Retiring In A Bear Market: Some Were Forced, Others Choose, All Can Succeed

Summary

• Retirement is an extremely personal decision.
• The current environment is driving many people into retirement. How can you maximize your chances to live comfortably?
• Retirement is focused on cash flow and not stored money.
• Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

Co-produced with Treading Softly

Retirement is an extremely complex issue. Here at High Dividend Opportunities, we recognize that your retirement experience will be unique and that it will be determined by your own specific circumstances. However, most people can be classified into one of three major categories:

1. People who choose when to retire
2. People who are forced into retirement
3. People who never make it to retirement

If you belong to either one of the first two categories, then you will be interested in this article. COVID-19 has brought on a financial crisis that has pushed a large group of people to look into their finances and ask themselves: "Do I need to delay my retirement, or should I retire now?" If you can still ask yourself this question, then consider yourself to be one of the lucky ones in the first category. Most probably, you still have your job or business. The less fortunate ones in the second category have either lost their jobs or maybe they have experienced serious health complications. These persons have been forced into retirement.

You may feel that this is the worst time to retire. Who can blame you? The market has crashed. You may have lost your job or you may have been forced to close your business. You still have bills to pay. The economy is essentially on hold and you are rightfully worried about your future financial security. You may feel overwhelmed.

The worst thing you can do is to panic. Always remain calm when contemplating decisions about retirement. Retirement decisions affect your financial security for the remainder of your life. Such decisions have major impacts as well, when applicable, on the life of your significant other. It's perfectly normal to be worried during major crises. But this should not make you succumb to fear. Fear-based financial decisions are usually the ones with the worst outcomes. Let's talk about how to address this situation constructively.

Take Stock of Your Situation

Before taking any major decision about retirement, the first thing you must do is to very carefully assess your overall situation. What are the things you need to review? Consider these:

• Income coming in - From Social Security, Pensions, Annuities etc.
• Cost to service debt - This would not be the total dollar value of debt, but the amount of outflow of cash to pay each month on your debt.
• The dollar amount of debt - Mortgages, car loans etc.
• The dollar amount of savings - Bank accounts, 401(k), investment accounts
• Your health and that of your spouse (if applicable) - Healthcare costs can amount to over one-third of all expenses in retirement.

Once you've taken stock of your situation, you can plan accordingly.

Consider Your Cash Flow

Cash flow should be viewed as going into or going out of a reservoir. Income flows in and expenses flow out. Your retirement savings are held within the reservoir. So long as income exceeds expenses, your reservoir will grow. Debt's main impact on your day-to-day life comes not from the total dollar amount, but it comes from the cost to service your debt. No lender will normally come to you and demand complete payment right away, unless you've contractually agreed to that. Most lenders will expect routine predictable payments from you to reduce your debt and pay interest. Paying down debt faster than required always is advisable. Generally, you must start by paying down high-interest debt such as credit cards. This is especially true if you have high income and relatively higher job security. If not, then prioritize payment of secured debt such as your primary residence mortgage over payment of unsecured debt such as credit cards. The reason is that if you don't pay your mortgage payments the lender will repossess your house. This is not something that anyone should experience. While a bankruptcy is painful to go through, however, if you do declare bankruptcy, then unsecured debts are usually forgiven.

I would caution against draining all your savings to pay off all your debt. This would leave you with next to no reserve cash to use in the event of a dry spell. Having no backup cash could spell disaster when emergencies come. Dave Ramsey - a big advocate of a zero debt lifestyle - suggests maintaining at least $1,000 as an emergency fund to start off with. More is definitely needed. We feel that enough liquid funds equivalent to at least three months of household expenses should be invested in secure liquid investments such as short-term CDs, money market funds or similar. This is extremely important, especially during crises such as the one we are all enduring these days.

Get Your Healthcare Figured Out

Once you are eligible for Medicare at age 65, enrolling and evaluating your choices is important. However, if you retire before age 65, then you need to make sure that you perform a costs vs. benefits analysis to ensure that you integrate related impacts on your retirement strategy. We wrote an entire article focused on that, viewable here.

To boil down that report in a few simple thoughts:

1. Healthcare is a major retirement expense that must be considered carefully
2. Low-cost, high-deductible plans can quickly drain your cash reserves
3. High-cost, low-deductible plans can be a negative pull on your monthly budget

In the end, we had concluded that for most retirees who use an income investing style, a higher monthly cost but lower deductible plan is more advantageous. The key reason is that we invest primarily for sustainable income. Implementing the Income Method provides out-sized income from our investments which in turn allows us to pay a higher monthly amount. In case you face a significant health impairment, insurance will cover related major payments.

Ultimately, you should aim to have a strong steady flow of income coming. This income will overcompensate for the relatively higher expense outflows of higher-cost, lower-deductible plans.

Do I Jump Into The Market Now?

With your initial I's dotted and T's crossed, the question of investing in the market becomes less of an "if" and more of a "when." Today's yields on CDs and Treasury notes are very low. Essentially, their income generation is laughable. You cannot meet your retirement needs with 1% annual yield on your savings.

This leaves us with the stock market as the primary driver of wealth. Retirees need to forget two common misconceptions as they consider investing:

1. Wealth generation is driven by share prices rising, alone
2. Bull markets create most wealth

These two misconceptions work hand in hand. Many would-be investors do not picture the long-term investor who buys stocks and holds them for long periods of time. They instead are enamored by The Wolf on Wall Street style traders, better known as day traders. These individuals buy securities and sell them rapidly as prices move up in order to make money.

