How to Create a Sustainable Income for a Secure Retirement

By Christian Koch, CFP®

With 10-year Treasury bond rates yielding 2.1%, preretirement investors (3 to 6 years prior to planned retirement) face a difficult challenge: Having adequate income for retirement. Conventional wisdom and textbook finance would suggest that as investors approach retirement their investment portfolios should become more conservative and weighted toward bonds. We disagree!

The economics of the new retirement have changed. The decumulation phase in a person’s investing life-cycle requires a different strategy. We believe having too much exposure to fixed income investments is not a good idea. As the broad stock market has been flat over the last decade investors that have only their 401K and IRAs are concerned that their retirement nest egg is not sufficient. Currently, many preretirement investors are faced with the reality that money market accounts and CD yields are below 1%.

Traditional investments like annuities, municipal bonds, CDs and Treasuries all have minimal before-tax yields, made even lower after tax. After factoring in inflation, investors in these assets could experience negative yields. So, what can investors do to increase their income? Our solution is an investment strategy that focuses on preferred stock.

Preferred stocks pay a fixed amount, which is a fixed dividend not interest, to the investor on a regular basis. Furthermore, changes to their prices are determined more by changes in interest rates and credit quality of the issuing company versus earnings growth. In general, preferreds appear well positioned to address the needs of retirees needing current income. They would fit extremely well in a tax deferred account such as an IRA or 401-K.

How do I know this investment strategy works? In 1994, I started my investment management career as an equity research analyst for a large mutual fund company. At that time, I worked for Eric Ryback, who was the portfolio manager of the legendary fund group The Lindner Funds. For those of you that don’t know Eric Ryback there is a book titled Investment Gurus written by Peter Tanous. Eric is highlighted in one of the chapters for his stellar performance managing the Linder Dividend Fund and investing in both convertible bonds and preferred stocks.

An investment preretirement strategy that focuses some part of an investment portfolio to preferred shares should provide a significant cash flow boost to an investor’s current income. Going forward, it appears possible to earn investment returns in the high single digits investing in preferred stocks. This investment strategy appears to be an attractive alternative to high yield bonds and to annuities.

Those interested in learning more about creating sustainable Income for a secure retirement and Preferred stocks are encouraged to visit our website at www.kamsouth.com

Author: Christian Koch

Mr. Koch is a Certified Financial Planner ™ professional. He is a NAPFA Registered Financial Advisor and is a member of the New York Society of Securities Analysts and the Harvard Business School Club of Atlanta. Mr. Koch has been awarded the Paladin Registry’s Five Star Designation (www.paladinregistry.com/advisor/christian.koch).

Contact Christian