How To Retire At 60 With A Million (Seeking Alpha)

How To Retire At 60 With A Million

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Ted and Mary are a hypothetical couple, who just turned 60, who experience real life situations that will be familiar to many readers. Retirees and future retirees need to know how to build a steady portfolio. Having reasonable expectation and planning cash flows are vital for retirement. For investors who aren’t worried about retiring for several decades, volatility is worth it depending on the risk-adjusted returns. For current retirees, volatility can be decimating. Ted and Mary are going to be making a plan based on needing the income from a portfolio to live.

Focus of the article

The focus of this article is to demonstrate how Ted and Mary can create a high yield portfolio. Rather than strictly using bonds, they will find the majority of their income from dividend stocks. There will be some allocations to ETFs, including bond ETFs, to help diversify some of the risks.

Layout

This article is going to open with discussing the situation and financial planning Ted and Mary are using. Then it will transition into discussing which stocks they picked for their dividend portfolio.

Working life

Ted and Mary spent a majority of their life on the West Coast where expenses can be significant. Both of their careers were on the west coast, and with the ocean, mountains, and outdoor activities, the couple enjoyed the area. However, in their older years, Ted and Mary realized they still liked the outdoors but would have to cut back.

Ted and Mary decided to move to Colorado Springs, Colorado, where the cost of living was lower. Further, Colorado Springs still offers many of the outdoor activities that Ted and Mary enjoy. The couple have lived the last couple of decades in Portland, OR. They currently live in a 4 bedroom home and would like to move to another 4 bedroom home. Ted and Mary often have family visit and do not want to give up the extra bedrooms.

Moving from Portland to Colorado Springs is going to help their extra cash on hand. Here are the prices of 4 bedroom homes in Portland:

Here are the prices of 4 bedroom in Colorado Springs:

The difference is well over $100,000. For retirees, it is important to plan out their budgets and capital allocations. One area many retirees ignore is the option to lower expenses in retirement. The difference in the cost of living from one city to another can be substantial.

Other income

Ted has noticed that there is very little traffic in Colorado Springs compared to Portland. He’s always been a fan of basketball and has decided to pick up officiating. The pay for refereeing basketball in Colorado Springs is decent as a supplement. Ted is able to pull in $12,000 a year. He loves the job and enjoys the games, so it’s extra exercise and pleasurable. Mary hasn’t started any money making hobbies or working currently. She plans to keep an eye out for a fun part-time job where they can get health insurance if they are having difficulties with money.

Mary’s parents worked in the real estate industry and she’s very knowledgeable in running properties. She has been discussing using part of the $100,000 they gained when selling their property in Portland and buying an investment property in Colorado Springs. Physical real estate can provide additional diversification and occasionally tax benefits.

Extremely important note

I would urge not only retirees, but anyone to pay attention to more than just housing prices. While the cost of living is less in Colorado Springs than it is in Portland, that’s not always the case. Many retirees move and then end up moving back because of costs they didn’t plan for. How close is the nearest airport? What are you going to do about transportation? How much do your hobbies cost? How often are you going to out to dinner? The list goes on, but the point is retirees, or anyone for that matter, need to do their own due diligence.

Back to Ted and Mary…

The couple nearly had their entire house paid off when they were living in Portland. The results were the couple keeping $100,000 in cash for additional investments or emergencies. They decided to buy a home in Colorado Springs for a little over $300,000. If hardships hammered at Ted and Mary, the couple can downsize to a smaller home.

Investing

Mary worked as a financial planner for many years. Additionally, she read about investment strategy from Seeking Alpha. Dividend champions are Mary’s favorite investments. Mary wants to invest in 25 companies which mostly have a great dividend history. There are a few high-yielding investments she would like in Ted and Mary’s portfolio. The couple have $1 million to invest and have decided to invest half of the money into the 25 companies Mary has chosen.

Here are the 25 dividend stocks:

Ticker

Company

Current Yield

(VZ)

Verizon

5.28%

(PM)

Philip Morris

4.17%

(CVX)

Chevron

3.77%

(T)

AT&T

5.68%

(TROW)

T. Rowe Price

2.39%

(KMB)

Kimberly-Clark

3.38%

(LOW)

Lowe’s Company

2.07%

(O)

Realty Income

4.50%

(NNN)

National Retail Properties

4.49%

(XOM)

Exxon Mobil

3.82%

(WMT)

Wal-Mart

2.05%

(MO)

Altria Group

4.02%

(TGT)

Target

4.51%

(JNJ)

Johnson & Johnson

2.42%

(KO)

Coca-Cola

3.18%

(MMM)

3M

2.05%

(PG)

Procter & Gamble

3.09%

(NWN)

Northwest Natural Gas

2.81%

(EMR)

Emerson Electric Company

3.29%

(NASDAQ:AAPL)

Apple

1.47%

(PEP)

Pepsi

2.80%

(ED)

Consolidated Edison

3.16%

(CBL)

CBL & Associates

14.05%

(SPG)

Simon Property Group

4.63%

(STOR)

STORE Capital

4.78%

Mary’s investment strategy

For the most part, Mary chose companies which have an extremely strong track record of growth, dividend sustainability, and raising dividends. As far as dividend stocks go, most of these dividend champions are staples in income portfolios. CBL seems like an odd choice, but Mary knows the market reduced their price significantly after they cut their dividend and lost their investment grade credit rating. She believes the company isn’t as bad as the market price would dictate.

