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Investing For Income In A Low Yielding World

As of this writing the 10 year treasury is yielding a mere 2.00% and it appears rates will stay low for a while;  in a very unusual move, the Fed has vowed to keep its key benchmark interest rate near zero through mid 2013.  And while we can debate whether or not  this is good for our economy, it certainly seems to create a dilemma for retired (or semi-retired) investors that are looking for investment income for their portfolios.

Or does it?  Could it be that the Journalist Walter Lippman was right when he said “What everyone knows often isn’t worth knowing”?  Is it possible that the best way for a retiree to invest for income in a low yielding world is….not to!

When Americans were retiring at age 65 and living for 7, 9 years playing shuffleboard and bingo – with full social security and a rich pension – maybe investing just for income made sense.  But like Dorothy said to toto “I don’t think we’re in Kansas anymore”.  Many retirees will live 20, 30 years or more without a pension - and in that world what matters more than income or yield is Total Return (income plus appreciation).

So first the retiree figures out how much Total return is required from their investments (on top of SS and pensions) to pay for gasoline, groceries, clothes, travel, rent or mortgage, healthcare, postage stamps et cetera – Make sure to adjust for taxes and inflation because there will always be taxes and these items will be costing more each year.  This leads to the appropriate asset allocation (mix of stocks bonds and cash) that will provide her with the best chances of generating the required income.

This isn’t just theory…I have used this approach with several retired clients taking periodic distributions from their portfolios and it has held up just fine – even through the unparalleled crash of 08.

The percent of your portfolio allocated to Bonds should be diversified and high quality.

But don’t just go searching for “income” in your retirement portfolio in a low yielding world.  It’s an outdated method of retirement investing … And today it’s fools gold.

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Comment   |  7 years, 11 months ago from Port Washington, NY