The Fed is costing you money. $470 billion to be exact.
According to a research report released in March, the Fed’s actions have cost U.S. savers $470 billion during its zero-interest-rate policy. Retirement income has almost entirely dried up and too many Americans are wondering how they are going to survive with yields stuck below 2%.
What’s more, the Federal Reserve and our government are in no position to help them because rates can’t go much higher any time soon.
At the 2021 SALT New York conference, which was held earlier this week, one of the panels on the main stage discussed the best macro shifts coming out of the pandemic and investing in value amid distress. The panel featured: Todd Lemkin, the chief investment officer of Canyon Partners; Peter Wallach, the managing director and Read More
But you have other options beyond Treasurys and bank CDs to help you attain the income you need for a comfortable retirement.
Americans have suffered from near-zero interest rates for more than six years. Yield from fixed-income instruments have been crippled. And to make matters worse, we still have many years left in what Jeff Opdyke, our Investment Director, has identified as the Decade of Yield (he has another yield revelation coming up in his monthly newsletter, the Sovereign Investor).
You already know that Treasurys and bank CDs won’t get the job done. In short, the hunt for yield is not going to get any easier.
While our options to generate steady, stable income are limited, there are still ways to stretch out your retirement funds — even in this extremely low-rate environment. So it’s time for our retirees to get those billions back.
The Fed – Your Only Option
We all dream of retirement. That day when we’re not tied to our desk with someone demanding that we hit a deadline or a revenue target, when we’re not awakened by the shrill sound of the alarm clock pushing us toward that long commute. But retirement requires having a steady flow of income that will see us through our golden years.
Below is a chart with three lines, each representing different scenarios for a retirement portfolio. They all start with $1 million, then, as funds are grown and withdraws are made to live off, the dollar amount steadily decreases. Of course, this is a simplistic representation of your retirement years, but nonetheless, it is one you should have already sketched out on your own.
The math behind the scenario below is that you use just $55,000 a year to live off. The average retirement age is 62, so we will start there and see how long your funds last…
Clearly a couple of these scenarios run into trouble as you age.
The red line represents you investing $1,000,000 in a risk-free account that yields 2% on average, which is above the current yield on a 10-year Treasury note. Running out of cash in your mid-80s is not the ideal picture.
The blue line represents what your income would have looked like just a decade ago, when risk-free rates were steady at 4%. Had you been able to spend just $55,000 a year, your funds would have stretched into your mid-90s — not bad, but it’s farfetched in today’s low interest-rate environment.
Instead, the green line is your only comfortable alternative.
It represents you investing 30% of your retirement funds each year in an account generating a 12% average annual gain (which happens to be the base annual return in Pure Income). The other 70% you continue to deposit in risk-free Treasurys with minimal yields.
You can see that this scenario gives you enough money to live comfortably throughout your retirement — which should be the ultimate goal.
But it also generates enough income that if any additional expense arises, you will be able to cover it, or you could just take that vacation you didn’t have time for during your working years.
The Fed vs Steady, Stable, Income Generation
No matter how you look at it, your financial future doesn’t look pretty. The amount you would be earning from your retirement savings has been cut in half due to the sharp drop in interest rates.
And now that the Fed is hooked on low rates, you’re stuck with minimal yield generation. That’s the red and green line above.
If you’re determined to regain some of those lost billions, then it’s prudent to do so with a conservative strategy that will preserve capital while looking to maximize your income — which is my goal in Pure Income.
The Pure Income strategy sells out-of-the-money options on stable equities, allowing you to collect income every month and generate annual yields that are at least six times higher than what you’d see with Treasurys or even six times the average yield in the S&P 500.
While options are routinely seen as risky and hard to understand, I will walk you through each trade and explain the risks involved so that you can feel comfortable with this conservative trading strategy.
I’ll be the first to admit it: Putting retirement funds into the stock market is not the safest place to park your money. There is always a risk of losing a portion of the capital you have invested.
But the consistent gains generated month after month offer stability and significant yield.
Last Friday, three positions were closed for annualized gains of 12%, 13.6% and 17% in Pure Income. This is the type of conservative growth that is needed to stretch your retirement portfolio.
Editor, Pure Income
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