Investing for retirement income can be challenging, especially when transitioning from a growth-focused portfolio to one that provides stable income. This post outlines a strategic approach used with a $3 million client to ensure they have the retirement of their dreams.

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Meet Dan and Barb

Dan and Barb, aged 65 and 63, have diligently saved for retirement. Their goal is to maintain their lifestyle with $12,000 monthly after-tax income. However, they faced a challenge: generating consistent income from their investments without exposing themselves to significant market risks.

The Initial Portfolio and Risks

Dan and Barb’s portfolio included:

  • Barb’s IRA: 2025 target date fund (Vanguard)
  • Dan’s IRA: S&P 500 fund (IVV)
  • Dan’s Roth IRA: QQQ
  • Trust Account: VT, TLT, HYG (65% stocks, 35% bonds)

While this portfolio had performed well during their working years, it posed substantial risks for generating retirement income. Specifically, long-term bonds like TLT and high-yield bonds like HYG showed significant volatility, particularly during market downturns.

Assessing Income Needs

To cover living expenses, private medical costs, and mortgage payments, Dan and Barb needed to withdraw about $185,000 annually from their accounts initially, before their Social Security benefits started in 2026 and 2028.

Proposed Strategy

1. Secure Income with Cash and Bonds

To protect against market volatility, the strategy involved allocating the first five years of income needs—approximately $900,000—to cash and short-term, high-quality bonds. This approach prevents the need to sell investments at a loss during market downturns.

Investment Adjustments:

  • Replace TLT and HYG with more stable options like BSV (short-term bond ETF) and VGSH (short-term Treasury ETF).
  • Hold one year’s worth of income in a money market fund for liquidity and security.

2. Tax-Efficient Portfolio Rebalancing

To minimize tax impacts while adjusting their portfolio, the strategy proposed maintaining VT due to its substantial capital gains but adjusting other investments for better stability and income generation.

IRA Adjustments:

  • Shift to 70% stocks and 30% bonds to balance growth potential with income security.

Roth IRA Adjustments:

  • Keep 100% in stocks, focusing on long-term growth since withdrawals are tax-free.
  • Diversify beyond QQQ to include small cap value, international, and emerging markets to spread risk and capture different growth opportunities.

Flexibility and Long-Term Planning

This strategic approach provides Dan and Barb with several benefits:

  • Income Security: The allocation to cash and short-term bonds ensures their first five years of income are stable and not reliant on market performance.
  • Market Flexibility: They can draw income from various accounts based on market conditions, preserving their portfolio during downturns.
  • Diversification: A diversified Roth IRA enhances growth potential and mitigates risk, making their retirement funds more resilient to market changes.

Conclusion

By implementing this strategic approach, Dan and Barb can confidently enter retirement, knowing their income needs are secured, and their portfolio is optimized for both stability and growth. This method illustrates how the wealthy invest for retirement income and focuses on risk management, tax efficiency, and long-term planning.

Final Thoughts

Adopting a well-thought-out investment strategy can significantly enhance financial security in retirement. By balancing income needs with market exposure and tax efficiency, you too can achieve a stable and fulfilling retirement. Always consider consulting with a financial advisor to tailor these strategies to your specific circumstances.

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures

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