Mary is primarily a dividend growth investor. She believes in picking individual companies and uses their current dividend yield and dividend history as an important part of the process. Unlike her husband Ted, she prefers to avoid ETFs. She wants to be able to pick the companies individually and is concerned about expense ratios.

Mary decided to use a simple equal weight strategy for the portfolio. To avoid any arguments with Ted, they each were in charge of picking half of the investments.

Other half of the money

Ted doesn’t have the background Mary does when it comes to investing. However, he would like to get more diversification via some ETFs. Ted has been researching preferred shares on Seeking Alpha, but doesn’t feel confident enough to pull the trigger on specific securities. He also believes they should be invested in some bonds. Ted wants to lower the beta of the entire portfolio. Less volatility should help their income, even though long-term returns will probably be lower.

Here are the ETFs that Ted chose:

Ticker

ETF

Current Yield

(VYM)

Vanguard High Dividend Yield

2.93%

(VDC)

Vanguard Consumer Staples

2.56%

(DVY)

iShares Select Dividend

3.00%

(PFF)

iShares U.S. Preferred Stock

5.81%

(SPHD)

PowerShares S&P 500 High Dividend Low Volatility Portfolio

3.49%

(VCLT)

Vanguard Long-Term Corporate Bond Index

4.11%

(HYG)

iShares iBoxx $ High Yield Corporate Bond

5.03%

Ted wanted VYM, DVY, and SPHD for diversification among dividend stocks. He likes Mary’s strategy of mostly dividend champions, but with his current knowledge base he isn’t comfortable picking individual companies.

Though Ted values the diversification from ETFs, he shares Mary’s concerns about expense ratios. Therefore, he focused on selecting ETFs with lower expense ratios. For diversification benefits, he wanted to include ETFs with preferred shares and bonds.

VDC was chosen for a defense against a market panic. VDC hasn’t been doing well lately:

PFF was taken for an allocation to preferred shares. Preferred shares offer a nice yield and less volatility than investing in the common stocks. Ted plans to read more on Seeking Alpha so he can start investing in individual preferred stocks that are undervalued.

Ted chose HYG and VCLT for the nice dividends and less volatility. Ted’s choices for half the portfolio will produce nice dividends, but the underlying investments have far less growth potential. This side of the portfolio should also have considerably less volatility. Investors during retirement need to be aware that less volatility is important. Retirees usually can’t stand to lose a large chunk of their portfolio.

Social Security

Ted and Mary both turned 60 this year and are going to wait to file for Social Security for as long as possible. Once they take Social Security, they plan to use it towards cruising (on cruises). They know that healthcare costs can be substantial as people get older. They are healthy now, but know things are inevitably going to come up as time goes on. Hopefully, it won’t interfere with cruising.

Ted and Mary could have chosen a much safer portfolio. However, they felt comfortable with their financial situation. They viewed Social Security as a very reliable source of future income. Their comfort with the cash flows from Social Security allowed them to be more aggressive with their dividend portfolio.

Total Income

Here is the income that will be coming in from the 25 companies Mary chose:

Source: CWMF’s dividend portfolio tracker

This half of the portfolio will be bringing in $19,457.99. Here is the percentage of income that will be coming from each stock (keep in mind this only accounts for the $500,000):

Source: CWMF’s dividend portfolio tracker

Notice how CBL is in the orange. Orange lights up if a stock accounts for more than 10% of total income. However, this is only half of the portfolio, so that will bring it into the yellow.

Here is the income from the ETFs Ted chose:

Source: CWMF’s dividend portfolio tracker

The total income from this half of the portfolio comes out to $19,288.30. Here is the percentage of income that is coming from each ticker:

Source: CWMF’s dividend portfolio tracker

Remember that this is only half of the portfolio, so the “% of income from ticker” will end up coming at half the values. Further, ETFs tend to be diversified by nature.

Ted is also pulling in $12,000 a year from officiating basketball. Let’s total it up

Mary’s picks: $19,457.99

Ted’s picks: $19,288.20

Ted’s officiating: $12,000

Total: $50,746.19

This is a comfortable income for the couple to live off of in Colorado Springs, especially since they don’t need a mortgage. Also, Mary has the choice of bringing in additional income if they need it.

End of this story

Ted and Mary end up not having any serious health issues and go on a lot of cruises (my wife required cruises in the story). There was a market panic when they were 63, but there income amount didn’t change materially. The dividend champions were able to sustain their dividends. Mary’s parents ended up coming to live with Ted and Mary, but the additional expenses were easily covered. Mary purchased some real estate and her parents helped run the property.

There are a few key takeaways from this story. The first lesson is that couples need to decide on an investment strategy that works for both of them. It could be dividend investing, using more ETFs, incorporating individual bonds, or anything else that they can agree on. Investing should involve as few emotions as possible. Being emotional about the investments leads to worse decisions.

The second lesson is the importance of planning for income throughout retirement. Because Ted enjoyed a part time gig where he still had income, they were able to take less risks with their portfolio. Investors who require returns over 10% every year in retirement are setting themselves up for hardship.

Where to find great research on preferred shares

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via Seeking Alpha

November 21, 2017 at 06:39AM