Knowing portfolio income vs. withdrawals
Joel Dresang: Dave, let’s discuss what you mean when you talk about income. On the one hand, income-generating investments are in a portfolio, but a lot of times retirees talk about income as the money they withdraw from their portfolio. Can you clear that up?
Dave Sandstrom: Sure Joel, I think that the confusion comes in from a lifetime of us working, collecting our paychecks. We’ve always referred to that as income. But as advisors, when we’re investing, we also talk about portfolio income as it relates to income-producing assets, like bond funds and dividend-paying stock funds. So, I think it’s important that investors realize that withdrawals and portfolio income are two different things.
Joel: Why is it important to distinguish between the portfolio income and withdrawals?
Dave: I think if you get too focused on just portfolio income, as a way to create withdrawals for yourself, you might be putting yourself at some undue risk.
There have been times in the past when yields have been high enough – both bond yields and dividend yields – that they would support that strategy, where all you owned was those income-producing assets, and you took that money, and it supported your withdrawals.
We’re in a low interest rate environment right now, which makes that very difficult. And what it has a tendency to do then is make investors reach for higher yields, and they’re taking more risk with the securities in their portfolio that are intended to be the safer ones.
Joel: So, where else in their portfolio should they be reaching for the money they need for their withdrawals?
Dave: Joel, I think it’s important to have a total return strategy.
So, it’s a combination of things. You’re going to take some withdrawals from those income-producing securities – the bond funds, those dividend-paying stock funds. But you’re also going to need some growth in the portfolio, some growthier assets – stock funds that are appreciating in value. So that when we run into a time like we’ve just recently had, where stock prices have appreciated quite a bit, you can sell some of those securities, take that profit and use it to fund withdrawals for a period of time.
Joel: And then you can leave those safer assets, the income-producing assets, for a later day.
Dave: That’s correct, Joel. So when we’re using that total return strategy, it’s very important to have good balance in the portfolio.
We want to make sure that a portion of our portfolio has those income-producing assets and a portion of the portfolio is dedicated to something growthier so that, depending on what’s going on in the markets at the time, you have some choices on where to take those withdrawals from.
Joel: So, portfolio income is different from withdrawals. You don’t need to take all of your withdrawals from your portfolio income.
Dave: Joel, you’re correct, it all comes back to balance.
That balance is going to provide for us in the short term as well as having those assets for the long term.
Dave Sandstrom is vice president and an advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
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The Importance of Balance for Investors, a Money Talk Video
(initially posted July 20, 2017)