.

Are Retirees Happy?

Most retirees end up filing for Social Security benefits before their "full retirement age". There is nothing inherently wrong with taking Social Security early. Yet, it’s important for investors to plan ahead.

Make the best choice for you.

While 15% to 16% regret drawing at a younger age, 73% to 78% state they are happy with their choice.

What Steps Should You Do?

Let's start with a quick look at a few things investors should do:

  1. Maximize contributions to tax-advantaged accounts.
  2. Purchase strong companies with excellent balance sheets (eliminating some of the gambling behavior that is far too common).
  3. Purchase shares in low-fee index funds if you don't like to manage your investments.

There are some areas where low-fee index funds provide the best possible exposure. For instance, investors looking for diversified bond exposure should look to index funds. Most of these funds will provide a yield that is fairly low but also steady.

We're not a fan of moving into junk bonds. Investors assume that the yield will continue, but completely underestimate the risk of a recession sending several of the companies into bankruptcy.

We’ll start with looking at ways to build individual stock portfolios, and then we’ll cover the index fund options.

Building a Stock Portfolio for Retirement

We've prepared a handful of articles on how to retire in your 60s with a defensive portfolio. We even built a tool for identifying lower-risk REITs to help investors. We call it the "Safe Income Portfolio" and provide it to subscribers of The REIT Forum. It can be accessed with just a couple of clicks on our service. We fill it with REIT shares that have a risk rating lower than 4. Our risk rating scale runs from 1 to 5 with 1 being the lowest. This portfolio creates an easy way for investors to filter out the lower quality REITs. We don't suggest that investors need to purchase every share in the portfolio. Instead, investors should think of it as a buffet where we've carefully evaluated each item.

For instance, it includes AvalonBay (AVB), Equity Residential (EQR), Regency Centers Corp. (REG), and Federal Realty Investment Trust (FRT). Those examples include two apartment REITs and two strip center REITs, but there are several other REITs that also qualify.

The chart below demonstrates how it works and includes 4 of the shares with a risk rating of 1:

We also own positions in several shares that are included in the portfolio. We believe this is a great time to focus on buying quality REITs and preferred shares.

Buying Common Shares

The traditional way to build a portfolio is to focus on common shares. We suggest that investors look to invest in larger companies with a healthy amount of research available. Beyond the REITs we cover, these are several other highly-covered companies on Seeking Alpha:

Consumer Staples

Healthcare

Consumer Discretionary

Technology & Others

Target

(TGT)

3.19%

Gilead Sciences

(GILD)

3.96%

General Motors

(GM)

4.10%

Apple

(AAPL)

1.55%

Altria Group

(MO)

5.64%

Merck & Co. Inc.

(MRK)

2.66%

Ford Motor Company

(F)

6.84%

AT&T Inc.

(T)

6.58%

Walmart

(WMT)

2.18%

Eli Lilly & Co.

(LLY)

2.00%

Disney

(DIS)

1.59%

Verizon

(VZ)

4.08%

Philip Morris

(PM)

5.22%

Johnson & Johnson

(JNJ)

2.59%

McDonald's

(MCD)

2.45%

Intel Corporation

(INTC)

2.37%

ETF Examples

Below we have a few options that might interest investors who prefer to use ETFs as their main investment method:

High Dividend ETFs

Bond ETFs

Preferred share ETFs

Sector ETFs

Vanguard Dividend Appreciation ETF

(VIG)

1.91%

iShares Core US Aggregate Bond ETF

(AGG)

2.72%

iShares US Preferred Stock ETF

(PFF)

6.01%

Vanguard Real Estate ETF

(VNQ)

4.57%

Vanguard High Dividend Yield ETF

(VYM)

3.07%

Vanguard Total Bond Market ETF

(BND)

2.79%

Invesco Preferred Portfolio ETF

(PGX)

5.74%

Vanguard Consumer Staples ETF

(VDC)

2.61%

Schwab US Dividend Equity ETF

(SCHD)

2.84%

Vanguard Short-Term Bond ETF

(BSV)

1.98%

First Trust Preferred Securities and Income ETF

(FPE)

5.83%

Invesco QQQ ETF

(QQQ)

1.00%

We are not endorsing current market valuations on ETFs. The indexes look pretty expensive to us and we only see a few pockets where values still appear compelling.

Alternative Ways to Invest

We like investing in high-quality preferred shares. It can push the total yield on the portfolio higher and several of them have steady prices. Preferred shares can be very useful for buy-and-hold investors due to the higher income and lower risk, but they also provide some trading opportunities.

We describe the technique in our Guide to Preferred Share Dividend Captures:

Dividend capture techniques end up confusing many investors. There are simply too many misconceptions about how dividend captures work. It is time to clear up those misconceptions!

Fundamentally, a dividend capture has 3 steps:

  1. Buy the shares before the ex-dividend date.
  2. Hold the shares at least until the morning of the ex-dividend date.
  3. Sell the shares for a price similar to the purchase price.

