I’m a Financial Planning Expert: How To Develop a Portfolio of Retirement Income That Lasts Your Entire Life

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In the complex world of financial planning, where ensuring a comfortable retirement can be a daunting task, there’s one major question: How can we guarantee our savings will support us throughout our golden years, adapting to an often tumultuous financial landscape?

Enter the retirement paycheck, aka your portfolio of retirement income, intended to fill the gaps Social Security can’t cover once you retire. GOBankingRates spoke with a couple of financial experts to figure out the best strategies to build a retirement portfolio capable of lasting you through your golden years — and beyond.

Longevity Annuities

Robert R. Johnson, PhD, CFA and co-author of “The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies,” among others, shared that annuities are an important part of a comprehensive retirement plan. “Annuities too often get a bad rap,” he told GOBankingRates. “They can provide guaranteed income and peace of mind to the retiree and the retiree’s family.”

He emphasized that including an annuity to cover your essential living costs is a strong foundation for a retirement income strategy. Specifically, a longevity annuity provides a continuous stream of payments that commence when an individual reaches a specific age, such as 85. Having a longevity annuity means you can count on a reliable source of income during your later years, all at a reasonable expense.

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Maximizing Your Annuities

Steven Conners, the founder and president of Conners Wealth Management in Scottsdale, Arizona, explained that Fixed Indexed annuities come in two main types: growth annuities and income annuities. However, some of the most favorable annuities combine both features.

In these hybrid annuities, the investment has the potential to grow when market conditions are favorable, and they also include income riders attached to the base contract. These “riders” are offered by the life insurance company and provide monthly income for life. Typically, the cost for these riders is around 1% per year.

Leading life insurance companies, the same ones responsible for pension benefits for many retirees from major corporations, often guarantee this fixed income for life. These annuities are purpose-built to ensure monthly income that you cannot outlive, and they can be purchased as single or joint life annuities, which cover two individuals. The associated costs are relatively low, and the payments can be quite attractive, especially with current interest rates significantly higher than they were a year or two ago due to Federal Reserve interest rate hikes.

Dividend Stocks

Johnson shared that a popular strategy to create income in retirement is to assemble a portfolio of high-quality dividend paying stocks, essentially creating an equity portfolio that is annuity-like.

“If one decides to go down that path, one need look no further than stocks that have increased their dividends for many consecutive years to find good, safe candidates for dividend investing,” he said. “Some refer to these as ‘ruler stocks,’ because if you laid down a ruler on a graph of dividends over time, the ruler would point to the northeast and most of the points would be very close to the ruler. Others refer to these stocks as ‘dividend kings.'”

Johnson advised investors to target companies offering attractive dividend yields and those demonstrating the ability to sustain these payouts in the future. Historically, dividends have contributed to approximately 44% of the S&P 500’s returns over the past eight decades.

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The advantage of dividend-paying stocks over bonds lies in their long-term growth potential: dividends tend to increase over time, alongside the stock prices of these companies. In contrast, bondholders receive only the promised interest payments and principal upon maturity. Although stock prices may exhibit short-term volatility, diversified portfolios of dividend-paying stocks tend to yield significantly higher long-term returns compared to bonds.

Furthermore, Johnson shared notable examples of “ruler stocks” or “dividend kings” like Coca-Cola, Hormel, Genuine Parts, Procter & Gamble, and Johnson & Johnson. These companies have consistently rewarded investors by increasing their dividends each year for more than five decades, underscoring the enduring value of dividend-focused investment strategies.

A Laddered Bond Portfolio

Connors shared that building a laddered bond portfolio can provide a consistent income stream during retirement. This strategy hinges on two key principles.

Firstly, bonds typically pay interest every six months. By acquiring a selection of six distinct bonds with staggered payment months, you can generate monthly income. For instance, you might invest in a bond paying interest in January and July, followed by another bond paying in February and August. By diversifying into corporate or municipal bonds with varying payment months, you can construct a reliable monthly income source.

Secondly, you can diversify the portfolio by bond maturity dates, which helps mitigate the risk associated with fluctuations in interest rates, whether they rise or fall.

Mutual Funds

Connors added that mutual funds designed to provide monthly income can serve as a solution for securing a lifelong monthly income. These funds come in two main categories: taxable bond funds and tax-free municipal bond funds tailored to specific states. State tax-free mutual funds, in particular, are exempt from income taxes and are an excellent choice for individuals in higher tax brackets.

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Furthermore, there are closed-end funds traded on the New York Stock Exchange, typically offering higher interest rates. On the other hand, open-ended funds can be purchased directly from a mutual fund company and are traded at their net asset value (NAV), reflecting the value of the portfolio on the day of purchase.

In contrast, closed-end funds often trade at a discount or premium to their NAV. These funds have perpetual existence, meaning they continue indefinitely. In addition to generating income, the value of the fund’s portfolio fluctuates in line with the broader bond or stock market.

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