Retirement; like your parents, but way cooler
In 1991 Billy and Akaisha Kaderli retired at the age
of 38. Now, into their 4th decade of this
financially independent lifestyle, they invite you
to take advantage of their wisdom and experience.
Buying an Annuity versus Equities
Billy and Akaisha Kaderli
I read an article by Mark Hulbert titled
Why retirees are better off safe than sorry.
This article was about retirement satisfaction and asked if having little money,
a reasonable amount of money or lots of money made a difference.
I have followed Mark’s writings for years and was surprised that Mark, to make
his point, was hawking annuities.
Mark explains that you could put $100,000 into an annuity and receive $501 per
month guaranteed for your lifetime. This equates to $6,012 per year or a 6%
My perspective and why
Here’s the problem that I have with this.
Inflation. As inflation is starting to heat up after years being quiet, your
$501 monthly check is going to buy you less and less over time. The erosion
of buying power will not be noticed at first but over the years it certainly
will. This is a huge negative for me.
Once you turn your money over to the annuity company, you no longer have
control of it and it is no longer part of your estate. This means you cannot
leave it to your spouse, a child, grandchild or your favorite cause. And
remember, your annuity is only as good as the company that backs it. If they
have dereliction in management or other calamities you could be getting back
pennies on the dollar.
In the example with this annuity It will take you about 16.5 years to break even
with your investment.
What if you die before that?
There are other options if you have $100K and want a 6% yield for income and
still keep control of the asset.
For instance, you could purchase any or all of these high yielding
AT&T (T) yield
Plains All American Pipeline (PAA) yield
Energy Transfer (ET),
Exxon Mobil (XOM),
Main Street Capital (MAIN) yield 6.14%
In this example, you could put $20,000 into each of the above for a 6.32% average
yield or $6,320 per year income. Also, there is potential for these equities to
increase in value as well as raise their dividends. So, in this case, you have
the possibility of being able to reinvest any amount over the 6% giving you the
opportunity to increase your holdings while still covering the $6,000 annual
However, if you are not comfortable owning three out of the five stocks in the
energy field, for more diversification, you could purchase DVY, IShares Select
Dividend ETF with a portfolio of 100 different companies and with a 3.07% yield.
The idea here is to receive the 3% dividend distributions and sell off $3,000 worth of shares
annually to make the 6% yield.
How is that done?
You invest 100K into DVY taking the quarterly dividends which amount to a 3%
yield. After one year-and-a-day (so that you meet the long-term capital gains
requirement), you sell off $3,000 worth of shares.
Year Total Return = +10.38%
In this example based on the past 10-year performance of DVY, your principal
would have grown to approximately $110,000, year one, which is a 10% total return.
You receive $3000.00 in dividend income and $3000.00 in capital gains leaving
We all know that past performance is no indication of future results, but
there are no guarantees in retirement, investments, nor annuities.
See the performance chart below.
In this example your tax liability would be lower because the shares that you
sell would be taxed at a more favorable capital gains rate. Plus, DVY has
a good history of increasing in value as well as increasing its dividend.
DVY 10-year Dividend History
Ten year Price Chart of DVY
In either of these options you maintain control of your assets with the
potential of your $100,000 increasing in value while at the same time still
giving you the income you need.
So, in Mark Hulbert’s examples, playing it safe is like a death of 1000 cuts.
Between inflation eating away at your income and the loss of the $100K asset as being part of your net worth, these are two losing
strategies. They might appear to be safe, but just as risk has a price,
so does security.
My Case for Financial Assets
Creating a Money Machine - The Effects of Compounding
Preparing Your Portfolio for Retirement? - Income is so Yesterday
How to Fail at Early Retirement
Money Never Sleeps
Retirement Issues Page
Media Interviews of Billy and Akaisha Kaderli
About the Authors
Early Lifestyle appeals to a different
kind of person – the person who prizes their
independence, values their time, and who doesn’t
want to mindlessly follow the crowd.
Retire Early Lifestyle Blog
About Billy & Akaisha