Editor’s Note: This article is part of the Financial Advisor series “How I Solved It.” Advisors describe a client with a problem and what they did to help.
The current volatile markets threaten the retirement savings and incomes that many near-retirees are counting on to fund the rest of their lives, but sophisticated investment strategies are available that can supplement assets for some clients.
Antwone Harris, founder and chief planning strategist at Platinum Bridge Wealth Strategies, developed such a strategy to help a 60-year-old divorcée who had turned to him for help two years ago.
Harris founded his boutique Washington, D.C., wealth management firm in 2017, but he has been specializing in retirement planning since 2014 and is a Certified Retirement Financial Advisor. His firm’s typical client is 50 years of age or older and has at least $1 million in investable assets.
The person in this example, who had been referred to Harris by another client, was afraid she did not have enough money to continue her lifestyle through retirement, which included a desire to travel with her two grandchildren. The members of her family tended to live longer, so she was looking to fund years of fulfilling retirement.
Harris says the client retired before she was eligible for Medicare and Social Security and did not have long-term-care insurance for her later years. “With careful planning, we found a way for this retiree to enjoy her retirement without sacrificing her quality of life, to travel with her grandchildren, and to still leave a legacy for her daughter and the grandkids,” Harris says.
The strategy relied, in part, on delaying Social Security until she turns 70 years old, when the benefit is at its maximum level; taking a pension in a lump sum and investing it rather than taking it in monthly benefits; and using covered calls to generate income in a volatile market, Harris says, but the key to the plan was using the covered calls to generate income.
With a covered call, an investor is selling the right for another investor to buy some of their stock at a specific price in the future. The second investor pays a premium for the right to buy the stock at a time when the market is increasing.
This strategy is useful if the investor, in this case Harris’s client, feels the market is going to remain flat or decline. In that case, the stock never rises to the level at which the second investor has agreed to buy it and the client gets to keep the premium payment, so the stock never changes hands. This strategy is generating approximately $35,000 a year for the client.
“This is one of the few areas of the market where you can generate enough income to outpace the rate of inflation,” Harris says. “If you are retired and in need of income, the money generated by the premiums can be used to meet your monthly living expenses during a downturn in the market.”
Covered call strategies offer a compelling investment option for investors who want to enhance their income streams and protect their portfolios during uncertain times, Harris says. The downside is that the seller may be forced to sell if the stock reaches the agreed upon sale price, at which point they miss out on increases in the market. The covered call agreements are usually written for only a short time, which can be limited to a few months.
“This strategy helped my client and can help other investors maintain the confidence to weather any near-term storms on the market horizon,” he adds. The premium payments are taxed according to IRS rules for covered calls.
In this case, the client had a total net monthly income, not counting the covered call premiums, of $4,000 from a taxable savings account, a traditional IRA and a Roth IRA. When she came to Harris, she was not yet receiving Social Security benefits—and she still isn’t taking them since she hasn’t reached age 70.
Her expenses include a $2,500 mortgage payment, $520 a month for health insurance, $990 for household expenses including utilities, and $3,500 for other living expenses. She budgets $1,000 a month for entertainment and vacations. She is only five years into a 30-year fixed mortgage.
Another part of the strategy to maximize income involves the client’s pension. She worked for a financial regulator before her early retirement and was eligible for a monthly pension payment of $1,270 a month when she reached age 65, an amount that, even with her other income, fell short of what she thought she needed to fund her lifestyle.
In addition to using the covered call strategy, Harris showed her the advantage of taking the pension of $209,000 as a lump sum and investing it to generate more income. Some of that investment should still be available when she dies and can be used as a legacy for her daughter and grandchildren.
With the lump sum of the pension added to a $1.5 million portfolio she already owned, her portfolio is now generating $6,400 a month in income. She is withdrawing $4,000 a month of that money, supplemented by savings, to support herself. Harris wants to keep her income below $48,000 so that she is eligible for healthcare supplements through the Affordable Care Act. She also has $200,000 in savings to draw from for unexpected expenses, Harris says.
As part of the overall financial plan, the client is setting aside money now to create a $600,000 pool of future dollars for end-of-life expenses 30 years from now.
With the rise in interest rates, Harris is also having his client use multi-sector bond funds, as well as some dividend-paying stocks to generate income. The stocks in the portfolio provide liquidity by being available for sale when markets are going well “so she won’t have to sell at fire-sale prices,” he says.
As part of the overall plan, the client is holding off on filing for Social Security until she reaches age 70 so the monthly payments will be 24% higher than they would be at her full retirement age of 67. As it is for all Social Security beneficiaries, this increased amount is indexed for inflation to give her a guaranteed income stream that increases with the cost of living, which secures her in case she lives a long time, as many in her family do, Harris says.
“For this client, the budget will be a little tighter until she is eligible for Medicare, but with the other sources of income, including the covered calls, and the supplements from cash savings, it is doable,” Harris says. “With the plan in place, she is no longer worried about her future and she can enjoy the things she wants to enjoy in retirement, including vacationing with the grandchildren.”