This Investment Change Could Save Your Retirement

If you’re of modest means and are hoping to retire overseas, you might want to make some changes to your investments…

I recently consulted with a lady who got a bit of a late start on her career and has only managed to accumulate a limited pension. She’s interested in getting a passive income visa in a couple of different countries, but the ones she really wants are just a little bit above what she brings in every month.

I went through her financial holdings with her. It turns out that she has a particular sort of pension that allows her to take a fixed amount every month, which she can determine. The problem was that it’s not clear how much of that is coming from profits from the investments in the pension, and how much is actually coming from the underlying capital. If the capital’s being run down, she’ll eventually run out of money. Based on my calculations, it seemed likely that that's what was happening.

So I ran through some scenarios with her. I showed her how much income she could generate annually and monthly from her pension if it was invested in dividend-paying stocks and funds. It turned out that if she spread her money across a particular set of investments, she could generate more monthly income than she’s currently taking and not touch her underlying capital at all. That would allow her to qualify for the visa she wants.

I suspect there are quite a few people out there who are in a similar position. Particularly in the United States, people with small pensions tend to take whatever advice they’re given from company benefits managers and the finance companies they work with. But that advice is rarely suitable for people who are trying to hit a target monthly income.

Most pension portfolios are invested in stocks with a variety of potential growth rates. The one thing they have in common is the expectation that the bulk of your returns will come from appreciation in the value of the stock itself. When you need money in retirement, you liquidate some of those stocks and have it paid out to you.

The problem is that if you don’t have very much invested to begin with, eventually you’re going to run out of pension altogether. And if the stock market takes a turn for the worse—as I strongly suspect it’s going to do in the US soon—that could happen sooner than you think.

One solution is to liquidate your stock holdings and reinvest the proceeds in instruments that pay dividends. Now, many stocks and exchanged funds pay dividends, but they are rarely more than 1% or 2% per annum. Some companies pay higher dividends, however, and they tend to be stable businesses that don't suffer too much during recessions. That means their stock price doesn't fall very much, especially when compared to more speculative stocks that people seem to like these days.

The other option, one that I use myself, is to invest in closed end funds (CEFs). CEFs trade like stocks but are structured so that they can pay much higher dividends than individual company tickers. At one point I was getting 14.5% annual yield on the CEFs in my portfolio. To put that into perspective, if you invested $350,000 of pension money in CEFs and other investments that could generate that kind of yield, you’d bring in almost $51,000 a year, more than $4,000 a month. That’s enough to qualify for a pension-based visa nearly anywhere in the world.

So if you’re worried that you don’t have enough in the kitty to qualify for a visa abroad, talk to a financial adviser about potentially converting your investments into dividend payers. You won’t always get sort of high yields I’ve experienced in the past, but you should be able to generate enough to get a retirement visa abroad… Without having to rundown your pension to zero.