Total return: Does your investment strategy in retirement need rethinking? (2024)
Retireeshave long strived to live off thedividends and interest income from theirinvestments and avoid dipping into their principal.
But in this low-interest-rate world, it’s become harder for retirees to support their standard of living in retirement with the investing-for-income-preserve-principal approach. That’s why investment advisers are increasingly suggesting that retirees now use the total-return approach.
That’s the practice of generating income from dividends and interest income, and dipping into principal. With this approach, retirees would sell their assets (stocks, bonds and cash) to meet their income needs. And by doing so, retirees are able to use all the tools in the toolbox to generate income, not just dividends and interest.
First, let's look at the traditional investing-for-income investment strategy:
Advantages of investing for income: When investing for income, there’s just the singular goal of creating a fixed-income portfolio that will allow retirees to generate enough income in retirement to reach their needs, says Brad Ledwith, a certified financial planner with Ledwith Financial Wealth Management. “Because we have a singular focus, we aren't as concerned with ‘beating the benchmark’ and taking on too much risk,” he says.
Disadvantages of investing for income: It can be difficult keeping your “eye on the ball” when the assets in the investing-for-income portfolio aren't doing well, says Ledwith. “For example, there have been threeor four times in the last 20 years that municipal bonds have taken a short-term ‘hit’ and the retail clients tend to get a little spooked,” he says. “When an income investment loses more than 5 to 7 percent over the course of a quarter, clients can lose focus – even though they are aware that they are investing in income-producing products.”
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Here's how total-return investing is different:
The advantages of total return. In the saving-for-retirement phase, financial advisers help their clients invest a portion of their paychecks to build a nest egg, says Marguerita Cheng, the chief executive officer of Blue Ocean Global Wealth. “During the distribution phase of retirement, however, clients will need to convert this nest egg into a paycheck,” she says. “Clients need their investments to create income.”
Just focusing on interest income from bonds and CDs or dividend incomefrom stocks may not generate enough to maintain one’s standard of living. For instance, the yield on iShares Core U.S. Aggregate Bond ETF was just 2.46 percent on Aug. 9 and the yield on the SPDR S&P 500 ETF Trust was 1.7 percent on Aug. 7.Advisers have historically suggested that retirees can safely withdraw 4 percentfrom accounts earmarked for retirement.But they said so when interest rates and dividend yields were much higher than today and retirees didn’t have to dip into principal to safely withdraw 4 percent from their nest egg.
According to Ledwith, investing for totalreturnbrings a lot more "benchmarking" into play. “Clients want or think they want to ‘beat the benchmark,’” he says. A benchmark might be the S&P 500, for instance.
“The pros of investing fortotalreturnare the model portfolio theory suggests that as we add assets to the portfolio we are reducing risk and increasingreturn.This benefits the client tremendously because they are exposed to certain upticks in certain asset classes.”
The downsides to the total return approach. “The cons of investing fortotalreturnin retirement is that some clients don't want to ‘play the market,’” says Ledwith. “Their risk tolerance is a hair above certificates of deposit or CDs and sometimes advisers want to convince these folks that atotalreturnportfolio is the best way to achieve their goals. When the markets make a downturn for a quarter or two these folks tend to want to sell out as their risk tolerance isn't matched with their goals.”
Putting things in perspective
To be sure, Cheng says retirees may prefer and feel more comfortable with the investing-for-income approach because, in their mind, they are retired and need their assets to create income and they don’t want to tap into principal. “But advisers may prefertotalreturnbecause there may come a point in time – every situation is different – when the client may have to tap into principal. The important thing to note is that there are different sources of income: interest income from cash, income from bonds, dividend income and capital gains.”
Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at [email protected] views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
Generating sufficient retirement income means planning ahead of time but being able to adapt to evolving circ*mstances. As a result, keeping a realistic rate of return in mind can help you aim for a defined target. Many consider a conservative rate of return in retirement 10% or less because of historical returns.
Total return is a core-plus strategy designed to seek consistent, attractive returns across all market cycles via a multi-sector approach, while remaining benchmark-aware and retaining the general risk profile of conservative fixed income investments. Capital at risk.
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
What does the 4% rule do? It's intended to make sure you have a safe retirement withdrawal rate and don't outlive your savings in your final years. By pulling out only 4% of your total funds and allowing the rest of your investments to continue to grow, you can budget a safe withdrawal rate for 30 years or more.
For many, living on $20,000 alone is likely not enough to retire at any age, given the high cost of health care, housing, and monthly utility and grocery bills. If Social Security payments and a part-time job are added to the mix, retiring at age 70 with $500,000 is more feasible.
A switch to the 6% rule could provide much-needed financial relief. For example, for a new retiree with savings of $500,000, withdrawing 6% instead of 4% would provide an extra $10,000. Unfortunately, the reality is that such a high withdrawal rate significantly increases the chances of your account running dry.
The 4% rule is a strategy that says you should withdraw 4% of your retirement savings in your first year of retirement. In subsequent years, tack on an additional 2% to adjust for inflation. For example, if you have $1 million saved under this strategy, you would withdraw $40,000 during your first year in retirement.
A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns -- perhaps even negative returns.
But if you're past that phase of your life, setting realistic retirement expectations and moving to an affordable home can put you on track to a nice lifestyle while keeping your living costs below $3,000 each month.
For example, if you have retirement savings of $1 million, the 4% rule says that you can safely withdraw $40,000 per year during the first year — increasing this number for inflation each subsequent year — without running out of money within the next 30 years.
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
For example, let's say your portfolio at retirement totals $1 million. You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years.
One rule of thumb is that you'll need 70% of your pre-retirement yearly salary to live comfortably. That might be enough if you've paid off your mortgage and are in excellent health when you kiss the office good-bye.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.
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