A common question that I get from potential clients
is “why do I need a Registered Investment Advisor? I can buy stocks on
my own.” Well, retirement planning is more than just buying and selling
stocks and bonds. The answer is that retirement involves not only
investment planning, but it also involves tax planning. The best way to
explain this involves one of the most popular investments for yield
today – master limited partnerships, or MLPs.
MLPs invest in energy assets. They’re similar to real estate investment
trusts (REITs), except that they carry on an active business. This has
allowed MLPs to constantly and consistently increase their payouts over
the last several years. A trend which will likely continue.
There are three types of MLPs – upstream, midstream and downstream.
Upstream involves exploring and developing oil and gas properties.
Downstream focuses on processing and refining. Midstream refers to the
companies in the middle that provide services to energy companies on
either side and charges fees for its services.
The tricky part to investing in MLPs is the way that they are taxed. An
MLP pays out the income from their businesses to its owners. Income from
a MLP is treated as a return of capital. MLP owners receive what is
called a K-1, which is a detailed tax report showing the income and
expenses of the business. Each owner is allocated a certain portion
based on the number of units they own.
Because of the income MLPs generate and the way that they are taxed,
they are great for retirement, but terrible for a retirement account.
What do I mean by this? By owning MLPs in your retirement account, you
are actually missing out on a lot of the tax breaks you can get by
owning the MLP. MLP investors not only get the income from the MLP, but
they get expenses that they can write off against all other income. This
is handy for retirees looking to limit the income they have to report to
Uncle Sam and lower their tax bill.
Most retirees fail to take taxes into consideration when planning for
retirement. The more money they have to pay Uncle Sam, the less they
have for retirement and to live on. I not only provide you with suitable
investments, but I also help devise your tax plan. After all, what good
is saving for retirement if the government is going to keep taking a
good chunk of your retirement?
Now, let’s look and see how some MLPs have done for my clients since the
start of the year. Here is how you would have fared had you put US$100k
into these MLPs on January 1.
Not including fees, you would be sitting on $117,435.49, good for over
17% return on principal. Along the way, you would have also collected a
total of $2,791.39 in distributions. You got price appreciation and
received an average yield of 5.58% on your money. This is why MLPs are
so attractive and why I recommend them for my clients.
Now, what are some of the risks going forward? One risk is that interest
rates rise. This would increase the yield on bonds and term deposits.
Investors could sell some of their MLPs and shift the money towards
What about the price of oil? The good news is that MLPs are not affected
by the price of oil or natural gas, especially the pipeline MLPs like
Kinder Morgan. Kinder Morgan gets paid to pipe oil and natural gas
regardless of their price. Kinder Morgan charges fees based on volume,
not on the price of the underlying commodity.
MLPs are great long-term investments. The increase in U.S. oil and
natural gas production will continue to drive demand for the businesses
of upstream, midstream and downstream MLPs. As long as oil and gas keeps
flowing, the MLPs will continue paying my clients and I and keep us
happy long into our retirement here in the Land of Smiles.
Don Freeman is president of Freeman Capital Management, a Registered
Investment Advisor with the US Securities Exchange Commission (SEC),
based in Phuket, Thailand. He has over 15 years experience and provides
personal financial planning and wealth management to expatriates.
Specializing in UK and US pension transfers. Call 089-970-5795 or email: