Co-produced with Treading Softly
Here at High Dividend Opportunities, we aim to keep our eye on the horizon, just as a Minesweeper ship should always be aware of the risks that lie just below the water.
Source: Navylive
As such, we need to warn pensioners and those planning their retirement of a major risk ahead.
Before COVID-19 hit everyone’s radar, the Social Security Administration published its short-term and long-term reports. In 2010, they raised a red flag:
Currently, the Social Security Board of Trustees’ project program is expected to increase until 2035, so taxes will be enough to pay for only 75 percent of planned benefits. This increase in costs results from an aging population, not because we are living longer, but because birth rates are dropping from three to two children per woman. Importantly, this deficit is in principle stable after 2035; tax adjustments as well as benefits that offset the lower birth rate effects can restore solvency for the Social Security program on a sustainable basis in the foreseeable future. Finally, if Treasury debtors (trust fund assets) are redeemed in the future, they will simply be replaced with public debt. When trust fund resources are depleted without reform, benefits are necessarily reduced without affecting budget deficits.
Source: SSA
Social security is designed to replace about 30% -40% of one’s prior income. However, a large proportion of pensioners are heavily dependent on Social Security income. According to another SSA report, the dependence on Social Security on retirement is enormous!
- Among parents of Social Security supervisors, 50% of married couples and 70% of unmarried persons receive 50% or more of their income from Social Security.
- Among parents of Social Security supervisors, 21% of married couples and about 45% of unmarried people rely on Social Security for 90% or more of their income.
Source: SSA Fact Sheet
What is causing the problem?
Before we dive into solutions as steps to prevent this problem, we need to take a minute to investigate why it occurs.
First, the payment of Social Security is financed through taxes. As more retirees start collecting payments, they will have to be financed from new tax money that rolls into and / or the large reserves of Social Security.
The problem that appears in the formula is that Social Security currently depends on the average birth rate of three children per household. It is important to note from the first quote above that long life days do not turn Social Security badly, but that the lower birth year is to blame.
Historically, American families had a high birth rate. This produced a large pool of workers. Now it falls among three children per family, or more importantly per woman.
The report cited above is from 2010. Birth rates have only continued to decline in the US.
The Centers for Disease Control and Prevention’s preliminary data shows significant birth and population measures reach record lows in 2019. American women, now, are now projected to have over 1.71 children over their lifetime – 1% of 2018 off and below the rate of 2.1 needed to just replace a generation.
Source: US News & World Report
Immigration also plays a role in this. Immigration has been a stumbling block on which declining birth rates have been supplemented by legal immigration. Young immigrants actually benefit from Social Security instead of being hurt. The reason for this is that they work for many years before signing benefits and cannot sign benefits until they have paid into the system for at least 10 years.
Immigration during COVID-19 has come to a standstill and birth rates have not recovered. The Social Security formula for long-term liveability is in jeopardy.
The second issue is unemployment. Social security depends on working people to pay into the system so that it can pay out to pensioners. Before COVID-19 the United States reached what was considered “full employment.” Now with the economy suffering from shutdowns and door-to-door orders, more Americans are sitting on the sidelines, many not by choice. This reduces the money that comes into Social Security and forces it to withdraw quickly from its reserves.
It is highly unlikely that Social Security will be able to maintain its full payouts until 2035. In 2010, they raised alarms. They had no idea that COVID-19 would come, that immigration would stop, and that birth rates would continue to go down.
That deadline has probably been pushed closer due to declining birth rates, lack of immigration and now lower employment rates due to COVID-19, while in 2010, when the 2035 date was set, we were in “full employment” and some higher birth rates / immigration levels.
You need to take steps to prevent a massive hit of income. SSA has stated that it should cut payouts by 25% by 2035, unless something changes. More dolls. More immigration. Higher taxes. Most likely, the first two will remain low, which means that the third will be more likely. However, Congress has historically waited until the 11th hour to pass legislation to try to solve the problem. But why? No matter how you try to solve the problem, some group of people take a hit. Increasing taxes disproportionately makes it young. Cutting back hurts pensions. Raising the minimum retirement age applies to anyone who is not retired.
