Is $1 million enough to retire on? You may doubt it. But here’s how to turbocharge your retirement planning. One million dollars in three mutual funds recommended by retirement income experts can lift your retirement income over $100,000 annually.
As for building a $1 million nest egg, a record number of Americans are doing just that.
An all-time high of 753,600 IRAs and 401(k) accounts overseen by Fidelity Investments burst with balances of $1 million or more as of June 30, says the giant Boston-based fund complex and brokerage.
That’s more than twice as many such accounts as just five quarters ago. It is triple the number from four years ago.
Retirement Planning That Pays Off: $1 Million Balances
As of the end of 2021’s second quarter, a record 412,000 of those accounts were 401(k)s.
The other 341,600 — also a record — were IRAs.
Retirement Planning: Is $1 Million Nest Egg Enough?
But is a $1 million balance at retirement enough? Increasingly, workers doubt it. On average, Americans tell Charles Schwab they expect they’ll need $1.9 million.
Still, will they really need that much? True, some common strategies simply won’t produce enough retirement income.
The 12-month yield from an S&P 500 index fund like SPY is an anemic 1.27%. So $1 million stuffed into SPY would have generated a modest $12,700 this past year.
An annuity? Suppose you are a 67-year-old male Californian who wants income to start now. If you plow $1 million into an immediate annuity, it will generate $4,971 a month, or $59,652 a year, for as long as you live, according to immediteanuities.com.
Pros, Cons Of An Immediate Annuity
That’s better than SPY’s yield. But it provides zero for any surviving spouse. That’s not what comprehensive retirement planning calls for.
And that annuity provides less than $92,000 a year in retirement if your annual Social Security benefit is $32,000.
That’s the benefit a worker who is 64 years old earning $136,000 preretirement would be entitled to. That’s if they wait until Social Security’s full retirement age of 66-1/2, per the Social Security Administration’s quick calculator.
How To Boost Retirement Income Above $100,000
So how can you nudge your annual retirement income from a $1 million nest egg up to at least $100,000? How can you fulfill your retirement planning obligations, retaining ownership of the investments so income flow continues to your surviving loved one?
Here are three funds currently generating yields or distribution rates of more than 7%. Today they’ll provide more than $70,000 in annual income. Combined with a $32,000 Social Security benefit, you’d be over $100,000.
Performance data is from Morningstar.com, going into Tuesday.
Investment professionals making the recommendations rank each choice as nonrisky, comparable to a 10-year Treasury; or moderately risky, like investing in an S&P 500 index fund; or very risky, comparable to a high-yield mutual fund. Using more than one fund cuts risk through diversification.
Including A Covered-Call Fund In Your Retirement Planning
For investors bullish on Nasdaq stocks, Brett Owens, chief investment strategist of contrarianoutlook.com, recommends $4.2 billion Global X Nasdaq 100 Covered Call ETF (QYLD). “The fund sells covered calls on the Nasdaq index itself to generate income,” Owens said. “It performs best when the Nasdaq rises because it captures some capital gains in addition to the covered-call income.”
With a covered call, an investor buys a stock and at the same time sells the stock’s potential price gain above a specific, agreed-to price to another investor. The sale of that potential gain provides the first investor with income.
Risk assessment by Owens: moderate. Over long periods, its “downside risk is generally less than the S&P 500, but (its) upside is also limited.”
Twelve-month yield (TTM): 11.81%. Expense ratio: 0.6%. Three-year average annual return: 8.64%. Last 12 months’ combined total projected income: $118,400.
Want Income Solutions For Your Income Puzzle?
Want to put a high-octane fund manager into your retirement planning engine? Owens recommends $1.8 billion DoubleLine Income Solutions (DSL). The closed-end fund is run by Jeffrey Gundlach. Owens calls the marquee manager the “bond god.” Owens said, “Gundlach is the best in the bond business and he has access to fixed-income deals that you and I do not. But fortunately we can buy DSL directly, and at a 4% discount to its NAV. That means we’re getting access to his great deals for just 96 cents on the dollar.”
Selling at a discount or premium to their NAV is a key factor to consider with closed-end funds. So is their tendency to use more borrowed money than regular funds.
Risk assessment by Owens: moderate. The fund manages credit risk smartly, he says. “The potential risk would come from a mega-spike in the 10-year (Treasury) yield,” he said.
Distribution rate: 7.41%. Expense ratio: 2.28%. Three-year average annual return: 6.57%. Last 12 months’ combined total projected income: $106,100.
Harnessing a ‘Durable’ Performer In Your Retirement Planning
Brian Bollinger, president of simplysafedividends.com, recommends $1.8 billion Gabelli Equity Trust (GAB), an actively managed closed-end fund that he said “has excelled at protecting investors’ capital over the long term.”
As for potential downside, Bollinger said, “A prolonged bear market could result in lower payouts given the fund’s objective to distribute 10% of its average net assets each year. But with hundreds of holdings (none greater than 3% of the portfolio), no industry exceeding 12% of the portfolio and use of only moderate leverage, the Gabelli Equity Trust appears durable over the long term.”
Risk assessment by Bollinger: moderate.
Distribution rate: 8.73%. Expense ratio: 1.48%. Three-year average annual return: 12.13%. Last 12 months’ combined total projected income: $119,300.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform the market.
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