By Al Valente
You’re Retired – Congratulations. You’ve probably made a lot of changes in your life from your “working years”. Yes, you now have more freedom in your day to do the things you most enjoy. But most paramount is living on other sources of income instead of that steady salary – a rather significant shift in mentality.
Table of Contents:
Larger Equity Means Larger Cash Returns
Remember: Your Portfolio Will Keep Living Even After You Die
Be Cautious with Growth Stocks
Dividend Stocks are Lower Risk Investments
Find Free Money with Covered (Out-of-the Money) Calls
Although a small portion of readers will have both a pension and social security, the vast majority will have social security and an annual drawdown from retirement savings. So not to run out of money in 20 years, the natural response is to run tighter living cost controls and become very conservative with your retirement investments. And that makes perfect sense.
However, retirement doesn’t mean the end to actually growing your portfolio. Yes, you will die one day, but your portfolio can keep on living and growing. Your surviving partner and heirs will be the ultimate beneficiaries. Here are a couple of approaches.
Larger Equity Means Larger Cash Returns
During your working years, you started with nothing in your retirement savings account then kept adding to it over the years. By the time you did retire it was a goodly amount, perhaps north of $1 million.
Simple math: if you made an 8% annual return on your first $100,000 that equals $8,000, nice. But fast forward to retirement where you may have amassed $1,000,000 That same 8% now adds $80,000. A rather nice piece of change.
So, yes, if you can live off your other recurring revenue such as social security, pension, part-time job or side hustle, the equity gains in your retirement account adds to your overall wealth and keep on compounding.
You Need to be Conservative
Our risk tolerance changes as we age. Remember how fast you used to drive your car in your youth compared to now? Similarly, you probably took more chances on buying stocks that were long shots and just never panned out. No problem, you had a lot more years to work and make it up.
Now that you’re in your later years, you just don’t have too many years ahead of you can’t afford to screw up on a risky long shot, so you become more conservative in your investing which is a good thing. It forced you to behave as you probably should have done decades ago.
Remember: Your Portfolio Will Keep Living Even After You Die
Somehow, we attach ourselves to the mentality that our portfolio dies with us, and consequently we become overly conservative and adopt the attitude that we’ll transfer more growth investments to conservative investments like cash. Then it becomes a self-fulfilling prophecy and does indeed decline.
With the inflation we’re facing today, that decline is worse since the buying power of the dollar diminishes and further erodes your wealth.
But what if we adopt the attitude that our portfolio can live on and on? It will live after you die, after your life’s partner dies and rolls down to your heirs.
This is a totally different way to act. With the proviso that an apportionment of your savings nest egg is in safety and can withstand a major stock market corrections and/or economic downturn, another apportionment can be invested in intelligent growth.
Intelligent Ways to Keep Your Portfolio Growing in Retirement Without Losing Your Shirt
OK, so you buy into the concept of growing your retirement portfolio even in your later years, but are averse to risk, don’t want to be heavily weighted in stocks. Here are a couple of ideas.
Be Cautious with Growth Stocks
Early-stage growth stocks like high-tech companies, typically run at a loss for years until their “story” show promise. It is best to stay away from these. When there’s a major correction, they’re the first to be sold off. But if you’re convinced you’ve done your research and have a growth stock with upside potential, then only allocate a small portion of your portfolio to such, say less than 10%, much less.
However, there are tried and true high-tech stocks that are cash flow positive and some even pay a dividend. Microsoft, Google, Amazon, Facebook come to mind. These are safer bets and over a 5-year period will most likely appreciate in value.
Dividend Stocks are Lower Risk Investments
Regardless of the vertical they’re in, dividend stocks are the stocks that are boring. But they’ve been paying a dividend for decades. Even if the stock prices stay flat, each quarter, you’ll get a cash deposit. Depending upon the dividend yield it creates a nice floor as to how far the stock could decline during a market downturn.
As of this writing a handful of Dow stocks with decent dividends: IBM (5.22%), 3M (4.16%), Walgreens (4.02%), and DOW (4.76%). This is after 2 years of coronavirus which battered down both Boeing and Disney who do not pay a dividend this year. But that will change in the years ahead.
Dividend stocks are the ones that actually increase in value when investors panic that their not-yet-profitable growth stocks and getting slammed and need to flight to safety. They move money to these safe havens where you will already be
Find Free Money with Covered (Out-of-the Money) Calls
Trading options is very risky and have no place in a retirement portfolio, hear us now! But there is one exception – selling out-of-the-money covered calls. “Out-of-the-money” means that the stock today is trading less than a future “strike price” a buyer is willing to pay.
Let’s say, you own a “mature growth stock”, called XYZ, that today is trading at $100 per share. And, let’s say that you check the trading of a $110 call that matures 2 months out and a buyer is willing to pay $5 per share for that right to purchase your shares at $110. That buyer obviously feels that 2 months from now, XYZ will be trading above $115 and is willing to pay $5 per share for that right.
Even if you absolutely love your XYZ stock, you feel the odds of it piercing the $110 price within 2 months is a long shot, you should sell that call and pocket the $5 per share. Should XYZ reach or surpass the $110 a share you’ll have to sell at the $110 strike price. Not bad, you made $10 a share on the rise and you also pocketed the $5 per share call. You won!
Call buyers have a gambler’s mind set. They purchase a number of different calls knowing that most will be worthless, but there will be those one or two that bring huge returns for them. Selling to their speculation is how you can add an entirely new income stream to your portfolio without downside risk. In fact, the only risk you have is an “opportunity risk” whereby the calls you sold exceeded the strike price by a large margin and you missed a larger profit opportunity. But it’s not something you’ll ever lose sleep over.
Doubling Down
Nirvana is owning blue chip stocks that have a high dividend yield and you sell “out-of-the-money” calls against them. No matter which way the stock market moves, you’ll be far better off then betting on the vicissitudes of speculative stocks.
Now Go Forth and Multiply…
..your wealth that is. Just a couple of semi-passive tweaks can keep your nest egg growing even now that you’re retired.
Related Posts:
Flipping the Switch — When to Start Spending Your Retirement Savings — Guilt Free
Don’t Outlive your Money in Retirement
When to Start Taking Social Security Payments – It’s not When you Think