As baby boomers retire, more and more investors are moving from the “accumulation” stage to the “distribution” phase. In other words, they need to live off the income from their portfolio.
The proliferation of new ETFs now makes such a portfolio feasible. However, with more than 200 dividend and income exchange traded products to choose from, you must exercise care when building a sound diversified portfolio that meets your objectives. Therefore, Capital Cities Asset Management is excited to offer a brand new Dividend and Income Strategy to help investors with their income requirements.
One question that always seems to come up is “how much of my portfolio can I withdraw while increasing the amount each year to keep up with inflation, and at the same time, not run the risk of outliving my portfolio?”
The answer to that question is “it depends.” It depends on many different criteria, and the answer is going to be different for everyone. As a starting point, we are going to use the 4% Rule. Simply stated, the 4% Rule is a rule-of-thumb that suggests limiting withdrawals in your first year of retirement to 4% of your investable portfolio balance. Thereafter, increase the annual amount you withdraw to offset inflation. The goal is to minimize the risk of outliving your money. You can read more about the 4% Rule here. However, our personalized planning process can help tailor an income plan to your specific needs.
For those of you without a pension, there are four basic approaches to living off your nest egg. The first two, living off the interest and buying an immediate annuity, will most likely not work in the current low interest rate environment – they struggle to generate enough current income and will almost certainly lose ground to inflation.
The third method is a traditional portfolio total return concept. With this approach, an investor typically builds a portfolio of 60% stocks and 40% bonds, sells enough holdings each year to meet their financial needs, and then rebalances annually. This is still a viable approach, but investors must be realistic in their portfolio return assumptions.
The fourth method is an income-generating portfolio, and dividend income has been getting a lot of attention by investors these days. One of the perceived benefits of this approach is that none of the underlying holdings need to be sold each year. Instead, retirees can just live off the income stream.
While it sounds nice, there are many pitfalls to this “pure dividend” approach that investors need to consider. First, the most popular dividend mutual funds and ETFs do not pay enough dividends to meet the first year goal of extracting 4% income. Second, dividends are not guaranteed – they can be (and have been) reduced. Third, since the portfolio is 100% invested in stocks, it can be very volatile.
We can design an ETF Dividend & Income portfolio for you that can address these pitfalls and other problems with a pure dividend approach. We’ve kept what we believe are the best aspects of the dividend methodology and coupled them with the tried and true risk management techniques of the total return approach.
The result is a customized portfolio specifically for you designed to:
• Generate income in excess of 4% the first year
• Provide lower volatility than pure dividend portfolios
• Not lock you in to current low yields
• Take advantage of higher interest rates in the future
If this type of portfolio interests you and you would like more information on Capital Cities Asset Management’s services or portfolios, please call @ 800.767.2595 or email us today. Thanks and we wish you the very best.
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