Best Ways To Invest For Retirement Income

An expert in financial management, Walter Updegrave, has noted that when it comes to tapping savings in retirement, many retirees fall into what he called the Income Investing Trap. He said they will tilt their portfolios almost exclusively toward “income” investments—dividend stocks, high-yield bonds, annuities, etc.—figuring this is the best way to assure a safe supply of spending cash throughout retirement.

Walter UpdegraveAccording to the editor of, Walter Updegrave, there are some strategies that can help you to plan adequately for retirement.

Start with a reasonable mix of stocks and bonds

Of course, what’s reasonable for many retirees—say, 50% stocks-50% bonds—may be too aggressive or overly conservative for others. So the key is to arrive at a blend of assets that can deliver returns high enough to provide adequate income without subjecting you to losses so large that you’ll spend down your nest egg too quickly.

You can get a sense of what mix of stocks and bonds you’ll be comfortable with by filling out the risk tolerance questionnaire in RDR’s Retirement Toolbox. I recommend that you repeat this exercise every couple of years throughout retirement, as many people become less tolerant of risk as they age.

Diversify your stock and bond holdings broadly

Many retirees instinctively home in on stocks that pay above-average dividends and bonds that feature outsize yields. The problem with that approach for bonds is that stretching for yield leaves you in lower-quality issues that get hit hardest at the first sign of economic weakness. Focus too heavily on dividend stocks, on the other hand, and you may end up with shares of companies concentrated in just a few industries, leaving you vulnerable if those sectors falter. During the financial crisis, for example, the iShares Select Dividend ETF lost roughly 60% of its value, in part due to its heavy weighting of financial stocks.

You’re better off creating a portfolio that mirrors the broad stock and bond markets. The easiest way to do that to invest in a total stock market and a total bond market index fund. That will give you a piece of virtually all publicly traded U.S. stocks and bonds. If you feel you want to tilt your mix a bit toward dividend shares, fine. But don’t let the make-up of your portfolio stray too far from that of the market overall. You can see how your portfolio compares to the overall stock and bond markets by plugging your holdings into Morningstar’s Portfolio Manager tool.

Set a sustainable withdrawal rate

The idea here is to set a withdrawal rate that’s high enough to provide an acceptable level of income, but not so high that you’ll burn through your assets early in retirement. There’s lots of debate about what that rate should be. But if you want your money to last 30 or more years, you should probably limit yourself to an initial withdrawal of 3% to 4%, and then adjust that draw annually for inflation.

So, for example, if you have a $1 million saved and go with an initial 4% withdrawal, you would pull $40,000 from your nest egg the first year of retirement. If interest and dividends from your portfolio total, say, 3% of your portfolio’s value, or $30,000 that year, you would get the remaining 1%, or $10,000, by selling stocks or fund shares.

How To Plan Your Finance

Charles Rotblut is a contributor to Forbes investing platform. In this write up, he engages Carl Richards, a certified financial planner, director of investor education for the BAM Alliance, and creator of the weekly Sketch Guy column at The New York Times, on the benefits of having an easy-to-follow financial plan.

Rotblut: Could you explain what a financial plan should be? I think most people have a conceptual idea of what a financial plan is, but may not be able to correctly explain what should be in it.

Richards: This is part of the issue I was trying to address in my book, The One-Page Financial Plan (Portfolio, 2015). It was just maybe a subtle shift—I don’t know that it’s a revolutionary shift—just a subtle shift in the way we think when we hear that word. Even as you asked that question, I felt myself tense up a little bit thinking about a two-inch-thick book with lots of assumptions. I don’t know if they work, or if they are going to sit on a shelf and collect dust. In fact, I’ve learned that on an airplane if I want quiet and my seatmate asks me what I do for a living, all I have to do is say “financial planner” and they leave me alone.

What a real financial plan is, is pretty simple. It’s a pretty clear definition of where you are today. I like to call it your current reality.  It’s factual. You could think of this as if you’re going on a trip. You start mapping out your trip with where you’re leaving from, where you are today. Then you make a series of guesses about where you think you want to go. You wouldn’t actually leave on a trip until you decided where the destination was. Finally, it’s an effort to map out how you’re going to get there. It’s pretty simple.

Getting clear about where you are today is called a personal balance sheet, which is just a list of your assets and your liabilities. Once you have this, you can make some guesses about where you want to go.

One of the really important parts of a financial plan that’s totally overlooked and almost never talked about is why you even want to go there. Why are you doing these things? I like to think of these as a statement of values. You get clear about your values, you make some guesses about where you want to go and you clearly define where you are. Then, it’s the next two or three things that you need to do in order to get yourself a couple of steps closer to that destination. We don’t need to worry about a list of a hundred things, because then nothing gets done. But what are the two or three simple things you need to do in order to get yourself close to that destination?

The last step is repeat, because it is a process. When you complete those two or three steps, you say, “Okay, what should I do next to get myself close to that destination? Is that still the destination I want to hit?” Maybe that part of the repeat might be “Hey, you know what? I think those guesses I made about my goals have changed a little bit.” You just sort of keep repeating that process over and over and over and get committed to the process, not the actual “plan.” That, to me, is what financial planning is.

 Rotblut: In your book you wrote about asking people why they thought money, or having a certain amount of money, was important. Can you elaborate?

Richards: This is my favorite place to start. You start with an exploration of values and my favorite question around that is “Why?” The question I like to start with is “Why is money important to you?” I’m not looking for “to send my kids to college” necessarily, I’m looking for values. Often you’ll hear people say things like “freedom” or “security” or “flexibility.” As they explore it more, I’ll ask “Why is freedom important to you?” The clients may respond with something like “Well, money gives us time.” “Okay, that’s great. Tell me why time is important to you.” Then they may get to something a little closer to the heart, like “Well, we really want to serve in our community and spend time with our family. That’s the most important thing.”

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