Generating Income from Investment Portfolios: Strategies and Considerations

I had a call with a client who was interested in starting to draw income from her portfolio last week. While this client and I have been working together for over 20 years, drawing income on a regular basis from the portfolio was a brand new concept. There is more than one way to achieve income goals, which made the learning curve feel even steeper. I wrote this piece to help her wrap her head around the various approaches and each has their pros and cons. Here are some vocabulary terms to remember: 

Income = Dividends (from stocks) or Interest (from bonds).  

Yield = Income (Dividend or Interest Payment) / Price

Total Return = Income + Capital Appreciation

Investors seeking to generate income from their portfolios have two primary strategies to consider: income-focused investing and total return investing. Each approach has its own benefits and drawbacks, and the choice between them depends on the investor’s goals, risk tolerance, and need for sustainable income that keeps pace with inflation.

Income-Focused Investing

Income-focused investing involves building a portfolio that generates income through dividends and interest payments. This approach appeals to those who prefer not to sell assets and want to maintain their principal. However, it has several limitations:

• Risk of Concentration: Focusing on high-dividend stocks or high-yield bonds can lead to a less diversified portfolio, increasing risk if these investments underperform .

• Inflation Risk: Relying solely on income can lead to a loss of purchasing power over time, as dividends and interest may not keep up with inflation .

• Tax Inefficiency: Income from interest is often taxed at a higher rate than capital gains, potentially reducing after-tax returns .

• Market Dependency: Dividend payments can fluctuate with the economy, potentially leading to inconsistent income .

Total Return Investing

Total return investing involves considering both income (dividends and interest) and capital gains (appreciation in asset value) to meet income needs. This strategy offers several advantages:

• Diversification: It allows for a more diversified portfolio, reducing risk by spreading investments across various asset classes .

• Flexibility: By focusing on total return, investors can adjust their withdrawals based on market conditions, potentially preserving capital during downturns .

• Inflation Protection: A total return approach can better protect against inflation, as it includes capital appreciation which often outpaces inflation .

• Tax Efficiency: It can be more tax-efficient, as capital gains are typically taxed at a lower rate than income .

However, total return investing also has its challenges:

• Complexity: It requires more active management and understanding of market dynamics to optimize both income and capital gains .

• Potential Overdistribution: There is a risk of depleting the portfolio if withdrawals exceed sustainable levels, especially if based on past capital gains .

Sustainable Withdrawal Strategies

Regardless of the chosen strategy, maintaining a sustainable withdrawal rate is crucial to ensure the portfolio lasts throughout retirement. A common guideline is the “4% rule,” which suggests withdrawing 4% of the portfolio’s value annually, adjusted for inflation. However, this rate may need adjustment based on market conditions and individual circumstances.

In conclusion, while income-focused investing provides a sense of security by preserving principal, total return investing offers greater flexibility and potential for growth. Investors should carefully assess their financial goals, risk tolerance, and income needs to determine the most suitable approach for generating sustainable income from their portfolios.

Examples

Here are some examples of how an investor might implement income-focused and total return strategies, along with examples of sustainable withdrawal strategies:

Income-Focused Investing Example

Portfolio Composition

• Dividend Stocks: An investor might choose stocks from companies with a history of paying consistent and increasing dividends.

• Bonds: The portfolio could include government or corporate bonds that pay regular interest, such as U.S. Treasury bonds or investment-grade corporate bonds.

• Real Estate Investment Trusts (REITs): These can provide income through dividends generated from real estate holdings.

Income Generation

• The investor receives regular income from dividends and interest payments.

• For example, if the portfolio is worth $1,000,000 and generates a 3% yield, the investor would receive $30,000 annually in income.

Total Return Investing Example

Portfolio Composition

• Balanced Mix of Assets: The portfolio might include a mix of stocks, bonds, and other asset classes, such as international equities and alternative investments.

• Growth Stocks: These stocks may not pay high dividends but have the potential for significant capital appreciation, such as technology companies.

• Index Funds/ETFs: Broad market index funds or ETFs can provide exposure to a wide range of assets, contributing to both income and growth.

Income Generation

• The investor focuses on both income and capital gains.

• For example, if the portfolio appreciates by 6% in a year and yields 2% in dividends, the total return is 8%. The investor might withdraw 4% for income, leaving the remaining 4% to grow the portfolio.

