Managing the Retirement Income Portfolio: The Plan

The reason people take the risks of investing in the first place is the prospect of a higher “realized” return than is achievable in a risk-free environment…ie, an FDIC-insured bank account with compound interest.

  • For the past decade, such risk-free saving has been unable to compete with riskier mediums due to artificially low interest rates, pushing traditional “savers” into the mutual fund and ETF market.

  • (Funds and ETFs have become the “new” stock market, a place where individual stock prices have become invisible, questions about company fundamentals are met with blank stares, and media speakers tell us that individuals are no longer public).

Risk comes in a variety of forms, but the main concern of the average income investor is “financial” and, if investing without the right mindset for income, “market” risk.

  • Financial risk affects the ability of companies, government agencies and even individuals to meet their financial obligations.

  • Market risk refers to the absolute certainty that all marketable securities will be subject to fluctuations in market value…sometimes more than others, but this “reality” needs to be planned for and dealt with, never feared.

  • Question: Is it demand for individual stocks that is driving fund and ETF prices higher, or vice versa?

We can minimize financial risk by only selecting high quality (investment grade) securities, by properly diversifying and by understanding that changes in market value are actually “harmless earnings”. By having an action plan for dealing with “market risk,” we can actually turn it into an investment opportunity.

  • What are banks doing to get the amount of interest they guarantee depositors? You invest in securities that pay a fixed rate of interest regardless of changes in market value.

You don’t have to be a professional investment manager to professionally manage your investment portfolio. But you need to have a long-term plan and know about asset allocation…an often abused and misunderstood portfolio planning/organization tool.

  • For example, annual portfolio “rebalancing” is a symptom of dysfunctional asset allocation. Asset allocation must control every investment decision throughout the year, regardless of changes in market value.

It’s also important to realize that you don’t need hi-tech computer programs, economic scenario simulators, inflation estimators, or stock market forecasts to properly set up for your retirement income goal.

What you need is common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The “KISS principle” should be the basis of your investment plan; Bonding gives the epoxy that keeps the structure safe and secure throughout the development period.

Additionally, the emphasis on “working capital” (as opposed to market value) helps you with all four basic portfolio management processes. (Business majors, remember PLOC?) Finally a chance to apply something you learned in college!

planning for retirement

The retirement income portfolio (almost all investment portfolios eventually become retirement portfolios) is the financial hero that appears just in time to bridge the income gap between what you need for retirement and the guaranteed payments you get from uncle and/or the past. to close employers.

However, how potent the superhero’s power is does not depend on the size of the market value number; From a retirement perspective, it is income earned in costume that protects us from financial villains. Which of these heroes should fill up your wallet?

  • A million dollar VTINX portfolio that produces approximately $19,200 in spending funds annually.

  • A well-diversified, high-yield $1 million CEF portfolio that generates more than $70,000 annually…even with the same stock allocation as the Vanguard fund (close to 30%).

  • A million dollar portfolio of GOOG, NFLX and FB that produces no pocket money at all.

I’ve heard that a 4% withdrawal from a retirement income portfolio is about normal, but what if that’s not enough to fill your “income gap” and/or more than the amount produced by the portfolio. If those two “what ifs” turn out to be true…well, it’s not a pretty picture.

And it gets uglier pretty quickly when you look into your actual 401k, IRA, TIAA CREF, ROTH, etc. portfolio and realize that it’s not producing anywhere near 4% of actual income to be spent. total return, yes. Realized disposable income, fear not.

  • Certainly the market value of your portfolio has “grown” over the past decade, but it’s likely that no effort has been made to increase the annual income it produces. The financial markets thrive on market value analysis, and as long as the market is going up every year, we’re told everything is fine.

  • So what if your “income gap” is more than 4% of your portfolio? What if your portfolio produces less than 2% like the Vanguard Retirement Income Fund? or what if the market stops growing at more than 4% per year…while you’re still depleting capital at 5%, 6% or even 7%???

The less popular (only available in individual portfolios) closed-end income fund approach has been around for decades and covers all the “what-if” approaches. Combined with Investment Grade Value (IGVS) stocks, they have the unique ability to take advantage of market value swings in both directions and grow portfolio returns with each monthly reinvestment process.

  • Monthly reinvestment should never become a DRIP (dividend reinvestment plan) approach. Monthly earnings must be pooled for selective reinvestment where the most “bang for the buck” can be made. The aim is to reduce the cost basis per share and increase the return on the position … with the click of a button.

A pension program that is only aimed at increasing market value is doomed to fail from the outset, even at IGVS. All portfolio plans require an income-based asset allocation of at least 30%, often more but never less. All individual securities purchase decisions must support the operational asset allocation plan “growth purpose vs. income purpose”.

  • The Working Capital Model is a 40+ year proven autopilot asset allocation system that, when used correctly, pretty much guarantees annual income growth with at least 40% of income earmarked.

The bullet points below apply to the asset allocation plan with individual taxable and tax-deferred portfolios… not 401k plans as they typically cannot generate a decent income. Such plans should be reassigned to maximum security within six years of retirement and transferred to a personally managed IRA as soon as possible.

  • “Income” asset allocation starts at 30% of working capital, regardless of portfolio size, investor age, or amount of cash available for investment.

  • Startup portfolios (under $30,000) should have no equity component and no more than 50% until six figures are reached. From $100,000 (until age 45) only 30% of income is acceptable but not particularly income productive.

  • Switch to 40% income purpose at age 45 or $250,000; 50% aged 50; 60% at age 55 and 70% income purpose securities at age 65 or retired, whichever comes first.

  • The income side of the portfolio should remain as fully invested as possible and all asset allocation decisions must be based on working capital (ie based on portfolio costs); Cash is considered part of equity or a “growth purpose” allocation

  • Equity investments are limited to equity CEFs with 7 years experience and/or “investment grade value stocks” (as defined in the Brainwashing book).

Even if you are young, there is a strong need to quit smoking and develop a growing source of income. If you continue to let income grow, market value growth (which you’re supposed to worship) will take care of itself. Remember that higher market value may increase hat size, but it doesn’t pay the bills.

So that’s the plan. Determine your retirement income needs; Start your investing program with an income focus; add stocks as you age and your portfolio becomes more important; If retirement is looming or portfolio size is getting serious, you should also be serious about your income purpose allocation.

Don’t worry about inflation, the markets or the economy…your asset allocation will move you in the right direction while focusing on growing your income every year.

  • This is the crux of the whole Retirement Income Readiness scenario. Every dollar added to (or earned by) the portfolio is reallocated according to the “working capital” asset allocation. When income allocation is above 40%, you’ll see income magically increase each quarter…regardless of what’s going on in the financial markets.

  • Note that all IGVS pay dividends which are also split according to asset allocation.

If you reach retirement age within ten years, a growing stream of income is what you want to see. Applying the same approach to your IRAs (including the 401k rollover) will generate enough income to pay the RMD (required mandatory distribution) and enable you to unreservedly say:

Neither a stock market correction nor rising interest rates will have a negative impact on my retirement income; In fact, I can increase my income even better in both environments.