I saw this stump carving that someone put a mask on at a campground in Texas. A sign of the times.
Followers of my articles are aware that we planned to retire in July of this year at the age of 54. Our original intent was to not use any of our tax deferred retirement accounts until we were 59-1/2. However, we had to change the plan due to uncertainty of the future of the Affordable Care Act. A federal judge ruled the law unconstitutional in December of 2018. To plan for the potential disappearance of the healthcare exchange and associated benefits, we need to get access to some of our IRA funds. We created a 72(T) withdraw plan from one of our IRAs in January of this year. An additional benefit of this was that it allowed us to retire in March of this year instead of July.
So retire in March we did. We retired on a Friday to start our "Motorhome Retirement", and the United States went into social distancing and all the related COVID-19 stay-at-home and business closures the following Monday. We had great timing (sarcasm), instead of heading out across the country, we did our "shelter-in-place" or "stay-at-home" or whatever else you want to call it at a lake campground near Dallas, TX. Like most others, our activities were limited to daily walks, weekly trips for groceries, and TV watching.
What we did in September
We left the Kansas City area in late August and spent September at a couple of different lakes in the North Texas area. The first half of the month was at Lake Texoma, which is on the Texas-Oklahoma line North of Dallas. The second half was spent at Lake Tawakoni, which is about 60 miles east of downtown Dallas or 30 miles east of the metroplex area. This is the area where we lived just before we retired, and we went back to the area for various doctor appointments.
In the August update, I mentioned that I like to cook and showed a few photos of some things grilled and BBQ'd. In September, I decided to get a griddle and do some cooking on that. If you have cooked on a griddle, you know it is different from stovetop or grill cooking. It is fast-paced, and one has to be ready with all ingredients and cooking utensils, including plating dishes before the food hits the heat. There is not time to look for or gather these items while manning the griddle. Regardless, it is a blast to do.
The griddle I bought has a cold-rolled steel cooking surface, so it had to be "seasoned" before cooking on it. Seasoning is a process whereby the hot griddle is coated with cooking oil and allowing the oil to "burn off". It requires multiple coats. I think I did it 5 times, maybe six.
Freshly seasoned griddle
My first cook was just some broccoli just to get a feel for it. I did egg sandwiches, fried rice, salmon, shrimp and asparagus, and somewhere along the way, I did the big cook pictured below. It has hamburgers, tater tots, broccoli, tomatoes, zucchini and squash with peppers and onions. I'm not sure I got the hamburgers smashed good enough, but the rest of it was awesome.
Also, during the month, I made a couple of cauliflower crust pizzas. I put pizza stone on a kettle grill to bake it. Also, delicious.
It is wonderful to have time to do these things now.
Income and expenses
We fund our Motorhome Retirement in four ways. In addition to the 72(T) account, we have a standard (non-IRA) brokerage account invested similarly that generates income. There is also minimal income from blogging under the heading of "other". Finally, we plan to spend down some of our cash savings. Neither of us have a pension or any kind of annuity, and we will not be eligible for social security for about 7 more years. We live off our savings and investments. To summarize the income streams:
Motorhome Retirement funding sources.
- 72(T) Account distributions
- Dividends and interest from brokerage account
- Minimal "other" income
- Savings spend down
The table below shows our cash flow for the month of September.
Income/Expense and Cash Flow | |
Income | September |
Income from Investments | $ 4,453 |
Other | |
Total Income | $ 4,453 |
Expenses | $ 3,770 |
Net Income | $ 683 |
Adjustment for accruals to cash | $ (191) |
Net increase (decrease) in cash | $ 493 |
We had to pay annual dues for a campground membership in September. This will be accrued into 12 monthly charges. I also show net cash because I know some readers are interested. Even with paying the membership and not having any income in the "other" category, we were cashflow positive for the month.
We project our ongoing income to average around $4,000-$4,500. It had been higher because Mrs. GrayBeard was providing support to her previous employer until her replacement is hired and trained. August was the last month for this. While it was nice having the extra income, we did not plan to have it and always expected that we will draw our cash savings down until we get to either 59-1/2 or 62.
Expenses
Without revealing too much detail, I am adding this little bit of insight into our monthly expenses. Hopefully, you will find it interesting.
