Retirement Survival – Trying to Hit a Moving Target
When it comes to retirement planning, Baby Boomers had the rug pulled out from under them by the government and Federal Reserve.
For decades, Boomers worked with their financial planners, saving, investing, and strategizing – targeting their “magic number.” How much money did they need to have on their retirement day to live comfortably and enjoy their golden years?
Bank bailouts, historic low interest rates and double-digit inflation have destroyed their plans, the target keeps moving. Retirement planning is a continuous battle to be sure you don’t outlive your money.
What is safe?
A major premise was you could always depend on 6% safe CDs or government bonds.
Safe meant you would not lose your money; you collected your interest payment on schedule and were assured you would get your money back at maturity. You wouldn’t lose a dime!
Today, “safe from default” is only part of the challenge.
My broker supplies a chart with CD and bond interest rates.
Despite rising interest rates, we are still facing double-digit inflation. Unless the Fed is willing to raise rates higher than current inflation, don’t expect real inflation to come down anytime soon.
If you buy a 5-year CD @ 3.75%, you will get your money back in five years. You are guaranteed to lose a lot of buying power; bad for retirees….
Investors must focus on two safety issues: default and inflation.
Today, retirement planning is like standing on top of a huge rubber ball, trying to throw a dart, and hit a moving target. Don’t buy outrageous claims by financial planners, they are investing in the same market.
Should the Fed stay on course; expect the recession to continue. That affects jobs, retirement, and the stock market. If they don’t, high inflation will cause the same result and could be catastrophic. Fasten your seat belts!
What about dividend stocks?
Dividend stocks are important – but present many challenges.
I contacted our dividend expert, Tim Plaehn, editor of The Dividend Hunter. Tim’s publication focuses on safe dividend income, and he is dealing with these issues every day.
DENNIS: Tim once again, thank you for your time. The stock and bond markets are starting to see the effects of the Fed’s tightening. Asset prices are dropping, and retirees need even more income to pay the bills.
What is happening to stock prices of dividend payers? Have you seen any dividend cuts?
TIM: Hi Dennis. I enjoyed your comments about the “magic number”. When I was a financial planner, using computer programs to help calculate that number was considered the holy grail. Unfortunately, things have changed a lot since then.
Share prices in the higher yield sectors have performed better than the broad market indexes. It’s important to keep in mind that a focus on the dividend income we collect makes share prices less of a factor, except it’s always nice to boost your income by picking up more shares “on sale” during a market downturn.
There have been no dividend cuts in my Dividend Hunter recommendations.
DENNIS: When we had the market correction in 2020, we saw a lot of corporations cut their dividends. It was fashionable and they went along with the crowd. You published a special report on Preferred Stock dividends. Many of their stock prices were below par value and have done very well.
Is today’s market like what we saw then?
TIM: This is a much better market for income investing. 2020 was driven by fears of something completely different. This year’s bear market is more of the traditional market downturn.
Preferred shares act more like bonds. Preferred shares pay fixed, stable dividends, the prices move inversely to interest rates. Higher interest rates this year have pushed down preferred stock prices.
The result is current very attractive yields from preferred stocks, many are now selling below par value and the potential for capital gains if the shares get called in will add to your return. Meanwhile you’re collecting a nice dividend on a regular basis.
DENNIS: I know you are still focusing on both Common and Preferred Stock dividends. While companies can cut their common stock dividends, that doesn’t mean they have to.
It looks to me like it takes a lot of research and analysis to find those which you would consider “safe enough” to recommend to your readers and invest in yourself.
What are the “difference makers” that make companies stand out for you?
TIM: Your moving target analogy is a good one. Preferred analysis is a little easier. If a company pays common stock dividends, they must pay preferred stock dividends first, it is not optional. It doesn’t matter if the common dividend gets reduced. The preferred dividends are safe.
Analysis of dividend-paying common shares requires me to work towards a deep understanding of a company’s business and what factors would affect the ability to generate enough cash flow to support current and growing dividends. It’s a blend of following them closely, communicating with them regularly, staying on top of all the news, participating in their earnings calls…and factoring in my experience to make a judgment.
Dennis, I feel it is important that readers understand the differences between common and preferred stock dividends.
Preferred stock dividends are fixed and must be paid ahead of common shares. Like bonds, the dividends are a fixed amount and will not be raised. Share prices may vary, but they seldom go very far above par value. If they are called in, it will be at par and investors who bought above par will lose the difference. As I mentioned, there is a great opportunity for stock appreciation if you buy preferred shares below par value…as many of them are today.
