Suppose your main retirement finance 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 amid stock-market 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 debt.
The stocks would be in the form of separately managed accounts and mutual funds . 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 companies.
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 market returns and remaining life expectancy, says Betterment product manager Alex Benke.
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% cash.
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 2%.
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 takes.
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 forever.