Making It Work Because You Have To

First up, the FT hopped on the covered call ETFs won't protect you in a downturn bandwagon. I don't think the reasoning was any different than what we talk about here but there was one quote by Ronald Lagnado from Universa to quibble with. He said "that over the long term, their performance was little different from a classic 60/40 portfolio of stocks and Treasury bonds." No.

Since Lagnado specifically said Treasury bonds, I used IEF. The compounded growth rate is noticeably lower for the two covered call proxies but with a higher standard deviation. When I first read that quote, I thought, no, I don't think that's right, is it? No it's not. When someone says something that surprises you or intuitively seems incorrect, double check the work. A covered call fund as a replacement for 60/40 fund would be interesting, I just don't think it's correct. I'm not saying there's no role for covered call funds, but a core replacement for 60/40 is not one of them. 

One recurring idea here has been that people who retire undersaved make it work because they have to. I've seen this time and again and wanted to share another anecdote of someone who is 72 and widowed with about $200,000 put away. They've been retired, widowed and taking monthly $1000 withdrawals for about four years. They haven't lost much ground despite that 6% withdrawal rate. They live on Social Security, the $1000, I'm not sure about a pension but there might be one and there is a modest emergency fund. There is no mortgage, no car payment and Medicare Part B is $174.

If there is no growth in their pot of money, seems unlikely, then they have about 200 months of $1000 withdrawals left which gets them to 88. Keeping the monthly amount at $1000 is a big if of course. And if you assume a little growth, maybe they make it into their early 90's before depleting what they have. At that point or earlier, their house is a potential source of liquidity.

There is nothing about this person's scenario that is optimal. There's plenty that could go wrong but there is a path to this working out ok, they are doing what they need to do to have the best chance at it working out. If you are reading this blog, you're probably not facing this sort of situation but you definitely know people who are and maybe can help them figure out a glass half full scenario that they could make work. 

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