Investing for retirement income is different: rethinking the 60/40 rule

Many of the retirement guidelines I’ve read recently continue to treat baby boomers like the rest of the investing public. Even after the first six months of 2022, when the traditional 60/40 stock / bond portfolio sank by more than 20%.

I cannot dispute the traditional approach for investors who are 25, 35 or 45 and accumulate savings for their children’s retirement or college education. As we know, markets have historically rebounded and younger investors who have time to recover from market corrections have the advantage of an average of the dollar cost.

But the boomers who enter or are already retired have different needs than all the “Gens” that have come after them: they may not be able to wait for their depressed accounts to rise again. For the boomers, income is the important consideration: an 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 annuity-paying contracts (also called income annuities) – which with rising interest rates have increased payouts on new contracts – are the current winners. As of August 15, 2022, new annuity purchases at certain ages provide 20% to 50% (depending on income starting age) more than at the start of the year, and that could increase further. They are almost the mirror image of mortgage interest rates, which are also rising.

How much do you think a 20% increase in income is worth? Imagine that your initial Social Security benefit that you could apply for next year has increased from $ 3,000 to $ 3,600 per month. Would this grab your attention?

However, most financial experts still only talk about investing business, not income. Perhaps because it is easier, not because it is better, to put these boomers together with everyone else.

Another type of assignment is required for a retirement plan

While a 60% equity / 40% bond allocation may not be appropriate for boomers, a different type of 60/40 allocation might be: one that includes a combination of stocks and bonds along with income annuities. We call it the Go2Income plan.

When you create a Go2Income plan for retirement income, you can start with 60% of your retirement savings in investment portfolios and 40% in income annuities. But that assignment is different from the 60/40 above.

  1. It is based on output and not input, and in a Go2Income plan you might find yourself with divisions of 67/33, 75/25 or another allocation.
  2. The split will change over time, with an increasing allocation to income annuities to ensure a lifetime income.
  3. More importantly, the division is designed to suit your personal goals and priorities and not those of your neighbors.

We talked about allocation between annuity types (see For Sustainable Retirement Income, You Need These 5 Building Blocks). So, let’s talk about the allocation within the investment part.

Assignment of the investment quota of the Go2Income plan

A Go2Income plan will use a share of the investment portion of your retirement savings to be a secure source of income rather than strictly a source of capital growth.

There are three types of portfolios in the Go2Income strategy:

  1. High dividend portfolio: This is primarily a source of increased tax-free income plus capital growth and is invested in an after-tax or unskilled savings account.
  2. Fixed Income Portfolio: A source of fixed income plus general security of capital, replaced in part by guaranteed annuity payments. It will be invested in your unqualified retirement savings account.
  3. Balanced Portfolio: A source of equity withdrawals from your rollover IRA account to generate growing income while meeting RMDs. This will be a blend of a growing portfolio and a fixed income portfolio to reduce the risk of withdrawal.

The allocation to stocks within investment portfolios can be high, medium and low, but you should consider what percentage your stocks absorb in your overall portfolio. A high allocation of stocks within 60% in investment portfolios can often be selected when a high allocation to annuities within the 40% quota is chosen. The overall impact of these two elections is a greater allocation to fixed income assets, primarily in annuities.

Tactical allocation within each portfolio

The tactical implementation of investment portfolios within a Go2Income plan must cover (1) whether you are using an external advisor or creating a self-managed investment account, (2) the types of investments (ETFs, mutual funds or individual securities) and (3) allocation to specific market sectors.

We assume that you want to achieve your income goals, with low fees and low planning risk, while achieving your legacy goals. We add easy plan tracking and plan management so you may be able to manage portfolios on your own. Either way, coming up with a personal Go2Income plan will help a do-it-yourselfer decide what questions to ask a consultant.

Some investors may research and purchase 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 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 towards a specific objective and managed with the help of artificial intelligence (AI) tools. We decided to explore this option for Go2Income.

We consulted with a company, FolioBeyond, which is a “quantum” manager who uses advanced algorithms, including artificial intelligence (AI) tools, to build portfolios. Quantum investors use quantitative methods, tools and technologies to make investment choices.

FolioBeyond was asked to design the high dividend, fixed income and balanced portfolios to align with Go2Income’s planning. The objectives of each portfolio were to match the interest and dividend yields of comparable low-cost ETFs and to outperform those ETFs based on total return by 1% to 2% per annum. We also wanted them to keep commissions low.

The following are the backtested investment results of these portfolios against the benchmark indices for the first seven months of 2022 and 10 and a half years since 2012. The FolioBeyond portfolios outperformed both the returns and total returns of comparable benchmarks (see “FolioBeyond Advantage “) in most scenarios. Of course, backtesting results are achieved while knowing what happened in past markets and cannot be used to predict future performance. See the discussion below the graph for other caveats.

The return performance shown above is based on back-tested simulations before February 2021 for the equity model and November 2020 for the fixed income model. Actual performance for client accounts can be significantly lower than that of modeled portfolios.

Performance tested:

  1. It does not represent actual performance and should not be construed as an indication of such performance. These results do not represent the impact that relevant economic and market factors could have on an investment advisor’s decision-making process if the advisor were actually managing the client’s money.
  2. It differs from actual performance because it is achieved through the retroactive application of model portfolios designed with hindsight.
  3. It could be favorable or unfavorable if portfolio models are changed from time to time.

Three takeaways from this article

  1. The allocation for retirement income differs from the allocation for the accumulation of retirement savings.
  2. Allocating the investment portion of a retirement income plan to specific portfolios must be in line with the income objectives and how the income is sourced.
  3. There are many options for managing individual portfolios, but be sure to consider both returns and returns after 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 a free custom plan which offers both a high starting income It is growing lifetime incomeas well as 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 income they cannot have survived. He learns more at Go2income.com, where consumers can explore all kinds of annuity options, anonymously and for free.

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