Investment Income Strategy
people assume that managing investments for income is simply a matter of
selling investments as needed from a diversified portfolio. But
there are hidden dangers in this strategy (or lack of strategy) that are
not obvious. It is tempting to assume that the ups and
downs of the market will balance out over time, or that at least one asset
class will always be in favor to sell. But asset classes often rise
and fall together, and when an investor is forced to sell investments at
bargain prices during a down market, a few bad years can quickly devastate a portfolio
to the point where it is no longer possible to recover---even
after the market does.
problem occurs when one is forced to sell investments for income at
painfully low prices during a down market. Strategies
and software tools that acknowledge this risk tend to focus on
identifying the withdrawal rate that can withstand either
worst-case hypothetical or worst-case historical scenarios.
But while these tools acknowledge the problem, they fail to solve
retirees are often forced to live on less income, leave less to heirs, or
live with less certainty than might otherwise be possible.
is important to consider not only the Withdrawal Rate, but also the
Withdrawal Strategy. The Defined Withdrawals
strategy uses an Income Ladder to minimize the risk of having to sell stocks during
a down market. An income ladder is created by purchasing a
series of high-quality fixed-rate investments with staggered maturity
dates such that the combination of interest and matured principal
exactly provide the desired income for a predetermined number of years.
The income ladder is a dependable source of income that replaces salary and makes it possible
to hold stocks for the long-term when necessary---similar
to the situation that likely existed before retirement. You can use
the free online calculator at www.IncomeLadders.com
to develop an income ladder.
market cooperates, then it is typically desirable to sell some stocks to rebalance the
portfolio and Extend the Income Ladder. But if the market crashes, an investor
with a long-term income ladder is less likely to be forced into selling stocks at
bargain prices to meet income needs. The investor can take comfort in
knowing that current income is secure while waiting for a more favorable
stock selling opportunity. We call this process Navigating.
confuse Navigating with Market Timing. But
navigating is not about moving in and out of the market on a
routine basis or attempting to predict which direction the market
will move in the short-term. It is simply a matter of periodically reviewing
the portfolio, typically on an annual basis, and using some logical
criteria to decide whether or not it is a favorable time to sell
the plan benchmarks been met or exceeded?
stocks at or above trend-line?
beyond the minimum planned holding period?
nearing the maximum planned holding period?
Are interest rates at higher levels?
is not likely that the answer would ever be Yes, for all of the
above questions, and every situation needs to be evaluated
separately. But in general, the more Yes's, the more likely
it is time to sell some stocks to extend the income ladder.
There are many fad
strategies that give excellent advice for
investing in the recent past. But the
strategy has proven the test of time.
We are pleased to report that retirees who have adopted it during
the past 15 years are some of the happiest people you will find!
Click here for a real-life account. The Defined Withdrawals strategy was developed based on
a broad look at historic risks and market cycles.
We studied the very worst periods in history to understand how a
retiree could have survived (see the creators' 1998 article titled, Navigating
an Investment Storm). We have not changed the strategy from
the time that it was developed during the early '90s. Since then
there have been stock market bubbles and stock market busts. But
good strategy anticipates and expects these ups and downs. It is
when we assume that the future will be just like the present that we
get into trouble.
may be interesting to know that in the early days of developing the
Defined Withdrawals strategy,
we never intended to sell
a software product. We built the software for ourselves and to help
clients. In time we came to realize the power of the
methodology and decided to make it commercially available. With over 70
million baby boomers in the US on the brink of retirement, during a time of
disappearing pensions and increasing longevity, we believe the Defined Withdrawals
strategy fills a critically important gap in modern-day retirement
offering individual investors greater peace-of-mind during difficult
times, we also believe that
the strategy will help to stabilize financial markets. The challenge
for the income investors is to maintain steady and dependable
income while investing in financial markets that are anything but
steady and dependable. The Defined Withdrawals strategy resolves
this paradox, and it will reduce the tendency for baby boomers to engage in panic selling when they sense a
Defined Withdrawals strategy is not complicated. The portfolio is
simply divided into two portions. The objective of the first portion
is to provide dependable income for a known number of years. The
objective of the second portion is to provide the growth that will be
required to support income during later years. It is the income
certainty of the first portion that allows an investor to manage the
second portion with a cool head.
our free book, No Hype Investing
for Income with the Investment Strategy Generator,
for a more complete explanation of the Defined Withdrawals strategy.