Originally posted October 23, 2017.
You need income in retirement. It’s that simple. But to many, retirement income, and the lack thereof, is a problem that will never be solved.
Over the weekend I read an article in the local paper about how dreadfully ill-prepared the Baby Boomer generation is when it comes to retirement income. And it’s a subject that comes up quite often in my conversations with prospective clients. They ask me, “How will I get income from my investments?”
After I explain how we construct portfolios, I tell them that a good rule of thumb is to draw no more than three to four percent per year. Preferably three-percent per year calculated at the end of each quarter.
“What do you mean, you’re only trying to make me three-percent?” is a typical response. “No,” I tell them. “It’s not a total return calculation. It’s simply suggesting that if you don’t spend more than three-percent per year, then chances are you won’t outlive your money. It’s a back of a napkin look at your spending needs/wants against your portfolio’s capabilities.”
My response isn’t always welcomed. But that’s the gravity of the low-interest rate world we live in today. Low interest rates have never weighed down income investors more than they do today.
And many are ignoring gravity. They are spending much more than three percent per year. They are invested in places (3x market etfs, variable annuities, emerging market high-yield) I would never consider as an investment advisor.
You can bet, the needy investor tends to be loaded in debt and feels entitled to a certain portfolio return. Whereas the frugal investor, the one I tend to work with, knows what must be done to survive.
Investors that figure out how to survive understand Dick Young’s guiding principle: You work to make money and invest to save money. It’s not any more complicated than that.
E.J. Smith - Your Survival Guy
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