3 Steps to Beating the Retirement Income Shortage

One definition of insanity is doing the same thing over and over while expecting a different result. This is an apt description of retirement income investors who definitely want and need more dividends, but are going about it in the wrong way.

For bond investors (NYSEARCA:BOND), yields on 10-Year U.S. Treasuries (ChicagoOptions:^TNX) have slid almost 12% since the start of the year. That means less income and less cash flow is coming from your bond investments. Buy more bonds isn’t the solution.

For stock investors, the yield on the S&P 500 (NYSEARCA:VOO) is around 60% less today compared to the early 1980s. (See chart below) Buying more stocks isn’t the solution.

Let’s examine a few ways that people nearing retirement or already retired can beat the income shortage they face.

Step 1:  Tilt Toward Dividend SectorsTilting your investments toward high yielding sectors is one way for beating the retirement income shortage.

Instead of chasing sectors with the simply the highest historical yield, it’s best to focus on the sustainability of current yields.  (We list these types of sectors in our Weekly ETF Picks and Newsletter.)

Real Estate Investment Trusts or “REITs” are one example of a sector that carries a yield 50% higher than the S&P 500 index. Owning income producing assets like this is an excellent way to overcome the retirement income shortage. 

Step 2: Use Proven Income StrategiesTo those who say selling monthly covered calls is inferior to a conventional buy-and-hold strategy, here’s what the numbers say: The CBOE Buy-Write Index (ChicagoOptions:^BXM) has gained 930% versus a gain of just 573% for the S&P 500 (NYSEARCA:IVV) since June 1988. Not only are the risk-adjusted returns of the buy-write strategy better than the S&P 500, but so is the monthly cash flow. My latest investing video examines other aspects of the covered call strategy and why it delivers.

In ETFguide’s Income Mix Portfolio (available to subscribers), we use a similar strategy to the CBOE’s buy-write index, but on a diversified basket of ETFs linked to other major asset classes like gold (NYSEARCA:GLD) and real estate (NYSEARCA:VNQ). Over the past year, the Income Mix has generated a close to a 9% yield based upon a $100,000 portfolio value.

Selling covered calls is a proven strategy for generating monthly cash flow. It’s not market timing, but rather a systematic way for extrapolating income from the market.

Step 3:  Eliminate High Cost Income Mutual FundsCutting your investment costs is an immediate fix to increasing your investment portfolio’s cash flow. This is especially true with high cost dividend or income oriented mutual funds that are stealing your cash flow.

The $90 billion Franklin Income Fund (Nasdaq:FKINX) is one example of how you can trim the fat. FKINX (A-shares) charges a bloated 4.25% sales load just to get in. Furthermore, the fund’s 0.62% annual expense ratio is consuming almost 20% of its 3.55% yield.* Imagine sharing 20% of your income with somebody you never met. That’s what you do when you buy-and-hold income mutual funds with excessive fees. The obvious solution is to choose lower cost income funds that permit you to keep more of your yield.

The ETF Profit Strategy Newsletter uses technical and fundamental analysis along with market history and common sense to keep investors on the right side of the market. We cover gold along with other major asset classes like stocks, bonds, and currencies. In 2013, 70% of our weekly ETF picks were winners.

Follow us on Twittter @ ETFguide*FKINX’s 30-day yield