HOW I SOLVED IT
your monthly living expenses during a downturn in the market .”
Covered call strategies offer a compelling investment option for investors who want to enhance their income streams and protect their portfolios during uncertain times , Harris says . The downside is that the seller may be forced to sell if the stock reaches the agreed upon sale price , at which point they miss out on increases in the market . The covered call agreements are usually written for only a short time , which can be limited to a few months .
“ This strategy helped my client and can help other investors maintain the confidence to weather any near-term storms on the market horizon ,” he adds . The premium payments are taxed according to IRS rules for covered calls .
In this case , the client had a total net monthly income , not counting the covered call premiums , of $ 4,000 from a taxable savings account , a traditional IRA and a Roth IRA . When she came to Harris , she was not yet receiving Social Security benefits — and she still isn ’ t taking them since she hasn ’ t reached age 70 .
Her expenses include a $ 2,500 mortgage payment , $ 520 a month for health insurance , $ 990 for household expenses including utilities , and $ 3,500 for other living expenses . She budgets $ 1,000 a month for entertainment and vacations . She is only five years into a 30- year fixed mortgage .
Another part of the strategy to maximize income involves the client ’ s pension . She worked for a financial regulator before her early retirement and was eligible for a monthly pension payment of $ 1,270 a month when she reached age 65 , an amount that , even with her other income , fell short of what she thought she needed to fund her lifestyle .
In addition to using the covered call
In addition to using the covered call strategy , Harris showed her the advantage of taking the pension of $ 209,000 as a lump sum and investing it to generate more income . strategy , Harris showed her the advantage of taking the pension of $ 209,000 as a lump sum and investing it to generate more income . Some of that investment should still be available when she dies and can be used as a legacy for her daughter and grandchildren .
With the lump sum of the pension added to a $ 1.5 million portfolio she already owned , her portfolio is now generating $ 6,400 a month in income . She is withdrawing $ 4,000 a month of that money , supplemented by savings , to support herself . Harris wants to keep her income below $ 48,000 so that she is eligible for healthcare supplements through the Affordable Care Act . She also has $ 200,000 in savings to draw from for unexpected expenses , Harris says .
As part of the overall financial plan , the client is setting aside money now to create a $ 600,000 pool of future dollars for end-of-life expenses 30 years from now .
With the rise in interest rates , Harris is also having his client use multi-sector bond funds , as well as some dividendpaying stocks to generate income . The stocks in the portfolio provide liquidity by being available for sale when markets are going well “ so she won ’ t have to sell at fire-sale prices ,” he says .
As part of the overall plan , the client is holding off on filing for Social Security until she reaches age 70 so the monthly payments will be 24 % higher than they would be at her full retirement age of 67 . As it is for all Social Security beneficiaries , this increased amount is indexed for inflation to give her a guaranteed income stream that increases with the cost of living , which secures her in case she lives a long time , as many in her family do , Harris says .
“ For this client , the budget will be a little tighter until she is eligible for Medicare , but with the other sources of income , including the covered calls , and the supplements from cash savings , it is doable ,” Harris says . “ With the plan in place , she is no longer worried about her future and she can enjoy the things she wants to enjoy in retirement , including vacationing with the grandchildren .”
38 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2023 WWW . FA-MAG . COM