Retirement Portfolio Income Strategies

Everyone would love to live off of their portfolio yields without ever having to touch their principle. However in today’s low yield environment other Retirement Portfolio Income Strategies are necessary.

Our goal is simple. We want to generate income to fund our retirement. Early Retirement or otherwise. It wasn’t that long ago, think pre-2008 recession that people could get a yield of 4% or more with savings accounts, CDs, and Money Market funds without risk. Bonds also paid a decent yield to fund retirement. We can wish for those days to return but that is not the case today.

That is why understanding the Pluses and Minuses of other Retirement Portfolio Income Strategies is more important than ever. Retirees need to scrap thinking about “portfolio income” and begin to think like an entrepreneur. Start thinking “portfolio cash flow”. Retirees need to shift their thinking by setting aside thoughts of living from portfolio yield. They should instead think about identifying and then selling the highly appreciated investments. This is a more defensible strategy to meet paying for their retirement lifestyle costs.

Retirement Portfolio Income Strategies – Income or Yield Only

This is the strategy of old when sufficient yields were easily and safely attainable. This strategy has our retirement funding paid for with whatever income our cash, savings or CD interest, our bond interests, and/or stock dividends the portfolio generates. We would never outlive our assets because we never have to sell any.

Pluses: We never touch our investment principle so we never outlive our portfolio. It also provides a true path to leaving an inheritance to our heirs or our favorite charities. Maybe  a retirement spending splurge at some time.

Minuses: In a couple of words: Non-predictable income. The income can vary year to year based on many factors. With the low yields of today, only those with a substantial portfolio would be able to generate enough income with this strategy. Those of us with less than a kingdom’s fortune in our portfolio means chasing after high yields to support our retirement lifestyle. That means taking on more portfolio risk. With that strategy there is higher risk of portfolio loss over the term of our retirement.

Is it still possible? Only for those willing to accept the higher risk of chasing higher yield. That and willing to gamble with their portfolio. Better first take a good hard look at your investment risk tolerance.

Retirement Portfolio Income Strategies – Annuities

Where other Retirement Portfolio Income Strategies are about receiving cash flow from our portfolio to fund our retirement lifestyle, buying an annuity is totally different. The common annuity is the basic immediate annuity. You hand over a big chunk of your portfolio to an insurance company.  They then give you income for the rest of your life. For an additional cost they will keep paying for your survivor’s life after you pass.

Pluses: Annuities give a guaranteed lifelong income stream that uses longevity-risk pooling. That means those who prematurely leave the planet leaves their money in the pool to be used by the insurer to continue paying everyone else. This is why annuities are able to boost payouts relative to investments. Annuities are attractive to people who do not have a pension and want that steady monthly check regardless of market conditions.

Minuses: People hate giving up control of their money. Once you hand it over to the Insurance Company that is providing the annuity, that money is no longer available to spend. Annuities can be complicated and carry high costs which can eat into benefits.

Special attention needs to be made about the creditworthiness of the insurance company the annuity is issued by. Annuities are guaranteed but it is limited by the State you live in. This kicks in if the annuity issuing insurance company experiences financial failure.

Another minus is the annuity’s payout amount is tied to the current interest rates. This low-interest environment means a lower monthly check relative to what would be if interest rates increase. Getting inflation protection for your payout can be costly. Without it your static monthly check’s buying power will erode over time.

Retirement Portfolio Income Strategies – Pulling Income and Rebalancing

As mentioned above, living off of portfolio income and yield means never having to sell assets. In this Retirement Portfolio Income Strategy our retirement lifestyle expenses are paid by both portfolio income and the selling.  Selling strategically selected assets through portfolio rebalancing.

It works like this: Portfolio income distributions from cash, dividend paying stocks, and bonds are used for retirement living costs. If there isn’t enough income generated then the needed funds are gained through rebalancing.

Rebalancing is done on a regular scheduled basis. This is done by periodically trimming back on those assets/asset classes that have performed the best. Meaning putting portfolio stock to bond ratios for the desired total portfolio’s asset-class exposures aligned back to planned percentage targets.

Pluses: Being able to rely on portfolio income distributions gives a baseline of generated income for retirement living costs. Portfolio income can rise when the market is struggling. Income yields will usually move in the opposite direction of asset prices. This means if it all works correctly, income will be high enough to avoid selling assets during a down market period.

Minuses: Income is being distributed and not reinvested. The portfolio’s potential overall long-term return will be less than cases where dividends are reinvested.

Retirement Portfolio Income Strategies – Reinvesting Income and Rebalancing

This is another Retirement Portfolio Income Strategy that requires strategic sales of assets to fund one’s retirement living cost. This is where all income from cash, dividend paying stocks, bonds and any capital gains are reinvested back into one’s holdings. Then money is taken from the portfolio’s investments to replenish cash positions through rebalancing as mentioned in the above strategy.

Pluses: One of the big benefits of taking a total-return view instead of using an income based strategy is this strategy is aligned with market movements and portfolio valuations. This means rebalancing by strategically and systematically selling appreciated assets. While not selling any undervalued assets. Maybe even adding to those positions to refill the retirement living cost “liquidity” bucket number 1.

Minuses: Overzealous rebalancing can cause premature asset class reduction. It can lower the portfolio’s overall return potential. This is why some recommend having two years of liquid assets in bucket one. That way there is more rebalancing discretion over the best time to do the rebalancing act of selling assets.

My Retirement Portfolio Income Strategies

As with anything else there is no one perfect rule that works for everyone. The above Retirement Portfolio Income Strategies were derived from research I have done and in my case I do a mix of the last two strategies detailed:

  • Pulling Income and Rebalancing
  • Reinvesting Income and Rebalancing

My SEPP (Substantially Equal Periodic Payments) 72t IRA sends me a monthly payment supported by investment Income strategic sales of assets through rebalancing. The cash bucket has sufficient funds to support the fund’s generated income for a year’s worth of 72t payments to me.

My non-SEPP IRAs and Roth IRAs are all using the Reinvesting Income and Rebalancing Retirement Portfolio Income Strategy to maximize their total return potential. There is no money being distributed to me at this time to fund my early retirement. When assets are sold through rebalancing, proceeds are used to add to the lower appreciated positions.

My non-retirement accounts are only used to support my retirement lifestyle cost above what my 72t payments send to me. I have two years cash and all investments in the non-retirement accounts are using the Reinvesting Income and Rebalancing strategy. Rebalancing in non-retirement accounts does cause tax related consequences when selling assets.

In Closing:

I offer this page for informational purposes only. I am not a financial planner nor adviser. Any strategy you use to fund your early retirement or traditional retirement requires careful thought and execution. If you need help you should seriously consider seeking the advice of a fiduciary Certified Financial Planner (CFP).


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