Mar 04

Investing for Retirement Income – Part 1

by Daniel Edinger

A sense of security comes from seeing a regular monthly income from your investment portfolio.  Especially when one is retired or is dependent on investment income to meet everyday expenses.

In the investment community, bonds are considered second class citizens.  Investors are told that holding bond funds is done primarily to reduce the overall portfolio risk of owning stock funds. (You never hear it put the other way—stocks are owned to add some spice to your bond portfolio).   At parties, who ever talks about the bond market?

The following are questions I will opine about in future articles:

Is focusing on income different than investing based on asset allocation?

Does an increase in the equity portion of your investment portfolio equate to income from the fixed income portion?

What is the best way to think of stock dividends?

Other than age, when should you be 80 percent or more invested in fixed income securities?

With everyone predicting inflation around the corner, how can you be comfortable with a sizable proportion of your investment portfolio in bonds?

Why don’t more people invest more in bond funds?

What is an appropriate bond fund strategy?

When does investing in a high yield bond fund make sense?  And does this answer change if you substitute the term “junk bond fund”?

Investor inquiry—“I don’t really care about asset allocation; I just want my one million dollar portfolio to produce $4,000 of income every month.”

 

Well, why not construct a portfolio that mimics an annuity, without the costs and fees.  And returns the principal to the investor.  And earns a 5 percent return in today’s interest rate environment.  Can this be done within an acceptable risk profile?

My model portfolio could look like this:

  1. $700,000 in a high yield fund at 6.1% produces $3500 per month.
  2. $200,000 in a total bond market fund at 2.7% produces $450 per month.
  3. $100,000 in a total stock market fund with a 1.3% dividend yield produces $100 per month.

This results in a 90/10 bond/equity mix.  The bond funds each have duration of 5.0.  Most importantly, the investor can depend on a predictable monthly income stream.

Are the risks unacceptable?  Inflation would seem to be the most significant risk with a one percent increase in rates reducing the portfolio by $45,000.  Default risk is always an issue with high yield funds.

But for some investors the tradeoffs might seem acceptable.  I would argue that this is a preferable approach than to purchase an annuity producing this amount of monthly income.  This is primarily because an annuity carries such heavy fees.  I just recently talked with a neighbor who paid a 5 percent upfront fee to purchase an annuity from a well known insurance company.  Seems like a high price to pay.

By Dan Edinger

You Might Also Like

Other articles filed under Retirement

Investment Committee Thoughts from Friday 4/27/18

May 8, 2018
Last week, we introduced you to our weekly Investment Committee meetings. When we met for class on 4/27/18, we began our discussion on the subject of an "optimal portfolio." The centerpiece of investment management is portfolio construction. Alongside financial planning,...
Continue Reading

Investment Committee Thoughts from Friday 4/20/18

May 4, 2018
Introduction People from all across the world look forward to Friday.  Friday marks the end of a (usually long) work week and the start of what is supposed to be a relaxing weekend.  At Rockbridge, we look forward to Friday’s,...
Continue Reading

Market Commentary – April 2018

April 23, 2018
Stock Markets Returns from various stock market indices over several periods ending March 31, 2018 are shown to the right. Here are a few highlights: While not observed in these graphs, volatility seems to have come back, which is normally...
Continue Reading

Tax Scams: What to Look For and How to Avoid Them

April 19, 2018
As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and...
Continue Reading

The Value of a Financial Plan

April 17, 2018
It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter