Choices for when your investment portfolio really needs to replace a paycheck

Many of my clients don’t know what they are REALLY spending. As result, they question how  they will be able to maintain their life style in retirement or, for that matter, they worry if they will be EVER be able to retire at all.

Once we do a retirement plan and answer those questions, the next step is to re-position their portfolios to generate the income they will need. Even people who are comfortable managing their own portfolios for growth, and they realize that managing a portfolio to generate income is more of a challenge.

Often, the first impulse people have is to move 100% of their portfolio to fixed income investments, and simply live off the interest. It’s a nice idea, if you have sufficient assets, but for most people, producing income isn’t enough. That’s because you also need a growth component in your portfolio to protect against the loss of purchasing power over a long period of time.  As an alternative, I prefer to design a portion of your portfolio to generate income. The following are some strategies to consider:

Annuity – I know.  I always warn you about purchasing an annuity.  If you won’t sleep unless you KNOW that you will be able to meet your fixed expenses, then maybe a fixed annuity is O.K. for a portion of your portfolio, ideally, not more than 30%.  Please talk to me or a financial planner before you make your final purchase to make sure you understand the annuity’s limitations.

Bond, or CD Ladders – Being a long-term investor in stocks can work in your favor, but when it comes to fixed-income investments, a long maturity date leaves you vulnerable to interest rate risk.  You can reduce that risk by dividing your total investment into four or pieces, each with a different maturity. This is called a “ladder,” with each “step” representing a percentage of your fixed-income investments, giving you the opportunity to use the money as the investment matures, or purchase a new investment. If interest rates are up, you can take advantage of higher paying returns. If rates are down, then the rest of your ladder is earning the higher interest.

Portfolio of High-Yield Dividend Paying Stocks –Dividend-paying stocks offer the double-advantage of giving you an income stream, while, at the same, providing the opportunity for growth. Low-cost index funds or Exchange-Traded funds are available with dividend-producing stocks only. Some even offer stocks that have increased their dividends over the years.

Like any investments, dividend-producing stocks have their ups and down, and, usually, a company that is paying dividends is a mature company, and may not equal the growth of a younger company that is re-investing their money. But the combination of more income, even with less growth, can be very attractive, and effective.

While not all the above strategies will be an option for everyone, a combination of these, and other income-generating strategies, can help you make the transition from growing a portfolio to living from your portfolio. One piece of advice that does apply to everyone is to start early.

And the best way to start? Call now for a no-cost appointment.

**Special thanks to Bob Goldman, a Sausalito financial planner, for his contributions to this ezine.