Inga Rachwald, Senior Investment Portfolio Strategist for Schwab Asset Management, joined Keith Black, Managing Director of RIA Channel, to discuss how retirees need to understand income-producing strategies.
Before designing a retirement income portfolio, investors need a financial plan. There are many variables in retirement, including longevity, the path of interest rates and equity market returns, assets held in taxable and tax-deferred investment accounts, and each investor’s individual risk tolerance. Each investor needs to determine their spending rate in retirement, when the spending will start, and how long that income will need to last.
Investors in or near retirement face the choice of how to generate income, either from income-producing investments or investments held for total return. Rachwald recommends holding both types of investments in a portfolio, which gives retirees flexibility in how and when to generate income from their portfolio. While total return investments may earn higher long-term returns than income-oriented investments, it can be difficult to time the sale of total return investments.
Investors may wish to delegate the timing of realizations of total return investments to fund managers. Schwab offers three monthly income mutual funds with different mixtures of equity and fixed income holdings. The target payout fund, with a fixed annual distribution of 5%, and the flexible payout fund, with a variable distribution rate of 4% to 6%, may include a return of capital in the distributed income. The income payout fund, which does not seek to distribute a return of capital, has an annual distribution ranging from 0% to over 5% based on the interest rate environment. While some investors will access retirement income through annuity products, mutual funds may allow investors to retain flexibility in their portfolios.
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