How To Retire At 65 With $600,000

by: Colorado Wealth Management Fund

Seeking Alpha helps investors and retirees find investing ideas to build a better portfolio.

Dividend investing can be a great source of income for retirees. Preferred shares should be in many dividend-focused portfolios.

Picking individual high-quality preferred shares enables the investor to reduce their volatility compared to ETFs.

One of our upcoming retirement articles will focus on how to reach retirement with a larger portfolio.

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

When you’re ready for retirement, you need to balance yield with safety. Many investors focus on only one aspect. One way to improve yield, as we will demonstrate, is to include preferred shares. Several of the preferred shares we are discussing in this article were covered more extensively in Preferred Shares Week 156.

What are preferred shares?

A share of preferred stock is a share of a company that is a cross between a bond and a common stock.

  • Preferred shares are called “preferred” because these shares have dividend preference over common shares.
  • Because preferred shares have a dividend preference over the common and because the price of the shares tends to be stable, many people think of preferred shares as having minimal risk.
  • Preferred shares of stock are issued with a prospectus, like common shares. A prospectus is a contract between the company and the investors. In the prospectus you will find the issue price, the call price, the date the shares are eligible to be called, and, of course, the dividend amount. These elements form the basic contract between you and the issuing company.

Compared to a stock

  • Like a common stock, a preferred share moves up and down in price with the market forces.
  • Unlike a common stock, a preferred share can be called back by the issuing company at a fixed price (after call protection ends) - normally $25.
  • Like many common stocks, a preferred stock pays a dividend, fixed by a contract known as a prospectus. Most preferred stocks pay a fixed dividend. This causes many people to compare them to bonds which also pay a fixed dividend.
  • Unlike a common stock, the dividend usually remains constant throughout the life of the preferred share. Because the dividend is fixed, they are compared to bonds, which also are fixed.
  • Note: Some preferred shares have an FTF (fixed-to-floating) feature. This means after call protection ends they cease having a fixed dividend rate and go to a floating rate.

Compared to a bond

  • Like some bonds, a preferred share has a “call date”. The issuing company may or may not call the preferred shares on the call date. If the share is called, the company gives the agreed amount (usually $25) to the investors and then retires the shares.
  • After the call date, the company can call the preferred shares at any point with a 30-day notice.
  • Unlike a bond, the preferred shares do not have a maturity date.

Are preferred shares useful for retirees?

They can be an exceptional tool for any investor who wants to build a stable portfolio with a solid yield. To get a similar yield from common shares, investors often need to take on dramatically more risk of losing capital. Sadly, many investors don’t recognize the risk of speculating on high-yielding common shares until it is too late.

You invest for a purpose: to make money. Whether you are investing in common stocks, preferred shares, commodities or tulip bulbs, the measure of your investing success is the total returns.

The returns come to preferred share investors in two ways:

  1. Dividends paid on a regular basis
  2. Capital gains when they sell the shares at a profit

If you bought and sold a series of preferred stock, all that will matter at the end of the day is the total return achieved on the position. After a position is ended, it is possible to know precisely what the values are by answering the two following questions:

  1. What is the difference between the starting value and the ending value?
  2. How long did it take to get there?

Preferred shares have the advantage of allowing the patient investor to benefit from both dividends and capital gains. Preferred shares, like every other investment, are vehicles for turning your initial capital investment into a profitable investment with the best total return. Preferred stocks are particularly appealing because they routinely sport a high dividend and a relatively stable price.

Do Preferred Shares Work for Buy-and-Hold Investors or Traders?

They can work very well for both. We have an example of a situation where we found it very prudent to trade though.

During December 2018, the market was in the grip of intense fear. No recession followed, but investors were in a panic and the market demonstrated the stress.

We swapped one fixed-to-floating share for a fixed-rate share. The shares in question were TWO-A (TWO.PA) and TWO-E (TWO.PE).

We bought shares of TWO-A on 9/12/2018. It turned out that this purchase was too early, but in September there was little indication that a panic was coming. We don’t intend to predict a market-wide panic. It simply isn’t feasible.

