The retirement crisis is over—forget it. All of the hand-wringing and teeth gnashing from advisors about underfunded defined-contribution plans, longer life spans, guarantees, appropriate withdrawal rates, etc.? Done, kaput, move on.
OK, maybe not quite. But Fred Taylor has "a solution to a problem that every baby boomer faces": quite a boast in this era of "new normal" volatility and one that's attracting attention.
Taylor, president and co-founder of Northstar Investment Advisors, wastes no time in getting right to it.
"We have a way for them to get income to live off in retirement," he says. "Right now, with money market yields at zero and the 10-year Treasury bond under 2%, baby boomers are being forced to look at equities as a way to get income. Our portfolios of roughly 48 stocks produce about 4% in dividend income and, more importantly, they increase their dividends on an average of almost 10% a year. People are actually getting a raise on their money, and it's a way to hedge inflation down the road."
Sure, it's a dividend play (what isn't right now?), which might not sound like anything new, but the way they employ the dividend strategy certainly is; enter the Farrell-Northstar Retirement Income Index.
Named for Charlie Farrell, the firm's CEO and index developer, it seeks to "help investors gain a better understanding of how to combine specific investments to produce income and protect principal in retirement," according to the firm. "The FNRI Index comprises securities that are designed to help investors meet the following investment objectives: current and stable income, growing income, principal protection and capital gains."
The reason for the index, Taylor says, was that "most of our clients would compare us to the S&P 500, but it wasn't a fair apple-to-apples comparison. On March 2009, the stock market was down 48% and our balanced portfolio was down 16%, so the proof is in the pudding."
To use an overwrought Colorado reference, each investor's situation is "as different as a snowflake," so does this one solution really translate to a wide swath of the generation?
"Their homes may be flat or down 20% to 30%," he counters. "No longer can you use their home as an ATM machine. Baby boomers, generally speaking, have gravitated in the last three years toward buying bonds because bonds have done very well through the crisis. But now with yields at historic lows, when we are back to the 1950s in terms of interest rates, they're not going to have enough money to live on."
For example, he notes that four or five years ago an investor could get 5% on a bond portfolio of $1 million and get $50,000 a year in income. Today, those same bond portfolio yields are 1.8% or 2%, and they're getting $20,000 a year in income with inflation of roughly 2% to 3% a year.
"So unless you want to absolutely cut your lifestyle in half, which baby boomers typically don't want to do, you have no choice but to invest in the stock market, in stocks that pay dividends," he exclaims. "And what we've done in the last three and a half years is identify companies that increase their dividends every single year and pay a meaningful dividend to start, which is roughly between 2.5% and 5%."
As for who else might be taking such an approach to retirement income, Taylor claims Northstar is totally unique in Colorado and probably in the country.
"Vanguard has a dividend growth fund, but it only yields 2%," he says. "We yield almost 4%. We also use what we call high-yield stocks, which are mostly master limited partnerships. Vanguard and these other mutual funds can't own the MLPs in their general mutual fund because of tax reasons."
Speaking of which, how tax efficient are they? Taylor says turnover in 2011 was under 10%.
"We're very focused on picking the right stocks to begin with. Most portfolio managers turn over their portfolios 100% to 200% and never collect the dividends. More importantly, you never get the increase in the dividends. So our goal is to do the work up front to identify the 48 or 50 names in the portfolio."
