There’s a rule of thumb out there that if you’re approaching retirement or already in retirement, you need to be a lot more conservative with investing than someone who’s much younger. Well, that may or may not be true. It all comes down to how much income your portfolio needs to produce for you. 

Income needs in retirement will vary from person to person, but let’s look at a total income need of 80 thousand dollars each year to cover all expenses. If this is a dual-income household where each spouse will bring in 30 thousand dollars a year from Social Security, they’ll need a portfolio that generates the other 20 thousand dollars in income annually. 

Stock dividends can satisfy this amount of money if you have enough wealth, but generally speaking, the bond portion of your portfolio is going to be the best income-producing portion. Additionally, your bond allocation is going to be the most stable part of your portfolio and will better withstand the inevitable market fluctuations. When the market dives down, your income from investments will remain steady. However, allocating more of your portfolio to bonds than necessary for generating income will cost you money in the long run.

The traditional portfolio management approach would say that you need to allocate 40 percent of your investment portfolio to bonds as you approach retirement. If you have a one million dollar portfolio, that’s 400 thousand dollars going into bonds. However, if you need your portfolio to generate 20 thousand dollars in income each year and you spend 10 years in retirement, you’ll actually only need to allocate 200 thousand dollars to bonds.

If you invest 400 thousand dollars into bonds when you only need to invest 200 thousand, you would be investing an extra 200 thousand dollars into bonds that could have been invested elsewhere. In general, if you have a bond return of 3 percent and a stock return of 7 percent, investing in stocks will give you 4 percent more growth than bonds. A 4 percent growth on 200 thousand dollars equals 8 thousand dollars each year, which is 80 thousand more dollars over the course of a ten year retirement than you would have earned by investing 40 percent of your portfolio into bonds.

The income-based portfolio management concept can be applied to your own portfolio, no matter the size or your income needs. The whole idea is that your portfolio allocation should be based on your unique situation instead of on general percentage guidelines. Earning regular income from your portfolio through bonds is important, but you need to allow the rest of your portfolio to accept risk in order to get that long term growth.

If you’d like to get your portfolio reviewed or reallocated to fit your needs, click below to schedule a call. How much more money could you be earning?