THE RETIREE PARADOX

Why Do We Put Ourselves Through This? The market is often a brutal place where we watch the value of our assets go up and down for reasons that we could never adequately understand, much less anticipate. Why not stay out of it and let the hedge funds and institutional investors knock themselves out? While this is an option for some of us, most of us need more income than we can squeeze out of a bond portfolio or government insured bank deposits. Herein lies the retiree paradox. We hate the market volatility but we can't derive enough income from so-called "safe investments." Consider the plight of a small businessman who sells a company for a half million in after-tax cash. Assume there is another half million in investment assets outside the company. A million dollars worth of investment assets puts him/her in the top 1% of retirees. Assume employment opportunities for a 60 year old former entrepreneur are limited and that the retiree wishes to stop working and live off social security and investment income. Further, assume that he/she has little tolerance for the ups and downs of the stock market. A "safe" investment will produce income at 5%, yielding $50,000 in before/tax income. When social security income becomes available, the retiree and spouse can get another $20,000-30,000 annual income for a total of $70,000-80,000 per year. It has been my experience that, although retirees in this category often tell me they need $5,000 per month in income, very few actually end up getting by on that amount. "Extras" like travel, home improvements, and helping out the kids often increase that amount by an additional $20,000-30,000 per year. In addition, declining purchasing power from inflation will sooner or later have a negative effect (although not as much as many financial professionals project). So what do we do?

Most of Us are Forced to Take Additional Risk to Obtain Higher Yields. This forces us into real estate or the stock market. The average annual return from the stock market is in the 10% range; however, we have been warned that 8-9% may be more realistic for the future. This would be satisfactory if we received this average return each year; however, a more likely scenario is a 15% return for one year and 3% the next. If the market is up when we need to make a withdrawal, we do well but if it is down we drain our capital so we have a lower investment base to produce income for next year. Studies have shown that retirees who need to withdraw from a down market for the first two years after retirement will have a substantial risk of running out of money during their life span. The main reason I established this blog is to offer people a solution.

Buy Cash Flow, Not Assets. Hence the title of this blog. If you are retired or planning to retire, your best bet is to start planting your "Cash Flow Garden." It doesn't matter how much money you have if you can't convert it to cash flow to fund your living expenses. The name of the game is to have cash flow from a variety of investments. This adds considerable flexibility since you can use the income in both up and down markets. You no longer have to worry about whether you will have to sell assets into a down market or whether your nest egg will last as long as you do. If you leave your nest egg intact and spend only the income, your risk of running out of money is much reduced. The market price of your portfolio can advance or decline but you can stay secure if your income continues.

The Recent Correction Brings us an Opportunity. The hardest hit stocks in this correction are those in the financial sector. We have sold some of our investments in this sector because we thought their income stream was in jeopardy. Others have been hit hard because they have had to reduce the value of their assets because of a rule that forces them to "mark to market" the value of some of their illiquid assets. While their book value has been reduced, their cash flow remains strong. If dividends continue at current levels, the market value will eventually return to previous levels. By searching a data base of these companies and selecting those with a high probability of dividend continuation, you can not only buy a strong dividend income stream that is likely to increase over the years, you will have a high probability of increasing market value in the future. In my end of October post, I listed five stocks that I believe have a high probability of producing a 9% dividend yield in the future. I did this not to recommend these stocks but to give you an example of some of the opportunities out there. My philosophy is similar to that of Dan Reeves, former Denver Bronco head coach. He said "Your offense has to take advantage of the opportunities the defense gives you. Similarly, your investment strategy has to be one of taking advantage of the opportunities the markets give you. This philosophy has served me well in the past and I will continue to use it.