Our top expenses for the month were:
- Groceries and other - $617
- Medical and Health - $462
- Dog vet bills and shots - $282
- Griddle and accessories - $316
- And of course, our standard $370 monthly contribution to Uncle Sam
- In addition to these, we had normal monthly expenses that you may find interesting for cell phones $103 (our phones are paid off), and mobile internet and streaming of $258
A note about our mobile internet and streaming services. This charge had been running about $87 per month for one streaming service and one cellular hotspot. In September, we set up a new streaming plan for backup to our normal plan. We had to buy a phone and pay two months of service. This amounted to about $170. Going forward, we will have an additional $40/month in addition to our previous charges, bring the new total to about $127 monthly.
Motorhome fuel mileage
Almost every time we stop for fuel, someone will ask me about the mileage we get in the motorhome, so I thought I would add it to the monthly updates. The three biggest factors for mileage seem to be relative wind direction, terrain, and speed, in that order. One of the trips below was over 8 mpg, that was the round trip to the campground near Yellowstone. By luck, we had either no wind or a tailwind in each direction.
We drove about 846 miles and got 7.49 miles per gallon in September. I added the October 1st fill-up because that tank was about half empty when we stopped on September 30.
9/30/2020 | Pilot/Flying J - Haughton, LA | 15,586 | 433 | 60.20 | 7.19 |
10/1/2020 | Buc-ee's - Robertsdale, AL | 15,999 | 413 | 52.75 | 7.83 |
September total | 846 | 112.96 | 7.49 |
The 72(T) IRA Portfolio
The biggest chunk of our monthly income is from one of our IRA's via a 72(T) distribution.
What is a 72(T)?
Rule 72(T) is a way to make distributions from an IRA account using "Substantially Equal Periodic Payments" or SEPP, without incurring the 10% penalty for early withdraw. Investopedia says the following:
"Understanding Rule 72(T):Rule 72(T) actually refers to code 72(T), section 2, which specifies exceptions to the early withdrawal tax that allow IRA owners to withdraw funds from their retirement account before age 59½, as long as the SEPP regulation is met. These payments must occur over the span of five years or until the owner reaches 59½, whichever period is longer."
So, under this exception, one can withdraw money from an IRA before the age of 59-1/2 without paying the 10% early withdrawal penalty. To qualify for the exception, the distributions have to continue for at least five years, and they must be "substantially" equal. There are three calculation methods the IRS has approved to calculate the amount of the withdraws. They are amortization, annuitization and RMD (required minimum distribution). I chose amortization mostly because it is the least complicated of the three. The factors that go into this calculation are the account balance, the interest rate, and the life expectancy. The interest rate is based on the Federal Mid-Term rate. The life expectancy is a look-up in an IRS table.
There are some drawbacks. Making the calculation of the distribution requires factors determined IRS tables, and it is not always clear which table is appropriate for a given situation, so it can be confusing. If an error is made or if the withdrawals do not go the required length of time, the 10% penalty is due on all of the withdrawals. Many avoid using this exception due to these rules. In fact, many financial planners and most brokerage firms will not calculate this for you for fear of backlash if done incorrectly. Indeed, we were going to avoid it as well if possible, but we have decided to go ahead with it due to the uncertain healthcare environment. Better that than to delay retirement.
The target allocation
I have decided upon the target valuation below for the 72(T). I have an allocation to gold as an inflation hedge due to the recent activity of the Federal Reserve Bank and the multi-trillion-dollar stimulus package from the US Government. The target allocation now looks like this.
- 65% Common Stocks and Preferred Stocks
- 10% Gold
- 25% Bonds
Having bonds and gold will depress the total yield of the portfolio and make obtaining a 4.5% overall yield unlikely without taking more risk than we can tolerate. To plan for this, the bond allocation will be split into 6.25% long term, 6.25% intermediate term, and 12.5% short term. The heavy weight of short-term bonds is to have something to sell because the portfolio income will not be enough to make the required 72(T) distribution.
Obtaining the target allocation will take some time. The allocation is not set in stone either. If the market continues higher, the equity allocation may be reduced, and if the market goes significantly lower, it may be increased.
Current allocation
The portfolio has been under construction and is a work in progress. The current allocation is shown below.
Source: Author
Portfolio changes
The following changes were made to the portfolio in September.