We prefer to look at the market as long-term income investors. We do so by carefully picking our securities to generate sustainable long-term wealth. We don't pick securities that demand constant attention. On the flip side, we cannot fall for the claims of SWAN or SUPER SWAN securities that do not require regular monitoring. SWAN stands for Sleep Well At Night. Super SWAN means it puts you into a medically-induced coma. We have a healthy approach to wealth creation as we have explained in our previous article below.

Original Article Here

Income investing places a heavy emphasis on functional wealth vs. static wealth. Functional wealth is how much your wealth makes vs. static wealth which is how much your wealth is valued.

As humans, we don't live off a single pile of cash but have recurring routine costs that require regular recurring income to offset. You can be statically wealthy but be functionally poor.

Think of the lottery winner. Boom! Tons of Static wealth! You're rich! Party!!! Except, once you spend it all. No more is coming. You're poor. Why? Because you were never functionally wealthy. Retirees need a higher degree of functional wealth than they need in static wealth.

This flies in the face of what many of you have been told over and over by banks and advisors - they are trained to get you to build the biggest cash pile possible. Banks make a killing on saving deposits and advisors often make more fee revenue not based on how much your portfolio earns but by how big it is. While they may have a fiduciary duty to you, they also want to earn money.

Timing the market is not a worthy cause.

Data by YCharts

Those who were invested in the market on Jan. 1, 2006, only saw 1% capital appreciation by Dec. 31, 2010.

Data by YCharts

If our retiree factors in their dividends or functional wealth, returns for that same timeframe jump to a total return of 11.93%. But what if you have been laid off in the midst of the Great Financial Crisis? You take what small sum you have to invest and by Dec. 31, 2010, look at how it would have grown.

Data by YCharts

Why are your returns even larger than the prior investor? You benefit from investing during a bear market. A common misconception is that bull markets make millionaires, but in reality, bear markets do. During a bear market, the opportunity arises for your money to rapidly increase in value. You also get to lock in high recurring income. All this shows the superiority of functional over static wealth.

Currently, some preferred securities yield over 20%. These same preferred shares continue to have sustainable coverage and dividends ready to be received. This crisis has generated for you great uncertainty, true. But the market is giving you a tremendous opportunity to strive over the long term. The secret is to invest properly and to remain calm during market turbulence.

Consider Buying Into Preferred Stocks and Fixed Income Funds as a Start

You know you want to jump into the market, where should you begin? Consider these securities or funds.

1. iStar, Inc., 7.65% Series G Cumulative Redeemable Preferred Stock (STAR.PG) from iStar Inc. (STAR) offers a strongly covered income flow to its holders. STAR is a REIT with a large diversification of income stream along with a heavy investment in Safehold (SAFE) - This REIT is one of the most conservative REITs on the market. This gives you another level of insulation from a panic-driven market while boosting your income.
2. PIMCO is a fantastic fund manager that offers two fixed-income, closed-end-funds ("CEF") that are worthy of any income investor's portfolio. These are their Dynamic Credit Income Fund (PCI) yielding 11.7% per year and Corporate & Income Opportunity Fund (PTY) yielding 11% per year. Both of these CEFs pay a monthly distribution. PCI and PTY have long histories of steady dividends which any retiree would find comforting. These funds are actively managed and are battle tested in crises such as the great financial crisis of 2007/2009.
3. A third option is to invest in a high-yield preferred stock CEF. Income investors secure a high yield with low price volatility, and this presents a great way to play defense. Flaherty & Crumrine Preferred Securities Income Fund (FFC) is a high-quality preferred CEF which currently yields 7%. FFC just raised their monthly dividend 5%. The management of this fund is best-in-class with a proven track record, and a history of out-performance. FFC offers income investors instant diversification into +30 of the best preferred shares issued by banks, insurance companies, utilities and others. FFC has a very strong yield relative to the safety and the quality of the fund.

Today, there are many once-in-a lifetime opportunities for income investors and retirees to choose from. With the markets still being uncertain, one of the best ways to invest is by playing defense. This means preferred stocks, baby bonds, bond CEFs, and non-cyclical stocks. Non-cyclical companies are companies that provide goods and services that are essential to our daily lives and that do well in both good and bad times. Examples are utilities (electricity and water), telecommunications (internet and telephone companies such as AT&T (T)) yielding 6.8% per year, and foodstuff, among others. Fortunately, there are many non-cyclical stocks that offer a very enticing dividend yield.

Conclusion

Whether you've decided to retire now or whether you have been forced to retire prematurely, the market is offering you a fantastic opportunity to pick great values and lock in sustainable high yield income. Bear markets provide you with a rare opportunity to boost your functional wealth. This crisis may now seem as a world-shattering event. If you invest properly, when this is over, this same event will be perceived by you as a positive life-transforming event.

First, take stock of where you are right now. Get your healthcare needs sorted out and examined. Do not avoid the markets. Bear markets provide the greatest opportunities to grow your retirement assets. Start carefully by placing your funds into securities that will reward you with recurring well-covered income.

Don't stop letting your dollars work for you when you stop working for your dollars. Preferred securities are priced currently at yields you may never see again. I will not say never as most didn't see this event coming either. However, the preferred shares and the funds we recommend above pre-date COVID-19 and will survive and even thrive through this event. This means that you can depend on that income to fund your retirement. Don't fall for the old adage of only investing in bull markets. Bear markets are the times your income can grow the fastest if you invest wisely.

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Analyst’s Disclosure: I am/we are long T, FFC, PCI, PTY, STAR.PG. 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.