Unfortunately, industry regulators are clueless when it comes to retirement readiness planning
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at firstname.lastname@example.org
What’s your favorite investment number: Market Value, Total Return, Performance vs. The S & P 500? Most of you will be thinking in terms of “market value”, “returns”, and annual growth of one or the other. But if you are in my age group (“over 55” to be kind), and thinking of retirement within ten to 15 years, such a focus will not get you to “retirement readiness”. Unfortunately, most of your tax deferred programs are market value focused, and even more unfortunately, industry regulators are clueless when it comes to retirement readiness planning. This makes it virtually impossible for you to get to where you need to be on R-Day.
My favorite numbers are: Working Capital*, Total Realized Return*, and Base Income* Growth. If you are looking for “Retirement Income Readiness” (RIR), a focus on these three “Googleables” will get you there. (*Google the concept name-Selengut). A true RIR portfolio will be more than just income sustainable when or if the markets and interest rates cooperate. It will be capable of growing the income, year after year, regardless of stock market volatility or changing interest rate expectations.
- For example, the mainly sideways stock market May of 2015 through November 21, 2016 gained just 2.9% in a nineteen month period of extreme volatility… boring tax free Closed End Funds (CEFs) produced twice that in disposable spending money.
A retirement income ready investor will be able to make this statement, unequivocally: “Neither stock market volatility, nor higher interest rate expectations, should have a negative impact on my retirement income or on my ability to consistently grow that income.”
Biggest Threat? Artificially Low Interest Rates
The biggest threat to RIR investing today is a Federal Government that keeps interest rates at artificially low levels (while, ironically, condoning usurious credit card interest rates). Wall Street is the primary beneficiary of minimal interest rates, as investors are forced to seek higher “returns” using riskier, stock market value focused, fee producing, products. A conspiracy theorist could see a connection here, considering the ten years since the end of the financial crisis, and factoring in the migration of funds from CDs and Savings Accounts into stock market based products.
How much after tax income will you need from your IRA or 401k/403b plans to supplement pension and/or Social Security benefits? How much income is being produced by your portfolio while in its tax deferred shell?
I would be willing to bet that your portfolio generates less than 2% in pure spending money, or significantly less than the minimum of 4% most experts say you will need when retired.
- While you focus myopically on monthly market value, your capital is (or will be) depleted in any month where your realized income is less than the monthly check you receive in retirement… + the inevitable taxes.
- The highly touted, 11 Billion Dollar, Vanguard Target Retirement Income Fund (VTINX) pays only 1.7% income, has a 30% equity exposure and 17% of the assets pay no income at all. Is this such a highly regarded income fund because it’s safe… or because it’s cheap?
- VTINX, the emperor’s new clothes of the 2000’s
Our Federal Government requires that employers encourage you to keep your money in the 401k program because the outside world is much too expensive. 1.7% income after minimal expenses, they feel, is better than 5% or 6% net after higher expenses.
A Return To Old-School Principles
The road to Retirement Income Readiness requires a reunion with some “old school” investment principals: Quality, Diversification, Income, and targeted Profit Taking… the four great investment risk minimizers. To achieve it, one has to use Market Value in the same way it is used in the non investment areas of life… as a determinant of what to buy and when, and of what to sell and why.
The “Total Return” Shell Game is counterproductive in what should be income focused portfolios, and like market value, it cannot be used to buy theater tickets. Higher total return numbers are produced by lower interest rates which, for most investors, eventually translate into lower base income production, and less disposable spending money. In the quest for Retirement Income Readiness, Wall Street’s market value growth obsession, must be replaced with sustainable “base income” growth… You haven’t googled it yet, have you?
Retirement Ready portfolios are built differently, so that they always generate more “base income” than the investors need to live as they choose… and to spoil the grandchildren. This is accomplished by using Investment Grade Value Stocks (yes, Google it), Closed End Funds and a select few REITs and MLPs.
- From their All Time Highs in 1999, the combined DJIA, NASDAQ and S & P 500 have gained a total of 6.38%… less than one half of 1% per year, but with a huge number of exciting buying and selling opportunities along the way.
- Select Equity and Income Closed End Funds, REITs, and MLPs have produced more than 5.70% in spendable income every year since 1999. Repeat that three times before proceeding.
- In the 10 years from its 2007 high of 1,549 until October 2017, the S & P had gained 42.8%, or 4.75% per year; during the same period of time, tax free CEF yields averaged between 6.5% and 7.5%; taxable CEFs more than a point and a half higher.
From the day of financial awareness, today’s investors are brainwashed into believing that market value is the most important number in the financial universe. This thinking has led to a dot.com bubble, several market “crashes”, and at least one financial crisis.
Since 1970, the only portfolios (I know of) that have weathered all three major market meltdowns without invading principal to pay expenses were those with a significant income purpose asset allocation bucket (35%-40%) from portfolio inception… and an understanding of the the other three risk minimizers mentioned above.
To become Retirement Income Ready, an investor must grow into this realization: a retirement portfolio producing 7 or 8 percent in annual spending money every year is much more suitable than a similar market value portfolio that grows roughly half that amount, most years, while producing even less in income.
What if the next several years bring the same modest growth levels for the stock market as the past twenty? How much dependable income is in your investment program… irrespective of where interest rates and/or the stock market travel?
A Retirement Income Ready portfolio becomes everyone’s goal eventually. What’s in your Wallet?
I will host an absolutely free, no strings, no promotions, and no advertisements Go To Meeting Webinar on “Achieving Retirement Readiness” Wednesday April 17th, at 1:00 PM EDT. The presentation will be on your computer when you sign in, and it is a Q & A based discussion. It will take a just over an hour, depending on group participation.
Please contact me if you wish to attend this or a future meeting (email@example.com).