I added few shares of AT&T (T) and some Enterprise Products Partners (EPD). I believe both dividends are safe. Seeking Alpha shows a GAAP EPS payout for T of 65% and a cash payout for T of 58%. EPD had distribution coverage of 1.2 in Q2 2020 and 1.6 over the TTM. They recently announced the Q3 distribution in line with previous, but we won't know the coverage ratio until earnings are announced later this month.
I also continued repurchasing shares that were sold in July.
- JNJ - Purchased back at $145.73, 33% of the shares sold for $151.30
- ABBV - Purchased back at $89.98, 40% of the shares sold for $98.46
- INTC - Purchased back at $49.55, 12% of the shares sold for $61.32
- CSCO - Purchased back at $40.27, 6% of the shares sold for $47.07
- WBA - Purchased back at $37.08, 9% of the shares sold for $40.85
Motorhome Retirement 72(T) account 2020 progress
The table uses a base account value of $100,000 for clarity and ease of calculation. Our starting balance was different. The rules of the 72(T) will require only 5 years of the constant withdraws. After 5 years, they may be different depending upon multiple factors, including healthcare law changes and other income needs. We will also be old enough at that point to draw from our other IRAs without penalties. I conducted a Monte Carlo Simulation of this allocation on portfoliovisualizer.com, and it showed a 96% chance of lasting 30 years with this allocation and draw rate. I am satisfied with this as I have flexibility on the withdraw rate after five years.
Note: February and April are omitted to fit the table on the page.
January | March | May | June | July | August | September | |
Beginning Balance | $100,000 | $94,448 | $92,521 | $94,717 | $94,172 | $95,987 | $96,104 |
Dividends | $181 | $328 | $135 | $243 | $188 | $128 | $234 |
Gains & (Losses) | -$817 | -$7,103 | $2,414 | -$435 | $1,980 | $341 | -$2,208 |
72T Distribution | $0 | -$353 | -$353 | -$353 | -$353 | -$353 | -$353 |
End of Month | $99,364 | $87,320 | $94,717 | $94,172 | $95,987 | $96,104 | $93,776 |
The 72(T) distribution was calculated using the January 1 balance. Distributions began in March. Note that the values have been prorated, so that the account balance on January 1, 2020, equals $100,000. The amounts are not the actual amounts, but they do represent the exact performance, on a percentage basis, of the account. So far this year, we have taken 2.47% of the beginning account balance in distributions, and the account value is 93.8% of the beginning balance or down 6.22%. When considering distributions, the portfolio performance is down 3.75 % via straight math. The return calculation shown in the brokerage account that considers the timing of the distributions is -3.69%. For reference, the S&P 500 was up 5.57% for the year as of September 2020. I am not beating the market. However, I am not trying to. The goal is to sustain the income at a lower than market volatility. The swings in the portfolio are lower than the market. This has created underperformance during the strong run from the March lows. The sequence of return risk is a real one right now for us. It is likely there will be some trying times ahead, so I need to be vigilant and continue with conservative portfolio management and asset allocation.
What's in the portfolio now?
During the rally from the March lows, some equities were sold and allocated to cash and gold. I anticipate that the market will drop again as I believe the market has now bounced too high for current and forward economic realities. The cash position will be invested if valuations become attractive.
The following table details the current account holdings in terms of value percent and income percent.
