From Mark Ford, editor, Creating Wealth: My mother-in-law—whom I officially adore—is not interested at all in finance. She retired about 20 years ago. When she did, she had a nest egg of about $750,000. It sat—I don’t know where—for 10 years, until her hairdresser gave her a suggestion.
What was it? To put that money in the care of her hairdresser’s son, a “nice young man” who had just become a broker.
Despite my gentle warnings, she was reluctant to move it to a broker of my recommendation because—I’m not making this up—she didn’t want to hurt her hairdresser’s feelings.
The market went up and the market went down. After 10 years, I figured this broker had grown my mother-in-law’s account by $50,000 or so with all of his hard work.
Instead, her account had shrunk to $700,000… a loss of $50,000.
Recently, the broker moved on to another company. This gave me the opportunity I needed.
I persuaded her to move her account to another broker. One I could monitor. And one over whom I could have some influence. We moved it to my broker at Raymond James. Then my broker, Dominick, gave me a breakdown of what had been going on.
I will spare you the details, but, as I’m sure you can guess, her portfolio was anything but good. Among other things, she was in bond funds and international stocks. An agent also sold her an annuity—at nearly 80 years of age.
If you know anything about risk, you can understand how happy I was to be able to reposition her assets.
I had a very good idea about what I thought she should do, but I asked Dominick for his thoughts. (It’s always good to ask your broker questions from time to time to see where his ethical tendencies reside.)
He very correctly asked me first about what her needs were. I told him: “She doesn’t need the income. She simply wants to be sure that her account doesn’t go down in value.”
So he recommended putting half of her money in high-quality municipal bonds and the rest in Legacy stocks.
I was once again reassured of the solidity of Dominick’s thinking.
(One day, I’ll tell you in some detail why I was good with his decision on the municipal bonds. The short answer is that if you are happy with 2-2.5%, you can buy good, safe, quality municipal bonds.)
Today, I want to tell you why I was happy with Dominick’s suggestion that we put the other half of my mother-in-law’s nest egg into our Legacy Portfolio.
You see, we have received dozens of letters from subscribers asking us if the Legacy Portfolio makes sense for people in their 60s and 70s, and older.
The main concern I see is that readers don’t think they have enough time left to take advantage of compounding.
It’s a valid concern. But if you are younger than 60, Legacy stocks are definitely for you. I’ll show you why in a minute. And if you are older than that, I’m going to give you two good reasons why you should consider adding Legacy stocks to your portfolio today.
How the Legacy Portfolio Started
Let me begin by reminding you of what I mean by Legacy stocks.
Legacy stocks are the strongest, safest companies in the world. These companies dominate their industries. They’re consistently profitable, which means they generate tons of cash. That cash finds its way back to investors through rising dividends and stock buybacks.
And because we’re certain these companies will be around for 20, 30, and 40 years and beyond, we never sell them.
But Legacy stocks, like all stocks, are subject to short-term market fluctuations. So, we buy more shares of our Legacy stocks when markets dip. I covered this in the April 20 Daily.
When Tom and I launched the Palm Beach Research Group, I knew that I wanted to offer a “Legacy” investment opportunity. The criteria were what I just mentioned—only the finest, most profitable, safest companies in the world. Stocks we could hold forever.
After deciding on the criteria, I went to Tom and asked him to construct a portfolio. I told him it should consist only of companies that met these strict standards.
I even put my money where my mouth was. I set aside $250,000 to invest in the 10 stocks that Tom promised to research and select for me.
Since then, I’ve watched how they performed. Now, having learned more about their value and safety, I have increased that commitment to $2.5 million.
The point is this: I think the Legacy Portfolio is one of the most important publications we publish. I believe in its power to compound your wealth.
In fact, I think it’s such a vital part of a balanced portfolio that I’ve encouraged two of my sons to put their investment accounts into Legacy stocks. I’m working hard to convince the third.
If you are young and saving for retirement, the Legacy Portfolio should be at the top of your allocation list.
But back to the point of this essay… What if you aren’t young? What if you want to retire soon or are already retired?
You’re Going to Live Longer Than You Think
If you are a 60-year-old female in good health, according to the American Academy of Actuaries, your life expectancy is 27 years (updated 2013).
In other words, statistically, you won’t pass away until you turn 87.
If you are 70, your life expectancy is 20 years.
And even if you are 80, as my mother-in-law soon will be, your life expectancy is still 13 years.
If my mother-in-law earns 8.5% annually on her Legacy stocks (what we’re projecting they’ll grow at), she’d turn $350,000 into $1,010,775 in the 13 years she has left to live.
If, when she was 70, she had put $350,000 in our Legacy Portfolio, she’d have turned that into $1,789,216 in 20 years.
Now, as I said, my mother-in-law retired 20 years ago (when she was 60). Consider this: What if she hadn’t invested her $750,000 nest egg with her hairdresser’s son? What if, instead, she had invested just $350,000 of that money in our Legacy Portfolio?
At age 60, she’d have 27 years left to live. Her $350,000 Legacy Portfolio would be worth $3,167,167 when she turned 87.
The numbers speak for themselves. I hope this clears up the longevity objection many of our older readers have.
And with the way health science is progressing, who knows? You could have considerably more time to hang around than that.
But there is another, more important reason I pushed my mother-in-law to allocate half of her money to the Legacy Portfolio… increasing retirement income.
A Final Thought… Growing Retirement Income
Right now, my mother-in-law is fine with the income she gets from Social Security and her pension. She’s not even using the income from her $750,000 nest egg.
But if she wanted to, she could take that $750,000 and disperse it among our 10 Legacy stocks. Right now, they yield an average of 2.5%. That would give her an extra $18,750 in income per year.
Now, our Legacy stocks all increase their dividends… between 6-15% each year. And they’ve done so relentlessly for decades. Assuming, as a group, they continue to raise dividends 8.5% annually, her annual income will grow by the same rate.
She’d earn $20,343 in her second year, $22,050 in her third year. In 10 years, she’d grow the income from her Legacy stocks to $42,375.
Here’s one last statistic to blow your mind.
If she really didn’t want the extra income, she could reinvest the dividend income to buy more shares in our Legacy stocks.
Our Legacy stocks would continue raising dividends at 8.5% each year. And the share prices would more or less follow along, increasing 8.5% each year, too.
From now until when the actuarial tables expect her to pass away (13 years from now), she’d grow her $750,000 into $2,985,785!
And she could pass the Legacy stocks on to her grandchildren to continue the compounding process.
Because of their ability to grow their dividends, Legacy stocks really are the best stocks to own when you are in your golden years. That could be if you want to increase your income or if you want to pass down a “legacy” to your children or grandchildren.
If you think you’re too old to benefit from compounding your money with our Legacy Portfolio, think again. It should be the first thing you consider as the backbone of your asset allocation plan.