Q: I am 69 and have $400,000- $450,000 to set up in a retirement plan to have a monthly income of $1,000 - $1,500 per month. What is the best way to go about this? What bond funds, mutual funds and ETFs would be good?
A: Creating income during retirement can be challenging and time consuming. Generally speaking, the ideal retirement portfolio has a combination of bonds (which provide predictable fixed income); equities (which provide capital appreciation potential and dividend payments); alternatives (which hedge inflation concerns); and cash (which signifies the safest investment option).
Prior to determining which investments fit best within a retiree's portfolio, the investor should first assess his/her risk tolerance in order to determine the proper allocation between bonds, stocks, alternatives and cash. In addition, the allocation should consider the current economic cycle, political climate, cyclical market performance and current/future inflationary trends.
Another challenge that investors experience when creating retirement income from their "nest egg" revolves around income consistency. For example, typical bonds make interest payments semi-annually. This leaves the retiree without income for 10 months out of a calendar year and requires budgeting while additionally reducing payment automation. One way around this is to create a "bond ladder." A bond ladder is a portfolio of fixed-income securities where each security has a significantly different maturity date (due date).
The benefits of this type of investment structure are twofold. Not only is the investor afforded income "smoothing," but by purchasing several smaller bonds with different maturity dates (rather than one large bond with a single maturity date), the investor minimizes interest-rate risk and increases liquidity.
At the end of the day, the goal is how to squeeze income from an investment portfolio, preserve principal and maintain risk equilibrium. Investors should either utilize the advice of a professional or spend time educating themselves.
Annette Thau wrote a fantastic book titled "The Bond Book." As the title suggests, "The Bond Book (Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More)," is a great resource for most retail investors.