Your Money
Today, it costs about $80,000 to generate $1,000 of income from a 50/50 balanced portfolio...that's a little more than triple the long-term average cost. Worse still for conservative investors, the cost briefly exceeded $150,000 for bond investors in 2020!
Retirees don’t like spending down their savings (a 2015 study confirmed it). Unfortunately, it has never been more expensive to position a portfolio for income. Historically low interest rates coupled with declining dividend yields have created a significant dilemma for income investors.
Many investors are tempted to reach for yield by purchasing lower quality bonds or equities with higher dividend yields. Evidence from past returns shows that reaching for additional yield by investing in lower-quality bonds or higher dividend stocks entrails greater risk with little expectation of reward through higher returns.
At PWM, we believe viewing principal as untouchable and spending only income is a behavioral mistake. We focus on maximizing the after-tax total return from the portfolio and mapping out at least three years of cash flow within the family's risk tolerance.
What to Do About the High Cost of Investment Income
by Michael Finke and David Blanchett
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