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A Retirement-Income Strategy When Rates are Low

It’s a quandary for retirees: Record low interest rates may be great for borrowers, but it means tough choices if you need investment income.

For instance, if you buy longer-term bonds to generate more yield, the price of your bonds could tumble if interest rates head higher. Alternatively, if you include a lot of dividend-paying stocks, those shares could decline sharply if another market correction hits.

So how do you generate spending money? Consider focusing less on yield and more on trying to earn a healthy overall return.

Here’s how you might do that: Start by figuring out how much spending money you will need from your portfolio over the next five years. Let’s say you are using a 4% portfolio withdrawal rate, which means you plan to spend a sum equal to roughly 20% of your portfolio’s current value over the next five years.

You might take that 20% and stash it in conservative holdings like savings accounts, certificates of deposit and short-term bonds, so you know that you have the next five years of anticipated spending covered, no matter what happens to the rest of your portfolio.

You can then invest the other 80% of your nest egg for total return using an appropriate mix of riskier bonds, U.S. stocks and foreign shares. You will want to consider carefully what combination of stocks, bonds and other asset classes to buy, because each has its own unique benefits and risks, and also how to diversify within each of these asset classes.

In years when the markets are kind, you might cash in some of your gains and use it to replenish your pot of spending money, so it once again holds enough to cover five years’ worth of portfolio withdrawals. What if the markets aren’t so kind? You could sit tight and see if the markets recover. Thanks to your five years of spending money in more conservative holdings, you should be able to go that length of time without touching the 80% of your portfolio that’s invested for total return.


The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Past performance is not a guarantee of future results.

Diversification and asset allocation do not protect against loss or guarantee a profit.

There is no guarantee that these strategies will succeed. . The strategies do not necessarily represent the experience of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies presented are not appropriate for every investor. Individual clients should review with their Financial Advisors the terms and conditions and risks involved with specific products or services.

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