Congratulations! Over the years…
- you’ve managed your spending,
- you’ve saved consistently,
- and invested successfully so that you have accumulated a retirement nest egg.
All you need now is a portfolio with a focus on distributions rather than accumulation. The trick is how to change a portfolio from growing principal to protecting principal and generating income. Some traditional approaches have been to fill the portfolio with stocks that pay dividends, or to create a cash position for the next 12 months, and then create a bond ladder for the remainder. If you’re not comfortable in doing the necessary research to select individual stocks and bonds to move from the accumulation to distribution phase, you will have some questions you need to answer:
- what the asset allocation should look like,
- how much you can take out each year,
- whether it’s principal or income,
- and which holdings to sell in order to do so?
I can help you with all the above questions. Right now I can tell you that I will want to include some equities for growth to give your portfolio longevity, and Treasury Inflation-Protected Securities (TIPS) to provide income that fluctuates with inflation. Another tool that I may consider is managed payout funds. These funds are very much like asset allocation funds, in that the funds’ portfolio manager chooses between a variety of asset types i.e. stocks, bonds, and cash. The difference is that these funds are managed to maximize distributions rather than accumulate holdings. This is accomplished in the following ways:
- They can be the aggregate of multiple funds.
- There is a tendency to increase the distribution return the closer the target dates.
- Neither the distribution nor principal is guaranteed; however some funds will be more likely match the objective distribution by using principal than other funds who will not use distribute any principal.
Income replacement funds are meant to be the core strategy for a given goal. So since they are the aggregate of multiple funds, you can upset your asset allocation if you use them as a holding in your portfolio rather than as the principal asset in the portfolio. They should be evaluated as you would a mutual fund with the caution that cost to purchase may make it cost prohibitive to dollar cost average.
Regardless if this approach appeals to you or not, I am available to develop a total strategy that considers your tax planning, your risk tolerance the degree to which you are adequately funded for retirement. Please call me to set up a complimentary introductory meeting.