The reason people take the risks of investing in the first place is for the possibility of achieving a higher “realized” rate of return than can be achieved in a risk-free environment… i.e. a bank account. FDIC insured with compound interest.

  • Over the last ten years, this type of risk-free saving has been unable to compete with riskier means due to artificially low interest rates, forcing traditional “savers” into the mutual fund and ETF market.

  • (Funds and ETFs have become the “new” stock market, a place where individual stock prices have become invisible, questions about company fundamentals are met with blank stars, and commentators from the media tells us that people are no longer in the stock market).

Risk comes in many forms, but the main concerns of the average income investor are “financial” and, when investing for income without the right mindset, “market” risk.

  • Financial risk involves the ability of corporations, government entities, and even individuals to meet their financial commitments.

  • Market risk refers to the absolute certainty that all marketable securities will experience fluctuations in market value…sometimes more than others, but this “reality” must be planned for and dealt with, never feared.

  • Question: Is it the demand for individual stocks that drives funds and ETF prices up, or vice versa?

We can minimize financial risk by selecting only high-quality (investment-grade) securities, diversifying appropriately, and understanding that the change in market value is actually “harmless income.” By having an action plan to deal with “market risk”, we can turn it into an investment opportunity.

  • What do banks do to obtain the amount of interest that they guarantee to depositors? They invest in securities that pay a fixed rate of income regardless of changes in market value.

You don’t have to be a professional investment manager to manage your investment portfolio professionally. But you do need to have a long-term plan and know something about asset allocation… an often misused and misunderstood portfolio planning/organization tool.

  • For example, annual portfolio “rebalancing” is a symptom of dysfunctional asset allocation. Asset allocation should control every investment decision throughout the year, every year, regardless of changes in market value.

It’s also important to recognize that you don’t need high-tech software, economic scenario simulators, inflation estimators, or stock market projections to properly align with your retirement income goal.

What you do need is common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The “KISS principle” should be the basis of your investment plan; Composite gains the epoxy that keeps the structure safe and secure during the development period.

Additionally, an emphasis on “working capital” (as opposed to market value) will help you through the four basic portfolio management processes. (Business majors, remember PLOC?) Finally, a chance to use something you learned in college!

retirement planning

The retirement income portfolio (nearly all investment portfolios eventually become retirement portfolios) is the financial hero on the scene just in time to fill the income gap between what you need for retirement and guaranteed payments that he will receive from the uncle and/or from the past. employers

However, the potency of the superhero’s force does not depend on the size of the market value; From a retirement perspective, it is the income produced within the guise that protects us from financial villains. Which of these heroes do you want to feed your wallet?

  • A million dollar VTINX wallet that yields about $19,200 in annual spending money.

  • A well-diversified, $1 million income CEF portfolio generating over $70,000 a year… even with the same capital allocation as the Vanguard fund (just under 30%).

  • A million dollar portfolio of GOOG, NFLX and FB that generates no money to spend.

I’ve heard that a 4% withdrawal from a retirement income portfolio is normal, but what if that’s not enough to fill your “income gap” and/or more than the amount produced by the portfolio? If both “what ifs” turn out to be true… well, it’s not a pretty picture.

And it gets uglier fast when you look inside your 401k, IRA, TIAA CREF, ROTH, etc. portfolio and realize you’re not producing even close to 4% in actual spendable income. Total return, yes. Realized spendable income, ‘I’m afraid not.

  • Sure your portfolio has been “growing” in market value for the past ten years, but chances are no effort has been made to increase the annual income it produces. Financial markets live on market value analysis, and as long as the market goes up every year, we are told that all is well.

  • So what if your “income gap” is more than 4% of your portfolio; What if your portfolio is producing less than 2% like the Vanguard Retirement Income Fund? Or what if the market stops growing at more than 4% per year…while you continue to deplete capital at a rate of 5%, 6%, or even 7%?

The less popular closed-end income fund approach (available only in individual portfolios) has been around for decades and has all the “what ifs” covered. They, in combination with Investment Grade Value Stocks (IGVS), have the unique ability to take advantage of market value fluctuations in either direction, increasing the portfolio’s income output with each monthly reinvestment procedure.

  • Monthly reinvestment should never become a DRIP (dividend reinvestment plan) approach, please. Monthly income should be pooled for selective reinvestment where the highest return can be achieved. The goal is to reduce the cost per action and increase the performance of the position… with a click of the mouse.

A retirement income program that focuses solely on market value growth is doomed from the start, even on IGVS. All portfolio plans require an income-focused asset allocation of at least 30%, often more, but never less. All individual security purchase decisions must support the “growth purpose vs. revenue purpose” asset allocation operating plan.

  • The “working capital model” is an autopilot asset allocation system proven for over 40 years that virtually guarantees annual income growth when used correctly with a minimum 40% income purpose allocation.

The following points apply to the asset allocation plan that runs individual taxable and tax-deferred portfolios…not to 401k plans because they generally cannot generate adequate income. Such plans should be allocated to the maximum security possible within six years of retirement and rolled over to a personally directed IRA as soon as physically possible.

  • “Income purpose” asset allocation starts at 30% of working capital, regardless of portfolio size, investor age, or amount of liquid assets available for investment.

  • Starter portfolios (less than $30,000) must have no equity component and no more than 50% until six figures are reached. From $100k (up to age 45), as little as 30% of income is acceptable, but not particularly income-earning.

  • At age 45, or $250k, move to 40% of income purpose; 50% at age 50; 60% at age 55, and 70% titles for income from age 65 or retirement, whichever comes first.

  • The income purpose side of the portfolio should be kept as invested as possible, and all asset allocation determinations should be based on working capital (ie, the cost basis of the portfolio); cash is considered part of the capital or “growth purpose” allowance

  • Equity investments are limited to CEF Capital with seven years of experience and/or “Investment Grade Value Stocks” (as defined in the “Brainwashing” book).

Even if you are young, you need to quit smoking a lot and develop a growing stream of income. If you maintain revenue growth, market value growth (which you’re expected to love) will take care of itself. Remember, a higher market value may increase the size of the hat, but it doesn’t pay the bills.

So this is the plan. Determine your retirement income needs; start your investment program with an income focus; add capital as you age and your portfolio becomes more significant; When retirement approaches or portfolio size gets serious, make your income purpose allocation serious, too.

Don’t worry about inflation, the markets, or the economy…your asset allocation will keep you moving in the right direction as you focus on increasing your income each year.

  • This is the crux of the entire “preparing for retirement income” scenario. Every dollar added to the portfolio (or earned by the portfolio) is reallocated according to the “working capital” asset allocation. When your revenue allocation is above 40%, you’ll see revenue magically increase every quarter…regardless of what’s happening in the financial markets.

  • Please note that all IGVS pay dividends which are also divided according to asset allocation.

If you’re within ten years of retirement age, a growing income stream is exactly what you want to see. Applying the same approach to your IRAs (including 401k rollovers) will generate enough income to pay the RMD (required mandatory distribution) and put you in a position to say, without reservation:

Neither a stock market correction nor rising interest rates will negatively impact my retirement income; in fact, I will be able to increase my income even better in any environment.

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