Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
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

Market Commentary – October 2018

October 22, 2018
Stock Markets For the last quarter, stocks are up except for Emerging Markets, which were close to flat. Domestic stocks are seemingly shrugging off the uncertainties of increasing interest rates, trade wars and tariffs. Year to date, an Emerging Market...
Continue Reading

Is Your Cash Earning Interest?

October 16, 2018
Interest rates are rising, and yet you may not be earning much on your cash.  As financial markets finally begin to reflect a recovery from the crisis of 2008-09, the brokerage industry is changing the way they handle customers’ cash,...
Continue Reading

Understanding Bond Returns

October 12, 2018
We had several clients this year reach out to ask how bonds were performing in their portfolios. These are great questions, so we created a few items to address what you see in your statements.  Some people notice they have...
Continue Reading

New Tax Law Makes Bundling Gifts to Donor-Advised Funds Attractive

October 9, 2018
“Give, but give until it hurts.” - Mother Teresa -    I don’t think Mother Teresa paid much attention to the tax code, but her quote is unusually prescient for 2018 taxpayers.  The changes have made it unlikely to get...
Continue Reading

What to Ask Your Financial Advisor

September 20, 2018
How does/and how much does your advisor get paid? Fees matter.  It is important to know how much you are paying and the value you receive for that payment.  If you're paying 1% or more for only investment management with no...
Continue Reading

‹ Back to Blog Home

getting started is simple

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