While the concept is three straightforward steps, many investors struggle to execute the technique. Since every dividend capture can be a little bit different, it helps to run through several examples. All of these examples will use preferred shares. We’ve found common share prices are too volatile and thus require too much luck. We don’t want to depend on luck, so we need shares with less volatility, but they still need to have high dividend amounts. Preferred shares can fit this description perfectly.

The guide includes examples of trades where things went exactly as planned:

It also includes examples where they did not:

Of course, there are also opportunities where we may buy shares in the month following the ex-dividend date:

Whenever possible, investors should look to utilize tax-advantaged accounts for these opportunities.

Whichever method you choose, the most important aspect is that it fits your personal needs. There are many very successful retirees who have capitalized on each of the investing strategies we mentioned.

What do Future Retirees Keep Asking?

When we prepare retirement articles on Seeking Alpha, one of the single most common questions is:

"How are investors supposed to reach retirement with a portfolio in the range of $500,000 to $1,000,000?"

Logically, our suggested choices for producing steady income in retirement still require the investor to have some capital upfront. Investors who avoid sabotaging their own retirement are in a much better position to have that capital available.

Ways to Sabotage Retirement

Investors are constantly asking how they are supposed to save enough money. They struggle to build the stock portfolio because they simply aren’t putting money into the portfolio. We’ve got a few suggestions for younger investors:

  1. Don't buy a brand new car.
  2. Don't finance a car unless it is at 0% and you have sufficient cash available to pay the full amount due immediately.
  3. Don't spend most of your budget on eating out.
  4. Don't purchase cable TV, you can get Netflix or 1 service and swap services each time you finish their shows.
  5. Don't buy things you don't need.
  6. Don't blow 6 figures on an education in doing something people don't want to pay you to do.
  7. Don't remain complacent in a dead-end job. Income is part of the equation also.
  8. Don't gamble with your investment accounts.

Number 6 could be the most controversial item on the list. Young people are taught from an early age that they can't put a price tag on education. That theory is precisely wrong. Colleges put price tags on education. They've been increasing the price dramatically faster than inflation.

Image result for college tuition growth rate

Source: U.S. Department of Education

It is ironic that college tuition costs increased so rapidly; it demonstrates that demand has been far more important than supply. The cost of providing education hasn't increased so dramatically. Thanks to the internet, it is possible to provide education at lower costs. It is possible to expand college class sizes. It is possible to record a lecture and play it for thousands. However, tuition rates have continued to increase rapidly. The growth in demand for college education has fueled increasing enrollment and enabled higher tuition rates. The demand is demonstrated by increasing enrollment:

Source: Pew Research Center

There are viable alternatives to paying up for private 4-year colleges. The state colleges are generally significantly less expensive. Unless the private college carries an extremely high ranking, they are unlikely to provide enough additional value to cover the cost:

Source

Another way to reduce the expense is to look at trade schools or to take the first two years through a community college.

Image result for tuition at trade school vs 4 year college

Source

That isn't to suggest that all college programs are a waste. If the word "Engineering" is in the title, the student is probably in good shape:

Image result for best vs worst degrees for salary

Source

Of course, healthcare remains an attractive field as well:

Source

One major difference between these fields and the lower paying fields is the difficulty and length of the programs. Students training to be doctors or engineers will often incur far higher debt, but they will have a very solid source of income. On the other hand, students training for much more generic degrees are unlikely to enjoy the same success.

How Much Did That Degree Really Cost?

With an average cost of over $25,000 per year for private colleges, a student graduating in 4 years would spend over $100,000. That's before accounting for the additional expenses of attending.

If they invested that $100,000 and earned a mere 5% annualized after inflation, they would have $898,500.78 in 45 years.

Some readers will argue that the students don't have $100,000 to invest. They need student loans to make college more accessible.

Tell me again about the benefits of students spending money they don't have. That's always a good story.

Conclusion

Investors planning for retirement should be prepared for changes. Many of today's current retirees had to modify their retirement plan. It is a normal part of the process.

There are a few techniques you can follow to give yourself a better position. The first factor is simply to avoid major cash outflows. Those outflows could be in the form of singular major purchases, or they could be the small recurring charges most people don't consider. In either situation, a small reduction in expenses makes it dramatically easier to plan.

The other aspect is that investors simply need an investing plan. Whether they choose to utilize low-fee index funds or pick individual shares, sticking to the plan is critical. Investors who choose not to max out their retirement accounts are giving up significant tax benefits.

For investors who want to reduce volatility or increase yields, preferred shares can help. They can provide stable income and stable values for buy-and-hold investors. For traders, they offer opportunities such as the "dividend capture". We've found preferred shares can provide a significant benefit to the portfolio for investors who are comfortable using them.

Disclosure: I am/we are long EQR, FRT, MO, PM, 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.