Should You Invest to Get Income In Retirement? Not So Fast My Friend

Marshall Rathmell |

Traditional stockbrokers and the media have long taught the public that the way to provide in retirement and leave something to your beneficiaries is to purchase income yielding stocks and bonds to live on, while leaving the original securities alone.  Our firm’s philosophy has always been (and what academics propose) not only is that inefficient for tax reasons but can also cause those investors risk in lack of diversification and inflation long-term that they do not realize.

While we have always advised against investing that focuses on the income securities may provide, it is even more difficult and frankly dangerous now than ever before. A recent article in Advisor Perspectives by Michael Finke and David Blanchett highlight the impact today’s low-yield environment is having on investors with this predilection.

Finke and Blanchett use Robert Shiller’s data on historic yields and cost of income to determine that historically a 50/50 portfolio could generate $1,000 in income for every $25,000 invested.  That works nicely with another past adage that you can live on 4% of your portfolio the year after you retire. With today’s low yield environment, you would need $80,000 invested to generate that same $1,000 now.


               Source: Advisor Perspectives Article

So, what do these retirees do? 

A cringe worthy approach that many explore is purchasing lower quality bonds and higher dividend paying stocks to increase the income.

On the bond side, higher yield (junk) bonds are higher yield for a reason.  While you hope the risk being compensated with the higher return does not result in failure, you should expect that the higher interest (and taxes) is lower than the additional risk taken.

The higher dividend paying stocks get me no more excited.  I expect investing for income instead of total growth to cause higher taxes, lower expected total return, and higher risk.

Do not let all of this discourage you.  Instead of starting with your investable balance and looking for the most income production to live off, you should start with a financial plan. Once you have a plan outlined, couple it with an appropriate portfolio that focuses on the expected total return after tax that you need to maintain your lifestyle without taking on risk that you cannot bear throughout the market cycle.