Our first tool for generating retirement income is to use dividends and interest from bonds and stocks for your current use without liquidating principal. With interest rates as low as they are currently you would receive only $22,200 for $1,000,000 in a newly issued 10 year U.S. government bond as of 11-27-15 (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield) During the 10 year period you own your bond you will receive steady income based upon the yield when you first bought it, but keep in mind that if you need to sell your bond before its maturity it is likely to be worth more or less than your purchase price. If new 10 year treasuries in 2018 are paying 3.2%, no one would buy your 2.22% 2016 purchased bond for the price you paid for it.
You may be frustrated by our current low interest rate environment, but it is possible to have individual stocks and bonds that have interest or distribution rates that are higher than U.S. Government bonds. Dividends from stocks can be changed by the companies that issue them at any time, based upon corporate policy, so you cannot depend upon current distribution rates to continue indefinitely or for any set period of time. And the price of corporate stocks fluctuates from minute to minute, so there is always the risk of the value of your stock being worth less than you paid for them. An example of a U.S. blue chip stock with a high distribution rate is AT&T. As of 11/7/15, according to Nassaq, the distribution per share per quarter for “T” is $.47 per share, for an annual distribution rate of 5.58% for shares trading 11/30/15 at $33.63 per share. http://www.nasdaq.com/symbol/t/dividend-history One could assemble a portfolio of similar stocks and receive current income of more than the 2.2% from government bonds currently with the caveat that the income and the share price of your socks will change over time.
Two other categories of bonds that often make up income portfolios are corporate and high yield bonds. Like U.S. Government bonds, corporate bonds pay the same interest rate until maturity and the longer the time period, usually, the higher the interest rate. For example, AAA rated corporate bonds for 2 years are paying an average of 1.4% and for 20 years, 3.95% as of 11/30/15. http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php You can expect high yield corporate bonds to pay higher interest because they are from corporations that have lower expectations of repaying interest to bondholders than bonds with AAA ratings.
The most common ways to assemble portfolios of stocks and bonds for generating income are to do it yourself and use a discount brokerage firm to make your purchases, use a full service broker to do the research work and place the trades for you, or use a financial advisor to provide the investment selections, the placing of trades, and ongoing management of your income portfolio. A full service broker would charge commissions for such work and an investment adviser would charge an annual investment management fee, paid quarterly from your account. Commissions and advisory fees vary depending upon what services are provided and the fee and commission schedules of the brokers or advisors you might consider working with.
For comments or questions on the blog above, contact brandon.smith@lpl.com