Sustainable Withdrawal Strategies

4% Rule Example

• An investor with a $1,000,000 portfolio withdraws $40,000 annually (4% of the initial portfolio value), adjusting for inflation each year.

• This approach aims to provide a steady income stream while preserving the portfolio’s longevity.

Dynamic Withdrawal Strategy

• The investor adjusts withdrawals based on market performance. For instance, they might withdraw less during a market downturn to preserve capital and more during strong market years.

• This strategy can help mitigate the risk of depleting the portfolio too quickly.

Bucket Strategy

• The investor divides the portfolio into “buckets” based on time horizon:

  • Short-Term Bucket: Holds cash and short-term bonds for immediate income needs.

  • Medium-Term Bucket: Contains a mix of bonds and dividend-paying stocks for income over the next 5-10 years.

  • Long-Term Bucket: Invested in growth-oriented assets for future capital appreciation.

These examples illustrate how investors can implement different strategies to generate income while considering sustainability and inflation protection. The choice of strategy should align with the investor’s financial goals, risk tolerance, and market outlook.

Any opinions are those of Kathy Reisfeld and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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Aligning Your Spending with Your Values

Few people enjoy a budget and for many the goal of building wealth is so to get to the point that one isn’t needed. We’ve worked with clients at all ends of the wealth spectrum to help them evaluate their spending. Sometimes those with relatively smaller incomes are excellent savers and for some, the more they have, the easier it is to overspend.

Reining in Excess

Overspending can become a silent drain on wealth and personal fulfillment. If you find yourself in this situation, aligning your spending with your core values can be a powerful strategy to curb excess while enhancing your life’s purpose. So how can you transform your relationship with money from one of excess to one of meaningful impact?

Recognizing the Overspending Cycle

Overspending often stems from a disconnect between our actions and our intentions. It can be driven by:

1. Habit and convenience

2. Social pressures and expectations

3. Emotional triggers

4. Lack of clear financial goals

5. Desire for reaping the rewards after years of sacrifice.

The Cost of Misaligned Spending

Overspending doesn’t just affect your bank balance. It can lead to:

• Diminished satisfaction with purchases

• Increased stress and anxiety

• Missed opportunities for meaningful impact

• A legacy that doesn’t reflect your true self

Steps to Align Your Spending with Your Values

1. Confront Your Spending Reality

Begin by honestly assessing your spending habits. Look at your bank statements and credit card bills. Categorize your expenses and identify areas of excess.

2. Rediscover Your Core Values

Take time to reflect on what truly matters to you. Is it family, environmental sustainability, education, health, or personal growth? Your values should guide your financial decisions.

3. Identify the Gap

Compare your current spending patterns with your core values. Where are the biggest disconnects? This exercise often reveals surprising insights and opportunities for change.

4. Set Value-Based Financial Goals

Create specific, measurable goals that align with your values. For instance, if health is a priority, your goal might be to redirect funds from luxury purchases or travel to wellness investments.

5. Create a Values-Aligned Budget

Restructure your budget to prioritize spending in areas that align with what is most important to you. This might mean significantly reducing impulse purchases or redirecting funds to meaningful causes.

6. Implement a “Pause and Reflect” Practice

Before making any significant purchase, pause and ask yourself:

• Does this align with my values?

• Will this contribute to my long-term happiness and goals?

• Is there a more meaningful way to use these funds?

Practical Strategies for High-Net-Worth Individuals

1. Quality Over Quantity: Focus on fewer, but more meaningful purchases.

2. Experiential Spending: Shift from material acquisitions to experiences that enrich your life and align with your values.

3. Strategic Philanthropy: Instead of impulse buying, redirect funds to causes you care about. This can provide a sense of purpose and impact.

4. Invest in Personal Growth: Allocate funds towards education, skills development, or wellness programs.

5. Sustainable Luxury: If luxury is important to you, opt for brands and services that align with ethical and sustainable practices.

Overcoming Challenges

1. Social Pressure: Develop strategies to resist peer pressure that leads to overspending. Surround yourself with like-minded individuals who respect your values.

2. Emotional Spending: Identify your emotional triggers for overspending and develop healthier coping mechanisms.

3. Habit Breaking: Replace ingrained spending habits with new routines that align with your values. This takes time and patience.

The Rewards of Aligned Spending

As you bring your spending in line with your values, you’re likely to experience:

• Greater satisfaction with your purchases

• A sense of control over your finances

• Increased overall life satisfaction

• The joy of making a meaningful impact

• A legacy that truly reflects who you are

Conclusion

Overspending doesn’t have to be a permanent state. By aligning your spending with your core values, you can transform your relationship with money from one of excess to one of purpose and impact. This shift not only helps in curbing overspending but also ensures that your wealth becomes a powerful tool for living a more meaningful and fulfilling life. Remember, true wealth isn’t measured by how much you spend, but by the positive impact you create and the legacy you leave. Start today by examining one area of overspending and considering how you might redirect those funds in a way that aligns with your deepest values. Your future self – and the world around you – will thank you for it.

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Keep Your Brain Healthy. It’s The Only One You’ve Got.

My father suffered from dementia during the last few years of his life. The man who once helped design guidance systems that sent satellites into space and men to the moon eventually got to the point that he would get lost on his own street. It was devastating to watch his decline and the toll it took on my mother.

As we age, our brains undergo natural changes, but there are ways to support cognitive health and potentially slow age-related decline. Research has shown that the aging brain can compensate for slower processing by using more of its capacity, leading to improved judgment and decision-making abilities[1][2].

Here are some tips for maintaining brain health as you age:

1. Stay mentally active: Learning new skills or engaging in cognitively demanding activities can enhance memory function[3]. What Do We Know About Healthy Aging

2. Manage stress: Chronic stress can negatively impact brain health. Practice stress-reduction techniques like meditation or engaging in enjoyable activities[3].

3. Stay physically active: Regular exercise supports overall brain health and may reduce the risk of cognitive decline. Read more about how Exercise Strengthens Your Brain.

4. Maintain social connections: Interacting with others can help keep your mind sharp and improve emotional well-being[3].

5. Eat a healthy diet: A balanced diet rich in nutrients supports brain health. Foods Linked to Better Brain Power

6. Get quality sleep: Adequate sleep is crucial for cognitive function and memory consolidation.

7. Challenge negative thoughts: Older adults tend to be better at minimizing negativity, which contributes to greater life satisfaction[2].

Remember, it’s never too late to start taking care of your brain. Even small changes in daily habits can contribute to better cognitive health as you age. If you have concerns about your cognitive function, consult with a healthcare professional for personalized advice and support. If you are a caregiver, find the support that you need to take care of yourself. If you are in the Hudson Valley and looking for caregiver support, let us know as we can point you towards some great resources.

Sources
[1] Don’t call me “old”: Avoiding ageism when writing about aging
[2] Why you should thank your aging brain – Harvard Health
[3] What Do We Know About Healthy Aging?
[4] You Can Keep Your Brain Healthy at Any Age – Connect Community
[5] Keeping Aging Brains Healthy – MIT School of Science

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What To Do With A Lump Sum of Cash?

When it comes to investing cash you have 3 choices:

• Invest it as a lump sum all at once

• Average it in over time (dollar cost averaging)

• Wait for a pullback (buy the dip) and invest it then

Statistically we know that investing a lump sum in equities beats dollar cost averaging 75% of the time. And we know that dollar cost averaging outperforms a buy the dip strategy 60 - 75% of the time. So it seems like a no brainer to go ahead and put that cash to work all at once. In volatile markets like these that can be a scary prospect though. Right now it seems like the economy and markets could easily get worse before they get better. The good news is you don’t have to choose among these three strategies. You can take a hybrid approach, which combines all three. We know that putting money to work and keeping it invested for the long haul is the most important step one can take towards building wealth, regardless of the exact timing of how you get started. So while statistics tell us that investing a lump sum all at once is a better strategy 75% of the time, it really hurts when you put a lump sum to work and then the markets crash, 20, 30, 40, or 50%! For many clients, they only have a large sum to put to work once or twice in their lives so the pressure feels much greater than a robotic approach to investing might suggest.

Rather than try to time the markets or live in fear of bad timing (unless you have an extremely strong stomach), for most clients, we would generally recommend utilizing a hybrid approach at times like these. Put some money to work as a lump sum. Then average in the remaining balance over 6 to 12 months, and accelerate those contributions for every additional 5% pullback from market highs. It’s a bit complex and requires a bit of extra effort on our part but it takes advantage of the best of all 3 strategies. There will be plenty of times when you wish you’d gone all in at once with a lump sum rather than a strategy like this but hindsight is 20/20 and more importantly a hybrid approach to putting money to work is one that most clients can feel comfortable committing to without fear of major short term regret.

The forgoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opions are those of Katherine Reisfeld and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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