Where Boomers Should be Putting their Money Now

Over the last 40 years most baby boomers have worked hard, saved and invested for their retirement. But then in 2008 the financial crisis hit and wiped out many of their nest eggs—forcing many to reconsider their after-work plans and stay in the labor market longer.

There is no denying that America’s population is graying. Statistics show that by 2030, the number of Americans older than 65 will have expanded 75% to 69 million, making 20% of the population older than 65. With that in mind, there is growing concern on what will happen when the nearly 80 million baby boomers retire and liquidate their assets. The Federal Reserve recently cautioned that this act could sink the stock market over the next few decades. So where should boomers be putting their money right now?

I had a chance to speak with James Poe, chairman and founder of Texas Retirement Specialists to discuss the tough environment boomers are facing when it comes to saving for retirement and how to protect our nest eggs. Here is what he had to say:

Boomer: Where is the best place for baby boomers to put their money right now?

Poe: First, we would avoid the most obvious recommendations that are likely to come out of your local wire-house broker, which would be some combination of stocks and bonds, with the primary decision being what ratio to use, such as 60/40 or 50/50, or any other ratio--none of that will work for investors right now.

Bond interest rates have been depressed for several years, with the Fed promising to hold them at record lows past 2015. If you agree with the axiom that "when interest rates rise bond prices fall" be very careful with bonds. The downside space for interest rates is being squeezed to zero--rates have no where to go but up. When rates start to rise, bond prices will start to fall, with a very ugly result for bond owners. The longer the term of the bonds, the more dramatic the price drop.

Stocks are peaking at this time. We do not see the fundamental support for a stock market rally in an economy with protracted high unemployment rates and a zombie residential real estate market. We believe that our country is in a secular bear market that has 10 or more years left to run. Within past secular bear markets, there have been rallies and crashes for as long as 25 years, with the overall market going almost nowhere. These are described as "sideways" markets. But there is a lot of motion (volatility) within the market, and most individual investors do not know how to make money in such a market.

Here are Poe’s five best places for boomers to invest now:

1. Business Development Companies (BDCs). BDCs make secured loans to mid-cap companies. Mid cap companies have traditionally turned to banks and the bond markets for their liquidity needs. Traditional bank lending to companies has become very difficult. Bond market rates are being artificially depressed by the Fed, making it very difficult for companies without a ‘AAA’ credit to successfully complete a bond offering. Enter the BDCs, who raise money from investors to lend to mid cap companies. The best BDCs make loans secured by hard assets that can be liquidated in the event of default. The best BDCs have very few defaults and when they do experience a default, they often collect 90%+ of their loan through the sale of the security. BDCs also often receive stock warrants and options and can make money from mergers and acquisitions involving their borrower companies. Dividends of 8% are available, with total returns above 10% over a five year period.

2. Covered call option writers. Closed End Funds sell call options on stocks they own, and there are several well-known names in this business. We like the model of selling the next month's call and collecting the option fee. Each month the fund sells the next month's call for 12 sales per year. Most options expire worthless, so the seller keeps the premium and sells the next call. When the buyer of the option is successful, the fund buys more shares of the company that got called away, or a different company, and sells the near month call again. If you search for these companies you will find current returns above 10% per year. Be sure to do your homework taking a keen eye at the historical performance of funds and the consistency of their distributions over time

3. Commercial, non-traded Real Estate Investment Trusts (REITs). We like REITs that own offices that will remain full regardless of the direction of stock and bond markets in the near future. We see two of those categories as being medical offices and computer server centers. As the boomer generation ages their need for medical attention will increase and the health-care industry will grow and need more clinic and lab space. You can likely ride this trend for 10 years.

The second big user of space is the ever expanding "cloud" of data storage. The cloud is actually a very large warehouse with huge air conditioners and a stand-by generator, filled with row after row of computer servers. There is currently more demand for this type of space than supply and both occupancy and rents are high. We prefer the non-traded version of these REITs as there is little or no price movement over time. The typical price movement is up, as landlords are able to increase rents due to contractual rent increases. Returns of 8% annually are currently available.

4. Collateralized Mortgage Obligations. These are typically organized as a closed end fund or REIT. The firms buy pools of performing mortgages; these are long-term mortgages that were made several years ago to homeowners with good credit. The homeowners have been paying their mortgage for years, and the lender has seen their consistency of payments. The firms we like purchase these mortgages and collect the payments. The returns are not affected by short- term changes in market interest rates.

One problem that has historically plagued these types of funds has been that when interest rates were low, homeowners would refinance in droves. Interest rates are low right now, but homeowners are confronting a zombie banking system where you can't refinance because the perceived value of your home is likely to be too low. The funds who buy these mortgages use leverage to increase their returns, so be aware of that. But the returns can be above 10% and many of these funds have been in the business for many years.

5. Commercial property REITs that buy distressed properties. This REIT manager is searching for good properties in good locations that have been poorly managed. One sign of this type of property is an office building that is half full, right next to a twin that is fully occupied. The half-full property is likely being mis-managed and if that proves to be the case after extensive due diligence, this REIT will purchase the building, often from the current lender, at a deep discount to the appraised value.

The yield from operations will often approach 10%, allowing the purchaser to pay a dividend to the investor of 7% or more. The purchaser then makes any needed improvements and enters a campaign to rent the building. As the building occupancy rises, the gross rents increase and dividends to the investor can increase. At the same time, the value of the property is increasing with the increased occupancy. As a result, the REIT manager is likely to sell the building for a substantial gain, which is distributed to the investors.

All investments have some associated risk. The potential investor will want to read all of the offering documents and do their own due diligence, asking any questions they have in order to satisfy themselves that this is a good investment for them.