Many retirement guidelines I’ve read recently continue to treat baby boomers the same as the rest of the investing public. Even after the first six months of 2022, when the traditional 60/40 stock/bond portfolio sank more than 20%.
I can’t argue with the traditional approach for investors who are 25, 35 or 45 years old and saving for retirement or the kids’ college education. As we know, markets bounce back historically and younger investors with time to recover from market corrections have the benefit of dollar cost averaging.
But young people entering or already in retirement have different needs than all the “Generations” that came after them: They may not be able to wait for their depression accounts to grow again. For boomers, income is the important consideration—income that remains stable and grows over the decades of retirement.
Where to find income
Economic downturns always provide winners along with many losers, and income-paying contracts (also called income annuities)—which as interest rates rise have increased payouts on new contracts—are the real winners. As of 15 August 2022, new purchases of income annuities at certain ages are offering 20% to 50% (depending on the age at which income begins) more than at the start of the year, and this may increase Further. They are almost a mirror image of mortgage interest rates, which are also rising.
How much do you think a 20% increase in pension payments is worth? Just imagine that your initial Social Security benefit that you can claim next year increased from $3,000 to $3,600 per month. Would this catch your attention?
However, most financial experts still only talk about investment assets, not income. Maybe because it’s easier — not better — to lump these boomers in with everyone else.
Another type of allocation is needed for a retirement income plan
While a 60% stock/40% bond allocation may not be appropriate for boomers, another type of 60/40 allocation may be: one that includes a mix of stocks and bonds along with income annuities. We call it a Go2Income plan.
When you build a Go2Income retirement income plan, you can start with 60% of your retirement savings in investment portfolios and 40% in income annuities. But this split is different from the 60/40 mentioned above.
- It’s based on output rather than input, and on a Go2Income plan you could end up with splits of 67/33, 75/25, or another split.
- The allocation will change over time, with an increasing allocation for income annuities – to provide lifetime income.
- Most importantly, the subdivision is designed to meet your personal goals and priorities, not your neighbors’.
We’ve talked about the distribution between types of pension payments (see For sustainable retirement income, you need these 5 building blocks). So let’s talk about the allocation within the investment part.
Allocation of the investment portion of the Go2Income plan
A Go2Income plan will use a portion of the investment portion of your retirement savings to be a source of secure income rather than just a source of capital growth.
There are three types of portfolios in the Go2Income strategy:
- High Dividend Portfolio: This is primarily a source of tax-advantaged income growth plus capital appreciation and is invested in an after-tax or non-qualified savings account.
- Fixed Income Portfolio: A source of fixed income plus general capital security, partially replaced by guaranteed pension payments. It will be invested in your non-qualified retirement savings account.
- Balanced portfolio: A source of capital withdrawals from your rollover IRA account to achieve growing income while meeting RMDs. This will be a mix of a growth portfolio and a fixed income portfolio to reduce drawdown risk.
The allocation of stocks within the investment portfolio can be high, medium and low, but you should consider what percentage your stocks occupy in your overall portfolio. A high allocation to stocks within 60% in investment portfolios can often be chosen when a high allocation to income annuities is chosen within the 40% portion. The overall impact of these two choices is a higher allocation to fixed income assets, primarily annuities.
Tactical allocation within each portfolio
The tactical implementation of investment portfolios within a Go2Income plan should address (1) whether you use an outside advisor or create a self-directed investment account, (2) the types of investments (ETF, mutual fund, or individual securities) and ( 3) distribution in specific market sectors.
We start with the premise that you want to achieve your income goals, with low fees and low planning risk, while achieving your legacy goals. We add easy plan monitoring and plan management so you can manage the portfolios yourself. In any case, working out a personal Go2Income plan will help a do-it-yourselfer decide what questions to ask an advisor.
Some investors may research and buy individual stocks and bonds in these portfolios, but there are other options for the investment portion of a retirement income plan that are perhaps easier to manage and understand, including mutual funds. mutuals and ETFs.
Wallets designed specifically for Go2Income
In addition to mutual funds and ETFs for investment portfolios, there are other pooled investments that can be targeted for a specific objective and managed with the help of artificial intelligence (AI) tools. We decided to explore that option for Go2Income.
We consulted with a company, FolioBeyond, which is a “customary” manager using advanced algorithms, including artificial intelligence (AI) tools, to build portfolios. Quantitative investors use quantitative methods, tools and techniques to make investment choices.
FolioBeyond was asked to design high dividend, fixed income and balanced portfolios to tie into Go2Income’s planning. The objectives of each portfolio were to match the interest and dividend yields of comparable low-cost ETFs and outperform those ETFs on a total return basis by 1% to 2% per year. We also wanted them to keep the fees low.
Shown below are the investment results of these portfolios backtested against the benchmark indices for the first seven months of 2022 and the 10 and a half years since 2012. The FolioBeyond portfolio has outperformed both the yields and total returns of the benchmarks comparable (see FolioBeyond Advant) in most scenarios. Of course, back-tested results are obtained by knowing what has happened in past markets and cannot be used to predict future performance. See the discussion board below for other caveats.
The return performance shown above is based on back-tested simulations prior to February 2021 for the equity model and November 2020 for the fixed income model. Actual performance for client accounts may be materially lower than that of modeled portfolios.
Back tested performance:
- It does not represent actual performance and should not be construed as an indication of such performance. Such results do not represent the impact that material economic and market factors may have on an investment adviser’s decision-making process as to whether the adviser would actually manage the client’s money.
- It differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of inevitability.
- It can be either favorable or unfavorable if the portfolio patterns are changed from time to time.
Three takeaways from this article
- The allocation for retirement income is different from the allocation for accumulating retirement savings.
- Allocation of the investment portion of a retirement income plan to separate portfolios should be consistent with income goals and the manner in which the income is sourced.
- There are many options for managing individual portfolios, but be sure to look at yields and returns net of fees and how each affects your plan.
If you are interested in creating a retirement income plan that reflects your specific needs, visit Go2Income for one complimentary custom plan which gives both a high initial income and growing lifetime incomeand long term savings.
President, Golden Retirement Advisors Inc.
Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide an income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of retirement income options, anonymously and at no cost.