In my next life I want to be an economist or research professional because they can say whatever they want without being directly accountable to clients. They can just revise their forecast or move onto another project without the consequences that we advisors suffer -- including the client's loss of income. Same goes for investment theorists, think tanks and companies that sell packaged investment products. Their information makes for good sound bites on TV and fills white space in magazines, but as far as applying it to daily investment activity it's about as valuable as a wooden penny.
Take for example a recent report from Putnam Investments and the Government Accounting Office. It suggests that retirees should have between 5 percent and 25 percent of their retirement savings in equities, and that Americans can avoid the risk of outliving their assets by saving more, working longer, investing wisely, delaying Social Security and buying an annuity. Wow! What powerful insight. That's like saying that if you eat less and exercise every day that you'll be healthier! Good luck on actually doing it, but if you do it should work out.
In fact, there's a major difference between the micro, macro and behavioral economics upon which many economists and researchers base their pronouncements compared with what I call "actual economics," which is what advisors confront every day. We have to pick up the phone, call a client, explain why an asset allocation failed and his bond fund lost 30%, and actually convert all those grand theories into practices and steps that the client can both feel comfortable with and understand.
It follows, then, that financial advisors need to develop specific strategies to help clients understand the retirement income environment we're in now and accept emerging strategies that will help them achieve the income they need in the future. Here are two equity-based retirement income strategies that are more than theory; they're actual programs that I use with clients to take advantage of the current interest environment while providing comfort in the form of familiar concepts.
One of my favorite things is to ask clients to tell me the highest interest rate they ever received on a money market or CD. Of course the double-digit yields during the interest-rate heyday of the 1970s always come up, which caused retirees and conservative investors to abandon traditional tools for generating retirement income, such as laddered CDs. My suggestion, though, is to take that strategy and give it a contemporary spin.
The concept of laddered CDs is pretty simple. Buy a series of CDs that mature at different times -- typically one to five years -- and live off the interest income. Once the first CD matures, reinvest the principal into another 5-year CD, striking a balance between short- and intermediate-term interest rates. This approach creates a consistent and reliable income stream throughout the retiree's golden years.
Many clients and professionals are surprised to learn that you can build a similar laddering strategy with dividend-paying stocks. Like CDs, many blue-chip companies pay their dividends at different times, including quarterly and annually, as well as in different months of the year. By strategically buying stocks with sequential dividend payments, investors can generate consistent income well above current CD rates. Consider the following three companies:
Kimberly Clark (KMB) -- Quarterly dividend payable in Jan., Apr., July, Oct.
Proctor & Gamble (PG) -- Quarterly dividend payable in Feb., May, Aug., Nov.
Johnson & Johnson (JNJ) -- Quarterly dividend payable in Mar., June, Sept., Dec.
Assuming each company maintains their dividend and payment date, they combine to provide a monthly paycheck throughout the year without the need to shop for new rates at maturity. Additionally, this strategy offers the potential for capital appreciation over time and, depending on future tax law, the option to pass along your interest in these companies to your heirs or charity on a tax favorable/step-up basis.
There is obviously more risk associated with individual stocks than with CDs, not to mention much more work and research required on a financial advisor's part compared with simply selling a packaged-income product like a mutual fund or ETF. Turning your client's money over to a mutual fund company or ETF that offers income still requires one to consider the consistency of dividend payments. Mutual fund and ETF dividend payments can vary widely from month to month or quarter to quarter. Contrast that with dividend payments from individual companies, which generally remain the same no matter what the value of the underlying stock.
Another, often unnoticed benefit of laddering an income stream around blue-chip companies with long histories of consistent dividend payments and annual increases is some built-in protection against inflation.
Investors seeking retirement income also might want to consider a variation on the traditional fixed-income barbell strategy.
A basic barbell strategy involves buying a series of short-term and long-term bonds. By buying bonds with maturities at opposite ends of the spectrum, investors historically have been able to create a comfortable amount of interest income from the long end of the yield curve while using the maturities at the short end for quick cash, which can then be reinvested when interest rates are rising.