Your investments: Look outside the US for retirement income

‘Seventy-two percent of people say their overall investment knowledge is ‘weak.’ Similarly, 89% say their current investment approach is on track to provide them with a steady income in retirement,” according to the Natixis Asset Management 2013 Global Investment Survey.

“Well, I think we tried very hard not to be overconfident, because when you get overconfident, that’s when something snaps up and bites you,” Neil Armstrong said.

The recent Natixis survey showed growing investor confidence in the future and a sentiment that their financial situation has shown improvement over the last year. It also showed that while investors were honest in their lack of knowledge, they may well be fooling themselves regarding their retirement prospects. While they acknowledge that they have little investment knowledge, they maintain that their current investing methods will be more than enough to provide the income needed for retirement.

Why this disconnect? If I had to hazard a guess, I’d blame the mainstream financial media. The incessant call for investors to manage their own money – and then follow a few basic steps to ensure financial success – has left investors realizing they know little but have confidence that they will be fine in the long run.

Unfortunately there is a lot more involved in retirement planning than buying a few stocks and holding them forever.

Investors need to understand that what may be appropriate for their neighbor has no relevance to them. Just ask someone currently trying to navigate their retirement. In today’s near-zero interest-rate environment, retirees have been scrambling to find ways to generate income. If it was just about buying and holding some stocks, retirees wouldn’t be so stressed.

How to plan?

To figure out how much money you will need for retirement, you need to understand your current expenses. Sit with a pen and paper and start figuring out how much money you spend each month, as well as annual, one-time expenses. Once you have a handle on how much money you need to live off of each month, you can get a good estimate of how much money you will need to retire. The general rule in financial-planning circles is that you need 80% of your current income to meet your expenses at retirement.

As readers of my column already know, I am skeptical of this “general rule.” From my experience with clients, expenses actually increase during retirement. Retirees tend to travel, eat out at restaurants and spend on leisure at much higher rates than when they were working. This means you should shoot for retirement income similar to or even a bit higher than what you were making while working.

Enhanced income International stocks?

For many investors just the words “international stocks” raise a red flag. After all, many investors tend to have a “home bias” when it comes to investing, meaning that they want to invest in things they are familiar with. Not many investors, let alone retirees, are in the know about semiconductor companies in Taiwan or utilities in Peru.

Why go global? Because that’s where the economic growth is. While the US muddles around with virtually no growth, there are places in the world that are growing at a decent clip. According to the Conference Board’s global economic outlook, it appears that either next year or by 2015 the predicted share of global GDP attributable to advanced economies will dip below 50% for the first time, compared with 64% in 1996 and 54% in 2008.

According to most economic forecasts the future is in Asia and Brazil, not France and Spain.

More income

According to an article from the MarketWatch website: “In 2008, dividends paid out by companies in emerging markets were less than half of those distributed by US firms and around a third of what European corporations doled out.

Midway through 2011 the dividend stream looked markedly different, with Asian firms’ dividend disbursements rising to $175 billion, compared to about $254 billion from the US and $361 billion from Europe, according to figures from WisdomTree and Standard & Poor’s. In the 12 months through May 31, dividends paid by emerging market firms rose 54.6% from the previous year, compared to a 26.4% increase among European companies and 12.6% in the US.”

This trend has continued into 2013 as well.

A great example of this is the WisdomTree International SmallCap Dividend Fund. It sports a dividend of around 4.5%. Compare that to the iShares S&P SmallCap 600 Fund, with a 1.3% dividend yield. This comparison holds true consistently as US companies pay far lower dividends than their international counterparts.

Speak to your financial adviser to see if you can enhance retirement income by incorporating foreign stocks into your portfolio.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.