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Life is a journey filled with pivotal moments, each carrying its weight of uncertainty and stress. From the daunting task of choosing universities post-high school to navigating career changes and significant life decisions like marriage and parenthood, every stage presents its unique challenges, making one feel anxious and stressed. Yet, one of the most stress-inducing milestones for many is retirement.
The questions abound: Have I saved enough? What are our fixed and variable expenses? Are there financial obligations to our children's well-being? The list goes on. And despite careful planning, unexpected surprises can lurk on the horizon, sometimes necessitating the dreaded return to work.
Almost 10,000 baby boomers turn 65 every day. By 2031, the U.S. population over 65 will reach 75 million, nearly double what it was in 2008. A generation of this size transitioning out of the workforce is significant for the American economy and makes retirement planning a crucial aspect of your financial security. Here are a few key considerations:
How much of your current income do you need?
One school of thought says you'll need 75% to 80% of your current income to maintain your present standard of living in retirement. That's because some costs-such as mortgage payments or employment-related expenses like business attire and commute-are expected to reduce or go away altogether.
The amount needed for a comfortable retirement varies based on lifestyle preferences, healthcare costs, and other factors. It is imperative that you make those estimates during the planning stage.
How much retirement income can you expect?
Retirees should rely on multiple sources of income, supplementing the Social Security benefits and pensions (if applicable). While Social Security provides a safety net, more is needed to cover all expenses. Your retirement savings (in 401(k)s or IRAs) and other investments play a significant role in determining your lifestyle.
With your savings, you could use the 4% rule. That means if you retire with $1 million saved, you'd take out $40,000 annually. The problem with this approach is that this method will exhaust your savings at some point; the question is when.
What if you fall short?
Life can throw a lot of unexpected expenses your way, so it is critical to have an adequate buffer to tackle these. Moreover, inflation can erode your lifestyle by forcing you to burn through more of your savings. A strategy depending on regularly and conservatively selling investments to generate income can particularly be challenging in bear markets and recessions.
With all these considerations, your savings can last less than you had imagined. It is also possible that the individual (or their significant other) lives a lot longer than estimated; after all, enhancements in medical care have boosted life expectancy in recent years.
A recent report from the AARP found that 1.7 million Americans who retired a year earlier have returned to the workforce. That represents just more than 3% of overall retirees and is becoming increasingly common amidst soaring living costs and a volatile stock market.
$10,000/year in additional income can add great flavor to your retirement and support that replacement income you need. Depending on your lifestyle, it could be grocery expenses, several months of rent, or a trip abroad with your significant other. Let us now evaluate three picks that can transform $100,000 in savings to $10,000 in annual income (or about $800/month) to spice up your retirement. Let's dive in.
Pick #1: CCD – Yield 10.7%
Convertible debt is a method for corporations to raise capital at lower coupons than comparable nonconvertible debt. During times of high interest rates, this can be an appealing option for issuers to keep borrowing costs low. Moreover, equity prices are depressed for a large segment of the market (yes, the bulk of the index returns are fueled by a few mega-cap corporations, leaving a very disconnected market valuation as the economy smiles at an upcoming recession).
Q4 2023 saw a notable uptick in convertible debt issuance, and we expect the trend to continue in 2024. Calamos Dynamic Convertible and Income Fund (CCD) is a CEF (Closed-End Fund) that maintains a diversified portfolio of 602 convertible securities, paying monthly distributions of $0.195/share. CCD has steadily maintained and grown its distributions since its inception in 2015. CCD's monthly distribution calculates to an 10.7% annualized yield and is poised to reward you with large paychecks as convertible issuance soars in 2024.
Pick #2: USA – Yield 9.6%
If you like exposure to mega-cap corporations, but want to draw steady passive income without timing the market to sell your holdings, Liberty All-Star Equity Fund (USA) makes an excellent fit.
USA is diversified across 149 holdings and maintains a variable distribution policy based on its NAV (Net Asset Value) each quarter. 22% of USA's assets are distributed among ten mega-cap firms, several of which are major beneficiaries of digital transformation, AI, and automation.
USA pays a quarterly variable distribution based on the fund's NAV, so the CEF doesn't have to irreparably sell its assets to maintain a specific distribution amount.
Pick #3: PFFA – Yield 9.5%
Fixed income is one of the best opportunities amidst elevated interest rates as we deal with a hesitant Federal Reserve. While several individual preferred stocks have rebounded strongly from the bottom last year, the security class remains historically undervalued, and Virtus InfraCap US Preferred Stock ETF (PFFA) provides a diversified entry into it with large monthly distributions.
PFFA maintains heavy exposure to income-oriented sectors like equity and mortgage REITs, financials, utilities, and industrials.
PFFA recently raised its monthly distribution to $0.1675/share, a 9.5% annualized yield, making it worthwhile to wait for rate cuts so underlying holdings move closer to par value.
Conclusion
Retirement marks a significant chapter in life, one that should ideally be filled with relaxation, enjoyment, and quality time with friends and loved ones. However, this stage can be relatively complicated with health issues, both for oneself and a significant other. Navigating through these concerns while striving to maintain a fulfilling retirement lifestyle can be daunting. Moreover, you may have responsibilities of ensuring the well-being and stability of your children, helping them establish themselves in life.
Amidst these complexities, the last thing one should be burdened with is the stress of financial uncertainty, having to monitor market fluctuations and economic news constantly. No one should come out of retirement because of higher-than-expected living expenses or rapidly depleting savings. This is why I invented the Income Method, a means to collect regular paychecks from investments without any change in ownership.
In this article, we discussed three picks with a blended yield of ~10% that can transform $100,000 in savings to $10,000 in annual income. We maintain a comprehensive portfolio of +45 dividend-payers, offering a +9% overall yield. We believe in diversification as an effective form of risk mitigation. Hence, the Income Method provides financial security and peace of mind during this beautiful phase of life so retirees can focus on what truly matters – cherishing moments with family and creating lasting memories free from financial worries.
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