The Transition To An Income Portfolio Can Be A Challenge When You Are Nearing Retirement.

The time has come to start drawing income from your retirement account after years of saving and investing. Here are some things to remember.

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You may have developed a strong skill for conserving money and making long-term investments over the years. But you might need to change your focus when the time comes for you to stop working or return to a part-time career. It's time to consider your income.

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You might have favored a portfolio that was primarily comprised of stock market investments when you were decades away from retiring. The benchmark S&P 500 SPX has generated an average annual return of 9.88% over the previous 30 years when dividends have been reinvested, thus this strategy worked well. The S&P 500 includes about 80% of dividend-paying stocks, and reinvestment is a key component of compounding, which makes equities such a reliable method of long-term gain.

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Buying shares of the SPDR S&P 500 ETF Trust SPY or other index funds that follow the benchmark is another straightforward way to invest in the S&P 500. Such funds are many, and many of them have relatively modest expenses.

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It goes without saying that a long-term growth investor whose portfolio is heavily weighted in the stock market must resist the urge to exit in bearish situations. Because investors who leave the market tend to come back too late after a large loss has been reversed, attempts to time the market typically underperform when compared to the S&P 500.

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And the stock market frequently experiences harsh falls. The market can drop by 20% or even more on occasion. Yet, the 30-year average return has stayed close to 9.9% throughout, and if you go further in the past, the average return has remained approximately the same.

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Due to changes in your life, you now require money.

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Now picture yourself at the age of 60, needing to retire or perhaps only wanting to work part-time. How can you get ready for this transformation when you've been saving and investing for growth for decades?

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According to Lewis Altfest, CEO of Altfest Personal Wealth Management, which manages over $1.6 billion in assets for private customers in New York, it is crucial to handle your income needs individually.

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Consider the many types of accounts you have. Whatever you withdraw from a 401(k), IRA, or other tax-deferred account will be subject to income taxes. Withdrawals from a Roth account, into which contributions were made after taxes, won't be taxed. (Read more about Roth account conversions here.)

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If you have a sizable tax-deferred retirement account and want to keep investing in stocks (or funds that hold stocks) for long-term growth, you might want to follow the so-called 4% rule, which states that you should only withdraw 4% of your balance annually as long as that amount is sufficient to meet your income needs. To start, you might just set up an automatic withdrawal schedule to produce this revenue. Of course, you should only remove what you need in order to keep your tax cost to a minimum.

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4% Of The Time

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According to Ashley Madden, director of financial planning services at Hutchinson Family Offices in Greensboro, North Carolina, the 4% rule is a helpful place to start when having discussions with clients who need to start taking income from their investment portfolios, but it shouldn't be a rigid guideline. Like other financial planning ideas, she asserts that the 4% safe withdrawal rate is not a "one size fits all" solution for all planning scenarios.

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Instead, according to Madden, you should consider how much you'll need to withdraw to cover your costs, such as healthcare, while still enabling your investment account to grow. Take into account all of your sources of income, your projected expenses, the kinds of investments in your portfolio, and even your estate planning.

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Madden notes that as an advisor, she is concerned about customers who have taken far more than 4% of their investment accounts during their early retirement years. She claims that at this point, discussing the 4% withdrawal notion can show how people are withdrawing money faster than their investments are increasing.

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According to Madden, when talking to seniors who are hesitant to take any income at all from their investment accounts, the concept of a 4% withdrawal rate can be useful.

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In either case, she argues, viewing withdrawals as percentages as opposed to fixed sums helps "empower decision-making by eliminating some emotion from the process."

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Producing Income

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Here are a few ideas to think about when it comes to making money:

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• Purchasing bonds, which until they mature, pay a consistent interest rate. Using funds, which have diversified portfolios that can reduce your risk, you can also pursue bond income.

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• Taking dividend payments from the equities you own rather than reinvested.

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• Investing in a few specific stocks with enticing dividend yields will allow you to earn income while pursuing growth as the share prices rise over time.

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• Choosing a few stock-holding mutual funds or exchange-traded funds to receive dividend income. Some of these funds might employ covered-call tactics, as explained below, to increase income while reducing risk.

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• Think about meeting with both a financial planner and an investment advisor as you plan for retirement and make changes to your investment strategy.

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The 60/40 split and bonds

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You may have read articles describing a portfolio that consists of 60% equities and 40% bonds, or the so-called 60/40 portfolio. The long-term feasibility of this strategy has been explained by Trade Algo writer.

