When you are planning out for your retirement, you need to plan and line up the investments so that it will help you to generate income in your post-retirement days.
When making out income portfolios for retirement, there is not something like a comprehensive portfolio it all depends on individuals needs, and choice and every portfolio may have their pros and cons.
Below we will discuss a few approaches to design income portfolios for the retirement and will see their pros and cons.
Portfolios Designed To Have Guaranteed Returns
If you want guaranteed income or returns for your investment in your retirement, you can have this income portfolio it just needs some more investment than applying strategically approach to create the collections which are also not sure.
When we talk about guaranteed retirement income or returns on investments, we only want to invest in the methods which are safe, and you can have this safe investment in various ways.
A bond ladder is one of the options which you can opt and plan it in such a way that it will get mature every year and in this way you can have the yearly expense in the form of interest and principal amount and can be continued in the following year.
This method can be applied in many different ways as you can opt for zero coupon bonds which don't pay any interest, on the other hand, you can have them at discounted rates and at the maturity of bonds you can have total interest and the principal amount.
You can also opt for 'Treasury Inflated Protected Securities' or TIPS, and if required you can also opt for CDs.
And if you don't want to invest in bonds and CDs, you can also opt for annuities which will ensure you the yearly returns.
- The return is guaranteed.
- You don't have to follow the complicated process and easy to implement.
- Maintenance is easy and small.
- The significant impact of inflation on the income and can't be adjusted.
- Flexibility is low.
- The principal is already being used by you in every maturity, so not much is left for relatives and heirs.
- The initial investment required is higher as compared with other investments methods.
Things to Note:
You should understand before making investments which give guaranteed income is that they are also less liquid.
In the case, if one of the spouses passes early or in case having the serious illness you are required to make unnecessary expenses as you are taking once a lifetime vacation.
You should be aware of these circumstances that can lock up your capital and will make it more difficult for you to change the flow of the advancement of life.
You can also equip and educate yourself to learn the basics of investing in guaranteed returns and income, you can opt for reputed magazines and can also take professional advice to know the basics, but it will cost you some extra fees.
Portfolios for The Total Return
If you have planned to make retirement portfolio for total return, it means you are opting for diversified approach and going to invest in various methods, as it will provide you with the long-term returns which will be based on the how many numbers of bonds and stocks you are having in your portfolio.
Let's take for an example if you have a portfolio with stock and bond index funds, and when you compare them considering the returns or outcome as per history, you can easily plan your goals and can set your expectations accordingly.
S&P 500 measured the stocks for the returns they are providing in history, and the result was average return was about nine percent, the data was collected from the year 1926 to 2012 as per the DFA Matrix Book resulted in about 9.8% total return.
In the same way, when the Bonds were measured by Barclays US Aggregate Bond Index, the average return comes out to be about eight percent and between the year 1976 to 2012 the gross return comes out to be about 8.2%.
If we use traditional way to buy bonds and stocks, let's say if we allocate about 60% of your fund in stocks and the remaining 40% of the fund in bonds.
Then if you expect long-term average returns in this way will come out about 8.6%(This figure comes out as we study the historical returns from stocks & Bonds), If we deduct the yearly fees which would be about 1.5% then the total yearly return will be seven percent.
When you have expectations to have an average return of about seven percent from your portfolio, then you can easily withdraw about five percent per year which will help for in yearly expenses, and at the same time, you can also continue the process of growth in your portfolio.
If you have set out your plans to withdraw about 5% per year at the initial stage of your portfolio, you can continue to withdraw the same 5% every year even if your portfolio has not earned about that much amount that year.
In this type of portfolio, you can always expect monthly, quarterly and yearly volatility, so it may be possible that incomes years you will observe that your investments were worth less than the previous year.
But if you are having long-term returns in your mind and investing as per this plan, then you should understand that volatility will always be there and you have to accept is a part of your plan.
In a case of the portfolio is underperformed then you need to lower the withdrawals so that it can meet the objective of desired returns over the extended period.
Advantages of Total Return:
- If you stick to your basic plan and show the discipline this plan will certainly going to work historical data and trend also approves it.
