Breaking the Rules of Retirement Income Planning
My wife and I got married on this day 40 years ago. We were only a couple of years out of college and living paycheck to paycheck. We had no savings, so we had to take out a loan to pay for our honeymoon!
I chuckle when I think about how little we worried about money back then. At that time, having enough cash to pay the rent and buy groceries was the extent of our financial planning.
Now, we are nearing retirement age and think about money a lot. Neither one of us had the type of careers that included a pension. Social Security and our savings are all we will have to live on once we stop working.
The good news is we were careful with our money and have accumulated significant savings. For the past several years we have both been contributing the maximum to our respective 401(k) plans.
The bad news is that it will take a lot of savings to replace our employment income in retirement. According to the “rule of twenty,” we will need twenty times our annual budget in savings to be financially secure in retirement.
Let’s say we plan to spend $5,000 per month, or $60,000 annually once we retire. All of that will be covered by our combined Social Security income, so we won’t need to pull any income from our retirement accounts. Without that, we would need $1.2 million in retirement savings to pay the bills!
But for other retirees, the math is going to be a lot tougher. Especially those that will carry a mortgage and other debt into retirement. For them, their Social Security benefit will fall far short of their total spending.
Living in the Past
According to U.S. News & World Report, the average American household age 60 – 64 has a little over $400,000 in total retirement savings.
Okay, so how much annual income can you generate from $400,000? According to the rule of twenty, about $20,000 annually would be the right amount.
But let’s look at this another way. Forget about the rule of twenty. How much income can that account generate based on expected investment returns?
A financial planner might tell you that the highest withdrawal rate that is safe is around 3%. They tend to be conservative and consider U.S. Treasury securities that only true “safe” investment. In that case, about $1,000 a month is all the income that account will produce.
An insurance agent may tell you that a 5% withdrawal rate is safe. That’s because a fixed rate annuity is guaranteed by an insurance company, so the investment risk is on them. Now we’re up to nearly $1,700 in monthly income.
A stockbroker might tell you that a 9% withdrawal rate is safe. That’s the long-term average annual total return of a portfolio that consists of 50% stocks and 50% bonds. That’s gets us up to $3,000 per month.
Technically, all those answers are correct depending on how much risk you are willing to take. At the same time, they could all be wrong depending on what happens after you retire.
That’s what makes retirement income planning so difficult. We all know what has happened in the past, but nobody knows what will happen in the future.
What most folks also don’t know is that there is a way to generate high income in retirement that is not dependent on the stock market always going up. It does not involve junk bonds, cryptocurrencies, or alternative assets.
Everything in Moderation
The strategy I am describing involves trading options on stocks. That may sound risky, but the technique I am about to describe is actually conservative.
Buying an option is risky. You pay a premium for the right to either buy or sell a stock at a predetermined price within a specified timeframe.
If you turn out to be correct about the future direction of that stock, then your option will appreciate in value. But if you are wrong, you could lose your entire investment.
Think about the investor on the other side of that transaction. They received a premium from you up front, and that income is theirs to keep no matter what happens next.
If you turn out to be correct, then they might lose some money on the back end of that transaction. However, they can hedge their position by selling or buying another option that limits their risk.
By the way, they receive a premium for selling that option, too. When done correctly, the total income received from those two trades can exceed the maximum risk exposure of the options.
For the same reason, the possibility of making a huge gain on a single trade is eliminated. In exchange, the odds of making a moderate gain on most trades are increased.
Over the course of a year, those small gains can add up to a lot of money. In most years, the net income received can far exceed the returns referenced above.
That isn’t my area of expertise but it is for my colleague, Robert Rapier. And if you are looking for a way to boost your income in retirement, I suggest you take a look at the returns he is producing at Rapier’s Income Accelerator.
Up, down, sideways… even in the face of rising interest rates…elevated inflation…overseas war…debt ceiling fights…and anything else Mr. Market throws at you, Robert’s trades are income-generating machines.
Robert Rapier can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.