So you need to take some steps on your own.
Build an income stream of your own
It’s time to hone your math skills and build an income from your own income. The average SS monthly payment is $ 1,513 every month as much as $ 18,156 annually. It is estimated that the average pension may show a 25% reduction in annual benefits, to $ 4,539.
To replace this amount of annual income, you could now purchase dividend or interest-paying securities to generate an income stream to offset this cut. How much would you be prepared to pay for all those benefits to your life? It all depends on the expected yield.
| Yield | Amount needed to save |
| 3% | $ 151,300 |
| 5% | $ 90,780 |
| 7% | $ 64,843 |
| 9% | $ 50,433 |
As you can see, investing in low-yield securities accounts for almost the full retirement savings of the average pension to offset an annual loss of $ 4,539.
The High Dividend Opportunity model portfolio delivers between 9% -10% and our Baby Bonds have an average return of 7% for conservative investors. To save $ 20,000 by 2035, a pension only needs to save $ 362 months. By factoring a 7% return over those 15 years, you only need to save $ 204 per month to reach your $ 65,000 goal.
If you can save more – $ 362 per month over the 15 years at 7% revenue, you would have more than $ 115,000 in your portfolio allowing you to deduct your revenue if you want when the Social Security cut comes.
To keep your income as safe as possible, buying baby bonds as a preference can keep your income generation as easy as possible with low effort.
Consider some of these options:
- RLJ Lodging Trust, $ 1.95 Series A cumulatively convertible preferred stock (RLJ.PA) yields 8.6% and has not missed a beat in years. Furthermore, it is not advisable and it does not become mediocre. By purchasing this preferred security, you can generate income for many years without having to adjust.
- Crestwood Equity Partners LP, 9.25% Preferred Partnership Units (CEQP.PR) yields 13.4% and gives a K-1 at tax time. This preference of partnership is similar to RLJ-A in that it is not moderate and cannot be mentioned. Although it is more volatile than RLJ-A than a baby tire, it compensates investors by offering a higher return and very friendly terms to investors. As Crestwood Equity Partners (CEQP) never misses an advance payment, the yield climbs higher. CEQP has solid coverage on their preferences and no signs that they will miss a payment.
- Sachem (SACH) offers a pair of baby tires that will mature in 2024. They are Sachem Capital Corp., 6.875% Notes delayed 12/30/2024 (SACC), en Sachem Capital Corp., 7.255% Notes due 6/30/2024 (SCCB). Both are currently trading just below PAR mar yield over 7%. These baby bands are ripe for our 15-year horizon, but will give us the revenue we want and a small boost in total dollars by maturity – and help us reach our overall goal. We would then reinvest those dollars in new opportunities.
Alternatively, you could consider purchasing a closed-ended preference fund that can give you exposure to hundreds of individual preferences and thus direct diversification. We have also recommended these to our investors. A great CEF in which I personally have a great position John Hancock Preferred Income Fund (HPI) with a generous yield of 7%.
Conclusion
The heavy cutting benefits remain closer. We strongly feel that COVID-19 has brought it closer to reality. While by 2035 it feels like a long way off, for many retirees 25% of their income could be affected and the impact will be financial difficulties.
By taking proactive steps now, you can eliminate the impact of this cut and have a stronger independent financial situation. We are always happy to help you discover new baby bands and preferences that we have in our Model Portfolio and that have been actively discussed in our chat rooms.
Today is the day to create and build a high-dividend portfolio for sustainable income.
Beware! There’s a mine ahead! Let’s dodge it together.
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Announcement: I am / we are long RLJ.PA, SCCB, HPI. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose supply is mentioned in this article.
Additional disclosure: Soft Hit, Beyond Saving, Trapping Value, PendragonY, Preferred Stock Trader, and Long Player all support employees for high dividend chances.