Motorhome Retirement 72(T) Account Holdings
Ticker | Credit Rating | % Value | % Income | Type |
ABBV | A- | 3.0% | 7.1% | Stock |
ADM | A | 3.1% | 4.1% | Stock |
BEP | BBB+ | 0.2% | 0.2% | Stock |
BEPC | BBB+ | 0.0% | 0.1% | Stock |
BPYU | BBB | 0.1% | 0.5% | Stock |
CAH | BBB | 2.8% | 5.2% | Stock |
CSCO | AA- | 3.5% | 5.8% | Stock |
EMR | A | 1.7% | 2.2% | Stock |
ENB | BBB+ | 1.5% | 5.4% | Stock |
EPD | BBB+ | 0.5% | 2.4% | Stock |
GPC | A-* | 3.6% | 5.1% | Stock |
HRL | A | 1.8% | 1.5% | Stock |
INTC | A+ | 3.7% | 4.1% | Stock |
JNJ | AAA | 5.0% | 6.0% | Stock |
KMB | A | 6.8% | 8.6% | Stock |
KO | A+ | 1.4% | 2.0% | Stock |
MMM | A+ | 3.2% | 5.1% | Stock |
MO | BBB | 0.2% | 0.6% | Stock |
SBUX | BBB+ | 2.4% | 1.9% | Stock |
T | BBB | 1.1% | 3.4% | Stock |
VZ | BBB+ | 1.6% | 2.9% | Stock |
WBA | BBB | 2.2% | 5.0% | Stock |
XOM | AA | 0.9% | 4.2% | Stock |
BPYUP | BBB | 0.0% | 0.2% | Preferred |
RNR PR E | BBB | 0.6% | 1.4% | Preferred |
IAU | 5.0% | 0.0% | Gold | |
PHYS | 7.3% | 0.0% | Gold | |
IUSB | 1.3% | 1.4% | Bond - Mid | |
SCHO | 6.2% | 2.8% | Bond - Short | |
SCHZ | 1.1% | 1.1% | Bond - Mid | |
SPAB | 1.3% | 1.3% | Bond - Mid | |
SPTL | 5.0% | 3.4% | Bond - Long | |
TLT | 4.3% | 2.5% | Bond - Long | |
VGSH | 6.2% | 2.4% | Bond - Short | |
Cash | 11.4% | 0.0% | Cash |
The average credit rating of the stocks is 'A'. The average equity yield is 3.7%, and the total portfolio yield is 2.2%. Overall, I am satisfied with this portfolio. I know it will not supply the needed income, but I can add to the income with strategic purchases, and I can withdraw cash or sell the short-term bond component when needed to cover distribution while I wait for the market to provide greater opportunity.
Dividends
Dividends were received from the following companies in September.
72(T) IRA Account | Non-Qualified Account |
ADM | AFL |
BEP | BEP |
BPYU | BAC.N |
EMR | BPYU |
ENB | COF.I |
INTC | CVX |
JNJ | IBM |
MMM | JNJ |
WBA | OTIS |
XOM | SO |
RNR.E | RTX |
TLT | XOM |
SPTL | STT.D |
SCHO | THOPX |
VGSH | SPTL |
SPAB | SCHO |
IUSB | VGSH |
SCHZ |
Dividend changes
The 72(T) portfolio had the following increases in September.
Dividend Increases | |||
Ticker | New | Previous | % increase |
SBUX | $ 0.45 | $ 0.41 | 9.76% |
VZ | $ 0.6275 | $ 0.6150 | 2.03% |
I also want to begin monitoring the impact the monthly changes have on the annual income for the portfolio. The table below shows this information for each month.
Dividend Increase Info | ||||
Month | Average Increase | Number | % of income | Increase as percent of total portfolio income |
August | 2.28% | 2 | 5.60% | 0.13% |
September | 5.89% | 2 | 4.80% | 0.28% |
After 12 months, the total of monthly increases will be a fairly accurate estimate of the annual increase. Over the last two months, the income has increased 0.41%. Prorated to one year, it would be equal to about 5%. I will continue to monitor this data.
Watchlist
This month, I will present the Industrial sector watchlist.
Industrials Watchlist
Ticker | Streak | Payout Ratio FFO or EPS | Recent Price | Fair Value | Buy Price | Div 5yr CAGR% |
CHRW | 22 | 60% | $ 100.23 | $ 80 | $ 80 | 7.1% |
CNI | 25 | 49% | $ 111.80 | $ 75 | $ 75 | 7.0% |
EMR | 63 | 63% | $ 70.28 | $ 50 | $ 40 | 2.3% |
FDX | 0 | 27% | $ 283.87 | $ 200 | $ 200 | 28.0% |
GD | 26 | 40% | $ 142.24 | $ 169 | $ 145 | 10.5% |
ITW | 25 | 73% | $ 206.64 | $ 126 | $ 114 | 18.0% |
LMT | 18 | 40% | $ 386.50 | $ 415 | $ 386 | 10.4% |
MGRC | 28 | 44% | $ 64.71 | $ 63 | $ 50 | 6.8% |
MMM | 62 | 70% | $ 170.97 | $ 166 | $ 130 | 11.0% |
RTX | 26 | 65% | $ 61.75 | $ 65 | $ 57 | 4.5% |
UPS | 11 | 57% | $ 174.44 | $ 125 | $ 125 | 7.4% |
Of these stocks, I own or have previously owned all except CNI and LMT. I have written articles on UPS, EMR, ITW, and MMM, previously. In these articles, I was not inclined to invest further in EMR and MMM at the time. I was positive on UPS and ITW at the time, but now, the prices have gotten away, and I liquidated my positions. In my view of this list, only GD and LMT appear compelling from the data in the table.