By 12/21/2018, their price of TWO-A had fallen by about 3.6%, but they had also paid out one dividend.

We were down 1.7% on the position, but we had an opportunity to swap for shares of TWO-E. Here is the chart covering that period:

Note: This is one of our “$100k charts”. These charts demonstrate how much would’ve needed to be invested at the close of trading on any day to have $100,000 “today”. This chart runs through late May, 2019. A dramatically more thorough explanation is available in our guide to the $100k charts.

We dropped shares of TWO-A to free up cash so we could cover our order to buy shares of TWO-E. It is unusual to get such a great opportunity to swap between two preferred shares from the same REIT, but the market offered that opportunity. The 3 shares that fell least were TWO-A, TWO-B, and TWO-C, each has a floating rate. Shares of TWO-D and TWO-E each had a fixed rate, yet they went on the better sale.

How can you tell that TWO-E was on sale? It becomes pretty easy to understand when you look at a quick comparison:

An initial investment of $26,450 on 9/12/2018 would’ve generated $2,031.25 in dividend income annually. An investor allocating $26,450 would’ve been choosing between 1,000 shares of TWO-A and 1,056.3 shares (pretend they can buy fractional shares) of TWO-E.

On 12/21/2018, 1,000 shares of TWO-A were only valued at $25,500, rather than $26,450. By swapping into TWO-E at this point, an investor could trade out their 1,000 shares of TWO-A and acquire 1,143.5 shares of TWO-E.

Note: We had purchased shares of TWO-A on 9/12/2018, sold them on 12/21/2018, and immediately used the cash to cover our purchase of TWO-E on 12/21/2018. The example above isn’t abstract, it was a trade we made and communicated to subscribers throughout the process. We’ve rounded to using 1,000 shares for the example to make the math easier.

Such swapping isn’t necessary, but it can work very well to enhance total income on the portfolio and total returns over time.

How much should investors allocate to preferred shares?

We believe the amount that investors should invest in preferred shares is not a specific %. While writing this guide, our allocation to preferred shares was 30.4%. Our allocation in preferred shares can swing in either direction for a few reasons. When investors are confident in their common stock investments, they are less likely to invest a significant amount into preferred shares. When investors are worried about common stocks, they may allocate more to preferred shares. We believe that it’s important to look at:

  • The current economic environment
  • Personal investment style
  • Risk tolerance
  • Current valuations

Why Should Investors Choose Individual Stocks

Many investors turned to preferred share ETFs like the iShares U.S. Preferred Stock ETF. That technique has delivered some yield for the investors, but it delivered much weaker returns than picking individual shares. We explained this concept at great length in Preferred Shares Week 147.

Within that article, we charted total returns for PFF and included MFA-B, DX-B, and CMO-E in one of our $100k charts:

We wrote:

The chart is designed so that all the final points must line up at precisely $100,000. Most charts show returns only from one starting date, but our chart shows returns based off any starting date. That means we don’t need to draw a new chart every time we want to look at a different date.

You can tell at a glance that an investor who bought DX-B, CMO-E, or MFA-B on any day between 7/1/2016 and 1/1/2018 was significantly outperforming PFF. You know that because throughout that period the highest line (worst performance going forward) came from PFF’s green line.

You also can see that these preferred shares usually correlate very well together. Small breaks in the valuation can appear for a few months, but the longer-term correlation is extremely strong. This is why we monitor prices so closely. We’re watching for those opportunities as they occur.

The next thing you may notice is the volatility. The preferred share lines (blue, gold, and red) are not showing materially more volatility than the ETF. They are climbing much faster, but the change from one period to another is not more volatile. This is important because it reflects the difference in risk. Since the ETF is diversified, it “should” be far less volatile than the preferred shares.

Does including preferred shares in a portfolio work?

There is no perfectly safe investment. Even cash can be stolen (often not covered by insurance) or the value can be inflated away. We mainly focus on low-risk investments and have done quite well at it.

We've had rough periods. Since the start of 2016, our maximum drawdown was about 10% and it was in early 2018 (slightly larger drawdown than in early 2016 with the recession fears). In a nutshell, even though we can't guarantee safety, our downside risk is usually much lower than other methods targeting the 7% to 8% return.

