Retirement Income: The Average American Is in Deep Trouble (but There’s Hope)

According to the National Institute for Retirement Security, the average American has just more than $30,000 in a defined retirement account. What income would that generate and how much would you need to have an average income? Here's a small portfolio of energy master limited partnerships to illustrate the situation.

Jul 12, 2014 at 2:04PM

I hate reading news from the National Institute for Retirement Security; it's really depressing. Each report details how unprepared U.S. citizens are for their retirement. The latest report indicates the average American has $30,345 in a defined retirement account. "Woefully inadequate" doesn't begin to describe the situation.

To put all this in perspective, let's examine a theoretical portfolio with retirement income in mind, and see what $30,345 delivers. I cover the energy sector, so we'll use energy-related master limited partnerships, or MLPs, since these provide investors with varying degrees of income and risk.

Retirement Jar Forbes

Image courtesy of Bing images and "Forbes" magazine.

The portfolio
One of the biggest MLPs in the country is Enterprise Products Partners (NYSE:EPD). The company operates a variety of midstream assets for oil, natural gas, and natural gas liquids. Enterprise boasts a long history of rising distributions. Enterprise's future also looks promising, in part because its export business just received a boost from Uncle Sam. So Enterprise's distribution growth looks like it will continue. Currently, the company pays an annualized distribution of $2.84 a unit for a yield of 3.8%. Assuming its 6% growth in distributions continues, in 10 years, the distribution will be $5.09 a unit.

Energy Transfer Partners (NYSE:ETP) also operates midstream assets, as well as retail gasoline convenience stores. The company's distribution was $3.74 a unit for years. Recently, the distribution has been increased at an annual rate of 4.6%. Energy Transfer enjoys a distribution coverage ratio of 1.36, well above the 1.0 considered safe and sustainable. At current prices, the yield is 6.6%. Assuming the distribution continues growing at 4.6%, in 10 years, the distribution will be $5.86 per unit.

Lastly, we'll add higher yield but higher risk with Linn Energy (NASDAQ:LINE). This company produces oil and natural gas from mature, low-decline plays. Linn makes extensive use of hedging to protect its revenues and distributions. Last summer, a series of negative articles, particularly regarding Linn's acquisition of Berry Petroleum, dragged the stock down substantially. The distribution stayed intact, but didn't grow. Of late, the stock has slowly rebounded and, at $2.90 per unit, yields 9%. Linn is currently involved with some asset swaps, most recently with Devon Energy. No telling how these transactions will pan out over time, so let's assume no distribution growth for 10 years.

Investing the money
Given the risk of Linn getting its operational ducks in a row, for this exercise we'll invest 20% in this company. The 9% yield is great, but for retirement, we don't want to incur too much risk. The remaining 80% will be evenly split between Enterprise, for its safety and track record of distribution growth, and Energy Transfer for its higher initial yield, and newfound ability to grow its distribution. With this admittedly limited portfolio, at today's prices, $30,345 buys 156 shares of Enterprise, 210 shares of Energy Transfer, and 188 shares of Linn. To keep things simple, we'll assume no distribution reinvestment.

Retirement income
If an Average American invested his or her average retirement balance as described, the yield on the portfolio would be a respectable 5.85%. Unfortunately, it also means an initial annual income of $1775.81. In 10 years, assuming distribution growth as described, the annual income from $30,345 would be $2,572.84, for a yield of 8.48%.

But what about Social Security? According to the Social Security website, the average monthly payment is $1,237, or an annual payment of $14,844. Put both investment and Social Security income together, and you get $16,619 today, $17,416 in 10 years, plus Social Security cost-of-living adjustments. For perspective, the Department of Health and Human Services defines poverty income for 2014 at $11,600 for a single person, and $15,730 for a family of two.

Put another way, to achieve the current median U.S. household income of $53,046, with two people receiving average Social Security benefits, you would need almost $400,000 invested in these three stocks.

Warms your heart, doesn't it?

Final Foolish thoughts
To be sure, this exercise is greatly simplified, and leaves out a number of variables. However, I hope it illustrates how much money you need to save now to have a decent retirement later. The good news is that the boom in U.S. energy production offers Americans a way to reap a respectable yield from their retirement dollars. The three companies used here represent just a few of many that will likely grow both their share prices and distributions.

Do yourself a favor: Start saving now if you haven't already. Educate yourself about the stock market and the risks and rewards therein. The Motley Fool offers helpful information on its website for free. The website also offers a slew of information about individual companies. It takes time to get a handle on it, but years from now, you'll be glad you did.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Robert Zimmerman owns shares of Linn Energy, LLC. His wife owns shares of Energy Transfer Partners. Robert Zimmerman has the following options: short July 2014 $30 puts on Linn Energy, LLC. The Motley Fool recommends Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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