- This type of retirement portfolio also provides you the flexibility as you can choose to adjust your withdrawals and can also spend some principal in emergency situations.
- This retirement portfolio requires less capital amount if we compare it with guaranteed returns on investment methods.
Disadvantages of Total Return:
- There is always a possibility that your desired returns will be affected as there is no guarantee it.
- Inflation can have its effect on this type of retirement portfolio, and you may need to lower your withdrawals.
- This approach requires more time for yourself in managing the portfolios as compared to some other investments methods.
You may also educate about total return retirement portfolios from reading related articles which we have provided earlier on our website.
Retirement Portfolios Based On Interest Only Approach
Most of the people try to make the portfolios such that they can live their lives and make the expenses from the income generated by interest.
But the reality is that it is challenging to fulfill the expenses on the income produced by interest only as now a day we are having very low-interest rates and making such portfolios focused on interest is near to impossible.
As most of you must know that CD's used to pay interest about five percent to six percent yearly which has gone down to about just two to three percent.
And suppose if you have invested about $2,00,000 in the past then you can yourself observe that you were getting income in the form of interest was about $12,000 had gone down to about $4,000 per year.
The investments which you can do which bears a lower risk are CDs, government bonds, higher corporate (double-A rated) or municipal bonds and blue-chip dividends paying stocks.
But still, if you want to invest in those portfolios which yield the higher rate of interest and ignored the lower risk-bearing investment.
Then there is always a possibility that dividends which you will get are going to reduce and which would instantly result in the decrease of the principal value which is the primary income-producing investment.
All these things can happen at such a fast pace that you won't have any time to re-plan your strategies for the portfolio. Let's see the significant advantages and disadvantages related to Interest only approach portfolios.
- If you are making the safe investments approach, then your principal value will not be affected, and it will remain intact.
- You can enjoy higher returns or income if you compare it with other investment portfolios.
- Due to the fluctuating nature of the market, the income generated can be varied as per the market.
- Before having an approach to this kind of investment portfolio, you should have basic knowledge of the underlying securities and the other factors which affect the returns or amount of income you are being paid.
- If you have not chosen the safe investment method, in that case, the principal amount can be affected and get fluctuated with time.
You can also study and instruct yourself about the investment portfolios which are based on producing interest, you can read reputed magazines and can also take help of our previous articles based on such investment portfolios.
Retirement Portfolio Based On Time Segmentation Approach
It is a kind of investment portfolio which is set in such a way that you will withdraw or have the returns at the time when you need it the most, this type of investment methods is also known as the bucketing approach.
In this approach usually, the investment having minimum risks are being made for the amount which will be needed during the initial years of your retirement it can be for first to five years of your retirement.
Then risk level can be raised in later years that can be six to ten years of retirement, and the investments which are much riskier and can be used for the later years of your retirement and it can start from eleven years to coming later years.
Below we will discuss the pros and cons of having this type of approach while having the time segmentation approach.
- Investments are usually matched with the time when they are most needed, and in this way, you can have income at your desired time segment.
- As in this approach, you have already made the riskier investments for the later years of your retirement, so you don't have to think much about the volatility in the market and can have mental peace.
- You have made the riskier investments for the later years of your retirement, but that does not guarantee you will generate the desired returns or income out of them at their designated time.
- You should need to decide and understand when you should sell your riskier investments cover your short-term time segments as that part is already being used.
Retirement Portfolios Having Combo Approach
You can also have a combination of approaches which have discussed above and set your retirement portfolios accordingly.
You can combine the investments which can be used for first ten years of your retirement and can use the principal and interest from the safe investments, this way you can have the combination of 'Guarantee of the Income' or returns and at the same 'Time Segmentation.' This also gives you a chance to invest long-term money in a 'Total Return Portfolio.'
In the course of time if you find that interest rates got higher at any point in time, then you have also the option to invest into the CDs and government bonds and enjoy the better income due to higher interest rates.
All of the retirement portfolios discussed above yield the results and to understand which is better investment approach for you.
It depends on individual circumstances and his/her plans for the income or returns they wish to have.
You need to stick with any of the approaches or can also have pre-defined guidelines so that you can understand when you need to change as per the conditions.