Our system has also consistently outperformed the major indexes for stocks we cover. Those are the Vanguard Real Estate ETF (VNQ) and the iShares U.S. Preferred Stock ETF (PFF):

Should investors still buy regular stocks?

Absolutely! We aren’t suggesting that investors build a portfolio that is only composed of preferred shares. Many investors entering retirement focus on a portfolio designed to generate yield, but that can be a matter of personal preference. We like including preferred shares as a way to maintain a higher yield with lower risk.

If you invested $600k in a dividend growth portfolio, it might look something like this:






Northwest Natural Gas Company




Procter & Gamble Company (THE)




Emerson Electric Company




3M Company




Essex Property Trust




Cincinnati Financial Corporation




Coca-Cola Company (THE)




Johnson & Johnson




California Water Service Group




Target Corporation




Stanley Black & Decker, Inc.




Altria Group, Inc.




Sysco Corporation




Black Hills Corporation




Universal Corporation




Wal-Mart Stores, Inc.




Pepsico, Inc.




Exxon Mobil Corporation




McDonald's Corporation




National Retail Properties




Realty Income Corporation




Lowe's Companies, Inc.




Kimberly-Clark Corporation




Consolidated Edison, Inc.




AT&T Inc.




T. Rowe Price Group, Inc.




Chevron Corporation




Philip Morris International Inc.




Verizon Communications Inc.




Helmerich & Payne, Inc.



Those are all steady dividend growers and the portfolio, assuming equal weights for the positions, would generate a 3.35% yield for $20,112.6 in income. The downside is that the investor would be quite exposed to the potential for a recession due to having their portfolio only invested in common shares.

The investor could reduce that risk by having only half of their portfolio allocated to those stocks. If we cut each position in half, the income goes down to $10,061.3. However, we can invest the rest of the capital into a combination of preferred shares and short-term high-quality bond ETFs.

We’ll use $100,000 for the bond ETFs:






Vanguard Short-Term Government Bond ETF




Schwab Short-Term U.S. Treasury ETF



We picked those two ETFs because they focus on very short-term debt instruments with high credit quality. The prices have very little volatility. Consequently, VGSH and SCHO are a viable way to store cash while getting a superior interest rate.

These two positions are paying out $2,133.89 based on $100,000 invested.

Then we have the preferred shares for the other $200,000:










ANH-C from Anworth




CHMI-A from Cherry Hill Mortgage




CIM-B from Chimera Investment Corp.




CMO-E from Capstead Mortgage




DX-B from Dynex Capital




MFA-B from MFA Financial




NLY-F from Annaly Capital Management




TWO-E from Two Harbors



The preferred shares add another $14,705.52 in annual income.

The combined portfolio increased from $20,112.6 in income to $26,900.71. However, it also became less volatile. It contains a very significant cash allocation to ensure the investors have an option for accessing additional cash without the need to sell shares.

Is that enough?

Without social security or any pension funds, it would be pretty tight for most investors. However, those factors can boost the total income significantly. We can be confident that investors who follow a strategy like this will generally be putting themselves in a much better situation than those who depend on double-digit dividend yields for everything they own. We’ve met too many of those investors and they are constantly grumbling, “Management of this company is terrible! They should go to jail for cutting my dividend!”

Those investors didn’t understand the basics of investing. They took on obscene amounts of risk because they “needed” the return. When things didn’t work out, they looked for anyone else to blame. If they had planned around a more defensive portfolio, they wouldn’t have put themselves in such a dangerous position. We suggest investors maintain a diversified portfolio, keep some cash on hand, and use preferred shares to boost the total yield on the portfolio. By picking individual preferred shares, investors can pick issues that hold up much better than the ETFs when the market gets scared.

If you want to learn more about investing, including how to reach 65 with a larger portfolio, click the “follow” icon next to our name. We are working on a piece discussing several of the steps that can help young investors reach retirement with a dramatically larger portfolio.

Disclosure: I am/we are long AGNCN, CIM-B, CMO-E, CIM-B, ESS,MFA-B, NLY-F, 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.