Suppose your main
challenge has less to do with how much to save and more to do
with how to deploy the money to generate the income you want.
We asked three financial advisers what they would recommend
for an investor with moderate risk tolerance, who wants $100,000
in annual retirement income, starting at age 65.
Their solutions are all valid. And each holds lessons for
investors planning their retirement finances.
One key lesson: Each of the advisers would use a highly
diversified approach. This minimizes volatility in your income
zigs and zags, says Joe Centra, president of Allocation Resource
Group in Mamaroneck, N.Y.
In today's market, the model portfolio offered by Centra has
about 42% of its $1.9 million starting balance in publicly traded
stocks, 26% in an annuity, 7.9% in nontraded mortgage REITs,
another 7.9% in non-traded equity REITs and nearly 16% in private
The stocks would be in the form of separately managed accounts
. Subject to change in market conditions, now you would withdraw
4% a year from the stocks, for $32,000.
The annuity would pay $26,000 a year. Each REIT sleeve would
provide $10,000 in dividends. The private debt would aim for a
7.5% yield, or $22,000.
The private debt has the added benefit of likely being in
senior, secured, first and second lien loans to private
Drawbacks? Their dividends are not qualified, so they're taxed
as ordinary income. And the tradeoff for high yield is that the
private debt would typically lock up your money for five to seven
years. The fee could be equal to 1.5% a year.
A Second Approach
Jon Stein of the online robo adviser Betterment.com recommends
a $2.65 million portfolio of low-cost index funds, including 56%
in stocks and 44% in bonds.
He would rebalance the asset allocation over the first 15
years of retirement to 30% stocks.
Income would come from dividends and interest, plus
withdrawals that would start at around 4%.
That rate could change annually, depending on factors such as
and remaining life expectancy, says Betterment product manager
Bob Phillips, managing principal of Spectrum Management Group
in Indianapolis, Ind., says a $4 million starting balance could
generate $100,000 in annual income.
His allocation would consist of 60% stocks, 37% bonds and 3%
Of the stock portion, 60% would be in U.S. large caps, 10% in
MLPs, 10% in U.S. midcaps, 10% in U.S. small caps and 10% in
foreign stocks. The stock sleeve's target yield would be about
Bonds would yield about 2.7%. The fixed income allocation
would be 15% each in high yield and short-term debt, with another
70% in the Barclays U.S. Aggregate index.
Of course, the longer you expect to live, the more money it
Phillips says if you're willing to settle for a nest egg
likely to last only until you reach age 90 instead of in
perpetuity, you can generate the same income with a starting
balance of just $1.8 million rather than $4 million.
Centra says it would take only $1.5 million to get you as far
as age 90, rather than the $1.9 million needed to last