Common stock dividends are corporations sharing profits with their owners – the shareholders. While management is motivated to keep shareholders happy, these dividends are not guaranteed. Dividends can be reduced or even suspended; but they can also be raised. I spend a lot of time researching companies that raise their dividends.
Shares of common stock can help with inflation because stock prices can go up, they can increase dividends, and pay special dividends. Dividend increases generally lead to share price increases. Many companies pride themselves on paying continuous dividends for decades and never cutting them.
I’ve seen several cases where investors held their common stocks for years and dividends have increased to the point where they are now earning great, double-digit returns on their original investment. The long-term potential for growth exists – with the right stocks.
As I mentioned earlier, our stock recommendations have not had any dividend cuts, and many have had dividend increases.
DENNIS: I’m reading a lot about “Bear Market Rallies”; meaning the market drops, then starts back up creating the illusion that all is well, then dropping sharply once again. During the great depression it took decades for the market to return to the previous high.
I get asked a lot about when to start buying back in. Cash is losing value big time, but if we are in a bear market rally, better buying opportunities will eventually arise.
What are you telling your readers?
TIM: I follow enough business news to understand that no one really knows where stock prices will go, especially in the shorter term. You can always find “experts” on both sides of any discussion about stock prices.
I tell subscribers to focus on building their income stream. If you buy one share of a dividend-paying stock, your income goes up.
If investors opt for automatic dividend investment, with each dividend they get more shares at the current price. That helps to average out your cost and your income goes up some more.
With a well-managed income-focused portfolio, your income will grow every quarter, no matter what happens in the stock market.
DENNIS: One final question. I’m getting leery of any bond or stock funds for a different reason. I’m at the point where I am willing to hold on and receive dependable income, as you suggest. I feel that in a fund, you have thousands of business partners. If they panic and sell, it forces the fund manager to sell good assets to make redemptions.
Are you shying away from funds these days?
TIM: Thanks again for the chance to address your readers.
Bond funds especially are good ways to lose your wealth. There are a lot of negatives to how bond funds operate.
Most of the stock funds I recommend I know the fund managers and intimately understand their investment strategies. There are a couple of specialty funds, such as covered call funds, where I want my subscribers to have exposure to a specific strategy.
However, the majority of my Dividend Hunter recommendations are common or preferred shares of individual companies.
Dennis here. I really appreciate Tim taking his time for our benefit.
Trying to maintain balance and hit a moving target is quite a challenge – and you need all the help you can get. Investors need to find trusted sources with good track records.
I look forward to Tim’s newsletter each month; it helps me stay on top of things, and many time I immediately act on his recommendations.
How do investors protect the value of their nest egg?
How do retirees pay their skyrocketing living costs?
Luckily there’s a proven way for you to stay ahead of inflation, just like 20,000+ investors are doing right now…
Here’s how you can be one of them. Click HERE for more information.
There is no, “set it and forget it” retirement plan anymore. Our new job is money manager for our life savings. Embrace the job, stay educated and you have a much better chance of making your money last for the duration.
On The Lighter Side
Last Friday we watched grandson Braidyn’s high school football game on the internet. I have a pretty good size monitor and the picture was great. What amazing technology.
On Saturday we went on I-17 south toward Phoenix to run some errands. I-17 north was stopped, with bumper-to-bumper traffic for miles. Jo queried her phone and there was an accident up near the Bumble Bee exit. We calculated the backup to be around 25 miles. The temperature was already 98 and climbing.
As you go further north, there are few exits and no real alternate routes. Jo wondered what happens to those with electric cars. They couldn’t move. Were they faced with the decision to turn off their air conditioner, so they didn’t run out of juice? How do they service electric vehicles that run out of power on the road?
It was a good reminder to be sure you have plenty of fuel when driving on the interstate in unpopulated areas.
Quote Of The Week…
“The pessimist complains about the wind.
The optimist expects it to change.
The leader adjusts the sails.”
— John Maxwell
Friend Charlotte P. sent along some clever definitions:
- PARADOX: Two physicians!!
- COUNTERFEITERS: Workers who put together kitchen cabinets
- AVOIDABLE: What a bullfighter tries to do
- HEROES: What a guy in a boat does
- RELIEF: What trees do in the spring
- EYEDROPPER: A clumsy ophthalmologist
And my favorite (Boy I wish we could do this for the damage they have done)
- SUDAFED: Brought litigation against the Federal Reserve
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
Affiliate Link Disclosure – This post contains affiliate links. If you make a purchase after clicking these links, we will earn a commission that goes to help keep Miller on the Money running. Thank you for your support!