Retirement Income Toolbox

March 15, 2016

How do you, or your advisor, create an effective retirement portfolio for systematic withdrawals for retirement income? We all want to withdraw the most lifetime income we can without running out money. With current interest rates so low and stock market performance so disappointing and so volatile, designing the right portfolio can be challenging.

It would be satisfying if an evidenced based portfolio existed that we all could use for modeling our income generating portfolios, but it doesn’t. Even the most carefully designed portfolios using modern portfolio theory in their construction are not predictable in their future performance. Things change, and what worked well the last five years may not do so the next five years. So whatever portfolio you land upon today, it will need monitoring, rebalancing and adjusting over time.

Based upon our long-term experience in selecting and designing income generating portfolios, here are our guidelines.

1. Take the time to consider your overall equity proportion of your portfolio in relationship to the initial withdrawal rate you are using. If you can meet expenses with a 3% initial withdrawal rate, then you may get by with a portfolio with 40% or 50% equities, but if you want 4% or more initially, your chances of your capital lasting a long time are better with 60%-65% in stocks. But there is no free lunch. If you strive for higher long term investment results and long-term portfolio sustainability by having a preponderance of equities, your day to day and year volatility increases and you may be susceptible to rude awakenings and the need to decrease your income withdrawals if indicated by eroding capital.

2. Use value oriented stocks in higher proportion than growth stocks, and especially those with long term track records to evaluate. Value stocks often pay higher dividends and sell at lower Price Earnings multiples than growth stocks. Pay attention to long term dividend histories and emphasize companies whose dividend payments have been consistent. Today dividends for long established companies are often near or above the current 10- year treasury bond interest rates.

3. Use at least four major categories of bonds; corporate, corporate high yield, foreign, and mortgage backed bonds. This will diversify the fixed income portion of your portfolio.

4. Review and, if needed, rebalance your portfolio annually. This review time is also when you can reconsider the individual holdings in your portfolio and replace any, if needed. If your portfolio has grown for the year, you may want to increase your dollars withdrawn by up to 3%. If it has decreased, then you should not take a raise for the upcoming year. If it has shrunk by more than 5%, decreasing next year’s withdrawals would be prudent.

Managing your portfolio and income withdrawals on an annual basis may be more important than your initial portfolio composition over the long haul. Paying attention matters, and is your best chance of meeting your needs while assuming acceptable risks.