In retirement, you’ll live off your retirement accounts, ideally pulling a steady income from your investments. But what’s the best way to take income from your
accounts? You’ll want to make sure you’re considering the facts and not getting caught up in common myths.
Myth #1 Your income should come from dividends
One common myth is that the best way to cover expenses in retirement is to rely on dividend income from bond funds or stock funds. In fact, there are different ways to generate income in retirement, and focusing on dividends isn’t necessarily the most reliable approach.
If you seek out investments with high dividend yields without paying attention to where that yield is coming from, you run the risk of losing money. A fund also can have a high yield and still have low or even negative returns if its price has declined more than the income it has generated.
Fixed income can help you manage the volatility of stocks and stay invested long term.
Most retirees want a consistent cash flow, and a fund’s monthly and quarterly distributions often vary depending on interest rates and the underlying stock or bond yields. This means that one month your dividends might be enough to cover your bills, but the next month you could be short.
Myth #2 You own bonds primarily for income
Another myth is that the only reason to own bonds is for the income flow. This is understandable: this asset class is called fixed income after all. But we believe you’re better off thinking of your bonds as the buffer in your portfolio. Fixed income can help you manage the volatility of stocks and stay invested long term.
How to generate cash flow?
We believe investors are better off positioning their portfolios for total return, which is the combination of capital appreciation and income. A total-return approach is designed to grow your portfolio over time by selecting funds by returns, not by yield alone, and it also can provide a steady income stream.
To create a steady cash flow, you’ll need to set up an automatic withdrawal plan, which will send a set amount of cash to you or your bank account each month. If you’re an investor in the Upgrader Funds, this is easy to do, and it can be set up at your broker or with our shareholder services.
How a balanced account can generate growth & income
The FundX Conservative Upgrader Fund (RELAX) invests in a classic mix of 60% in core diversified stock funds and 40% in our Flexible Income model, which is mostly bond funds. RELAX has helped retirees build wealth and generate income for the last 15 years, as you can see in the chart below.
If you retired in 2003 with a $1 million investment in RELAX, you were able to withdraw an initial 4% per year ($40,000 in the first year), and you could increase your withdrawals to keep up with inflation during this time period and still grow your portfolio. In fact, by investing in RELAX, your initial investment nearly doubled, even after taking withdrawals.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by calling 866-455-3863 or clicking here. The chart illustrates the performance of a hypothetical investment. The chart assumes reinvestment of dividends and capital gains. Withdrawals adjusted for 3% inflation.
Dividend yield refers to a fund's dividend payments expressed as a percentage of its current price. Diversification does not assure a profit or protect against loss in a declining market. Cash flow is another word for income stream, meaning the money investors draw from their investment accounts.
The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg Barclay’s Aggregate Bond Index is a market-capitalization-weighted index of investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. You cannot invest directly in an index.