Hop on the slow-track route to retirement
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Dear Mr. Berko:
In mid-2007, my self-directed 401(k) was worth $400,000 and I was hoping, if the market could average its historical 9.6 percent return, that it would be worth $1 million when I retire at age 67 in 10 years. I was hoping to withdraw 5 percent, or $50,000, a year (not touching the principal), and combined with our Social Security, this would give me and my wife at least $75,000 in income. Today, my 401(k) is worth $223,000. I’m reluctant to say that from my father – who is dying of cancer – I will inherit one-third of his $600,000 life insurance policy. If I can earn 9.6 percent on that inheritance and my 401(k), my wife and I can reach our retirement goals in 10 years. Can you tell me how I should invest this money?
D.J., Ann Arbor, Mich.
Dear D.J.:
Here’s what you’re up against: (1) Your Social Security benefits may be greatly reduced when you retire in 2020; (2) federal and state tax rates may be 30 percent to 40 percent higher in the coming 10 years; (3) the Dow Jones industrial average’s 9.6 percent historical total return may be closer to 7 percent during the coming decade; (4) the standard of living for all middle-class Americans may be lower for the foreseeable future; (5) corporate revenues and incomes may be measurably lower than pre-2007 levels; (6) home values may not reach the pre-2007 levels for a long time to come; (7) the Dow Jones industrial average may not return to its 2007 highs before you retire; (8) inflation may smother your buying power by 50 percent; and (9) today’s money managers don’t understand the changed economy and the different metrics of the new economic infrastructure.
It’s infinitely wiser to depend on dividends and dividend growth rather than principal growth. And you must employ the right adviser because this is a different market and the old rules are less likely to work. This adviser must select investments that have 4 percent to 6 percent dividend yields with semi-regular or regular dividend increases. These issues should have minimum average annual appreciation potential between 3 percent and 6 percent over a dozen-year time frame.
If you add a 4 percent annual appreciation to a 5 percent dividend, you have a 9 percent total return; and at 9 percent, your investment doubles in eight years if you reinvest the dividends. These issues can be preferred shares trading at discounts, convertible bonds, convertible preferreds, common stock, business development companies, real estate investment trusts (REITs), deep-discount corporate bonds, pipeline companies, exchange-traded shares, closed-end funds, etc. There are a cornucopia of issues that over the coming years can provide the dividends, the dividend growth and performance you need to reach your goals, many of which have been discussed in this column.
Certainly some of the safest investments to use are closed-end funds and exchange-traded funds that own portfolios of REITs, convertibles or high-yield bonds, etc. They’re safer because rather than owning two or three high-yield REITs, or two or three convertibles, you would own a closed-end fund with a portfolio of 50 or 60 REITs or convertibles.
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