Retirement Preparation 101

Prompted by a recent article in “Financial Planning” entitled “For Retirement Portfolios, a Smarter Glidepath”… several points in the referenced “conventional wisdom” have fingernails on chalkboard quality.

The use of “stocks” in retirement to help with portfolio growth and to keep up with inflation is the first. The main thrust of a retirement program is (should be, anyway) the generation of income… closed end income funds do this better (and historically safer) than anything else.

If there is enough income (defined as more than the retiree needs for regular monthly expenses), the transition to retirement can be easy without ever being overly concerned with market value.

If a retiree spends a max 70% of the dividend and interest (“base”) income, it’s easy to grow both the portfolio market value (which you can’t spend) and the income (which you can)… thus keeping up with inflation, something we haven’t been allowed to see a glimpse of for years.

Only when there is enough income should equities even be considered in a retirement portfolio. Stocks have nothing whatsoever to do with inflation … a measure of buying power. More income dollars = more buying power. More market value tends only to encourage excessive spending.

Another myth is “today’s low interest rate environment”… totally not true in the land of income CEFs and even some income ETFs… tax free CEFs are paying (they have been for years) over 6% on average, with taxable funds paying much more.

A retirement “glide path” that increases equity exposure “to improve total return outcomes” is another dose of illogic that stems from the idea that the market price of income securities is even more important than the income the securities produce.

It just ain’t so… ever. Take the example of the financial crisis. Investors who held income CEFs (particularly the tax exempt variety) never saw a change in spending money, while the reinvestment of the “at least 30% of the income” rule mentioned above allowed them to add to their holdings… growing yield, growing income, and reducing cost basis per share.

The problem is that the search for the holy (market value) grail makes pre-retirement investors forget the purpose of their retirement portfolios (i.e., it’s the income, not the market value).

The problem this market value, total return, focus brings to the 401k space is the millions of pre-retires, appendages crossed, genuflecting frequently, praying that their market value will be stable. Somehow their standard of living will be maintained with realized income in 2% to 3% range… so let’s add more stocks, the article suggests, because they will go up in price better than income securities.

My hope is that the vast majority of Financial professionals will reject this lunacy… no matter how you slice it, higher, even stable, market value may float your boat, but it won’t produce the income needed to run it.

A wise man once defined true wealth, not as the ability to accept financial risk, but as the ability not to need to. Wise men in the 401k 3(38) fiduciary space can be found at Expand Financial and QBox Fiduciary Solutions.