Do we have enough money saved as collateral against potential market downturns during retirement?
My wife and I are retiring in 2019. We have no debt. We have $300,000 in a 401(k), $700,000 split into 14 dividend stocks, and four $60,000 CDs laddered for four years for insurance when the market tanks and our dividends pay out less than now (which is $67,000 a year including the 401(k) payouts). We will be 53 and 55 years old when we retire. We can live very comfortably on $50,000 a year, as we will be overseas living and traveling. Should we have more than the four $60,000 CDs for insurance against a major down turn in the market, or is four year's worth enough for the market to recover?
The laddered CDs should be more than enough protection if you're guarding for a downturn. The Great Recession lasting 18 months was the worst recession since the 1929 depression. While it's true some companies slash or even halt their dividend during a time of economic hardship, if the dividend stocks are well capitalized businesses, there shouldn't be much slashing going on. You shouldn't have to factor a total loss or a sizeable loss in dividend income, unless the quality of the businesses you own are poorly capitalized.
Here are a couple more ideas on your current situation:
- One of the biggest risks to those retiring early is Healthcare. Do you have proper coverage? Even a sharing network like Medishare is enough to get you by until Medicare kicks in. Having a major healthcare expenditure could ruin your early retirement and travel plans.
- You didnt specify, but have you considered adding some Real Esate Investment Trusts(REITs) to your dividend portfolio? These businesses offer diversity from the equity markets and have the divdends built into their organizational structure, so they can be relied upon much more. I assume you do have some exposure currently because the dividend yield is quite high. If not, that high of a dividend yield worries me about the quality of companies you currently have in that portfolio and the quality of companies should be reviewed.
Hope this helps! I wish you the best in your retirement and travels!
Chance Butler - Intelligent Investor
First, congratulations on being in a position to retire in your 50s. That puts you in a very small percentage of folks, especially without pension income. I am impressed.
How to achieve downside protection has been discussed by investors for decades. If you were to do a quick search, the first thing you would see would be "Why you should buy an Annuity". In full transparency, I don't recommend annuities to clients, so you will get a biased investment based approach from me, but I have to acknowledge that annuity companies do a great job of selling the idea of downside protection. Think about it, they say if you put your money with us, we will guarantee your income or give you principal protection, etc. Those "knowns or guarantees" are real enticing. Wouldn't having certainty on a future income stream or a guarantee on downside protection make you feel secure and confident. Transferring that risk to an insurance company is the opposite of investing. To invest is an expectation that the current asset will appreciate, but with an acknowledgment that there is a risk that the asset will not. The key to investing is balancing that risk with the expected return of each asset used. The story of “Why to Diversify”.
Assuming that you had the worst timing on the planet and you put all of your money in the S&P 500 Index at the height of the tech bubble, August 2000, or just prior to the Great Recession, October 2007, you would of needed to not distribute from your investments for 7 years or 5.5 years respectively. This is oversimplifying everything to make a point...therefore no dividends and reinvestments. But this does make the point that holding equities long term will work, including through the most recent financial down turns. So, how does this relate to downside protection. If we focused on the Great Recession, you could of avoided a loss in equity holdings if you had alternative cash resources to distribute from for a full 5.5 years.
You mentioned that the dividend stocks and 401K payouts were providing $67,000 of income but all you needed was $50,000. Based on that assumption your current strategy would have to be reduced by about 25% ($67K x 0.75 = $50K) to put you at the bottom level of your income needs. Each CD is enough to cover 1 year of comfortable income. Therefore, I believe that you have plenty of downside protection... in summary that is a 25% downside of current investment assets and you have 4 years of cash equivalent assets to be used in the event you need to buffer a loss greater than the 25% downside referenced.
Based on the information you provided, I believe you don't need any more cash or CD assets. I would caution you on the distribution of 401K assets. You should check to make sure you are not going to be subject to a 10% penalty for taking distributions prior to age 59.5. The key to the distribution of investment assets is managing the risk verse return profile of each asset, and managing taxes. It is about spendable money, not gross distributions. Keep thinking about protection and how you can distribute from different buckets during different market conditions.
Hope this helps and congratulations again on being in the position to retire before most of your peers.
I advise you in the strongest possible terms not to put any personal financial information out on the web in an open forum format such as this. Financial planning conversations in which you reveal your holdings should occur with a financial advisor, with the mutual understanding of total privacy. We live in a world where phishing, identity theft, and fraud are rampant. Just last year, Equifax was hacked and all of our Social Security numbers and sensitive credit information were leaked out into the dark web. At 53 and 55, you are still vibrant and have many good years left, but note that financial schemes targeting retirees are rampant. I believe that people who frequently travel internationally are easier targets in many ways (someone reading this would know you are traveling internationally and when you plan to travel). In such a vicious world, there is reason to be ultra-cautious about divulging any personal information to anyone for any reason, much less volunteering it for the entire world to see.
It is clear from your question that you are thinking about financial security for the rest of your life. This cannot happen without complete and total protection of your private data and personal information. I would urge that, before you even consider a financial plan, you do an honest and robust accounting of your personal cybersecurity. One cannot exist without the other. Do you use the same user name and password for multiple financial account logins? Do you use two-factor authentication to access your financial accounts online? Do you monitor your credit frequently to make sure that fraudulent accounts are not being opened in your name? Are sensitive details about your life easily visible on social media?
This may not be the advice you were looking for, but I believe it is the advice you need. While your name is obviously not revealed on this forum, it would not be too difficult for a skilled hacker or identity thief to track down the IP address you used and realize that you are wealthy retirees who plan to travel internationally and are a bit casual about divulging personal information. I apologize for the harsh tone of this response but I believe it is of paramount importance.
All my best to you and congrats on your success and upcoming retirement. And, for what it's worth, the answer to your original question is yes, having four years' worth of cash parked in CDs is more than likely sufficient protection.
Would be happy to speak with you at your convenience. What is the best time & phone # to speak with you. Thank you!