General Dynamics (GD)
Based on revenues, GD is about 25% Aerospace and 75% defense, operating in the following segments: Aerospace, Combat Systems, Information Technology, Mission Systems and Marine systems. The US Government is the largest customer, with approximately 66% of 2019 revenues. The defense segments except the Information Technology showed to be somewhat resistant to COVID-19 and should also be recession resistant. The Aerospace segment is not recession-resistant, but it is possible COVID-19 may actually provide a tailwind in the long run as companies look for alternatives to commercial airline flights.
The Aerospace segment is the least dependent on the US Government. They design, manufacture, and sell the Gulfstream business jet line. Additionally, there is a jet aviation service arm. Jet aviation was/is the most affected by COVID-19 with customers, limiting or eliminating onsite contractor services.
The largest defense segment is Marine Systems. In the second quarter, the US Navy awarded GD an $11.6 Billion contract to design and construct the next class (Columbia) of submarines. The order was for the first 2 of 12 units anticipated to replace Ohio class submarines. This brings the GD total estimated contract backlog to $132 Billion.
Debt has increased over the past few years. In 2017, the debt/EBITDA was 0.86, and at the end of 2019, debt had more than tripled, and the ratio was higher, but still a very manageable 2.4. The increase in debt was used to purchase CSRA, an IT company that is complementary to the legacy GD Information Technology segment. Operating income covered interest expense 6.9 times over the last 12 months. Earnings and FCF payout ratios are, for 2020, expected to be about 40% and 48%, respectively. S&P assigns GD a credit rating of A.
Lockheed Martin (LMT)
Lockheed Martin was formed in 1995 by a merger of Lockheed Corporation and Martin Marietta. LMT operates in four business segments: Aeronautics, Missile and Fire Control, Rotary and Mission Systems, and Space. Aeronautics is the largest segment with approximately 40% of revenues and operating profit.
According to the 2020 Q3 earnings release, the COVID-19 pandemic affected all businesses unit via increased costs, supplier delays, and site access and quarantine requirements. However, the impact of these on the financial performance was well mitigated, and LMT reported strong performance across all business segments. Indeed, the earnings presentation claims a quarterly sales record was achieved during the quarter.
The Aeronautics segment produces military aircraft for the United States. The stable of aircraft include the F-35 Fighter, the C-130 Hercules and Super Hercules along with the Galaxy series. They also have lines of commercial airplanes and helicopters. The Rotary and Mission Systems segment produces military helicopters littoral combat ships (LCS). LMT has delivered 11 LCS to the US Navy and has another in trials and also one in construction. LCS ships are smaller ships with shallow draft that allows them to go where traditional warships cannot. This is just a small sampling of their products. A review of the LMT website revealed an impressive array of innovation as well as combat systems and weapons.
A review of the financial records shows debt and share count decreasing since 2015. For the last 12 months, the Debt/EBITDA is 1.3, and operating income covered interest better than 13 times. Guidance was raised in the Q3 earnings announcement. Projected EPS forward dividend payout ratio for 2020 is 42.5%, and the FCF payout ratio is 44% (note this is higher than the table above because the table is based on 2020 dividends paid and not the forward rate). S&P assigns an A- credit rating to LMT.
We already have a small position in GD in the R-Squared portfolio and will be looking to increase our holdings in GD if market conditions cooperate. The market is reacting negatively to the LMT Q3 report as I write, so I established a starter position in the 72(T) portfolio.
I am not in a big hurry to bring the stock allocation up to target. A stock trading below the price target does not mean I will automatically buy it. As discussed previously, I think there is a considerable probability the market drops from current levels of around $3,463 for the S&P 500 as of the time of writing. I may make small buys but will wait till the market drops or the COVID-19-related health and economic issues are resolved before I become aggressive.
In case you missed it, last week, my Real Money Permanent Portfolio update was published. It is still beating the market two years in.
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Ran into this little guy at a campground in Texas.