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According to Ken Roberts, an investment advisor with Four Star Wealth Management in Reno, Nevada, the 60/40 portfolio is "a solid beginning point for discussions with clients" about income portfolios.

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He adds, "It's an approximation. "We might drop a particular asset type if it is increasing. We might seize an opportunity if it arises in another class at the appropriate moment.

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The 60/40 portfolio is "used broadly by the financial sector to denote a portfolio of equities and bonds; it does not imply that a 60/40 mix is the optimum allocation for each customer," according to Sharmin Mossavar-Rhamani and Brett Nelson in a study from January titled "Caution: Heavy Fog."

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With the rise in interest rates that has caused a decline in bond prices over the past year, both Roberts and Altfest highlight current opportunities in the bond market. Due to the fact that bond prices have fallen as interest rates have increased over the past year, Altfest suggests that a portfolio consisting of two thirds bonds and one third equities would be acceptable in this market for an income-oriented portfolio.

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According to Altfest, taxable bonds offer more alluring yields than municipal bonds for the majority of investors.

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Your yield is the bond's annual interest payments (the coupon, or stated interest rate, divided by the face value), multiplied by the cost of the bond. Additionally, if you purchase the bond at a price below its face value and hold it until it matures, you will make a profit. You have an unrealized gain if interest rates increase after you purchase a bond, and vice versa.

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According to Altfest, bonds currently offer a yield, and if a recession occurs, they will make you money as opposed to equities, which will make you lose money. In other words, the Federal Reserve would probably reduce interest rates to promote economic growth during a recession. As a result, bond prices would rise, perhaps resulting in "double-digit yearly returns," as stated by Alftest.

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Although we are unable to forecast which way interest rates will move, we do know that the Fed's strategy of raising interest rates in order to reduce inflation cannot continue indefinitely. Bonds are attractive right now when you take into account the present price discounts, relatively strong yields, and eventual maturity at face value.

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Bond funds can take care of the work for you because it can be challenging to create a diverse bond portfolio on your own. Because the share price of a bond fund fluctuates, it is subject to pressure when interest rates increase. Nonetheless, the majority of bond fund portfolios currently consist of securities that are trading below their face value. This offers both the possibility for gains when interest rates inevitably start to decrease as well as downside protection.

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Two bond funds that primarily invest in mortgage-backed securities are recommended by Altfest.

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With $2.9 billion in assets under management, the Angel Oak Multi-Strategy Income Fund ANGIX advertises a 30-day yield of 6.06% for its institutional shares. .Most of its investments are in privately issued mortgage-backed securities.

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With more than 50% invested in mortgage-backed securities and government bonds, the $33.8 billion DoubleLine Total Return Bond Fund DBLTX, which offers a 30-day yield of 5.03% for its Class I shares, is a more conservative option.

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Institutional or Class I shares, often known as adviser shares, typically offer the lowest expenses and greatest dividend yields for classic mutual funds with numerous share classes. Notwithstanding the titles of the share classes, the majority of investors can access them through advisers; for clients without advisers, brokers are frequently used.

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Roberts suggests short-term U.S. securities for investors who are unsure about what to do right away. Using Treasury funds is a good substitute. The yield on two-year U.S. Treasury notes, BX:TMUBMUSD02Y, is currently 4.71%. He advises, "You might wait out the next couple of years and search for market possibilities." But when the Fed approaches its terminal rate, averaging in to longer-term bonds can be beneficial before it pauses and starts to decrease rates.

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The municipal bond category. In the current climate, should you take this alternative into consideration for tax-exempt income?

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According to Altfest, most investors would be better off with taxable bonds because the difference in yields between taxable and tax-exempt bonds has grown so significantly over the previous few months. Consider the Bloomberg Municipal Bond 5-year index, which, according to Trade Algo, has a "yield to worst" of 2.96%, to support that claim. When a bond is kept until its maturity date or call date, its annualized yield takes into account the bond's current market value to determine its yield to worst. A bond's call date, which could be earlier than its maturity date, is possible. The issuer may at any time redeem the bond at face value on or after the call date.

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This 2.96% return can be used to determine a taxable equivalent rate by dividing it by 1, less your highest graduated income tax rate (leaving state and local income taxes aside for this example). The Internal Revenue Service's list of progressive tax rates for 2023 can be found by clicking here.

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For a married couple earning between $190,750 and $364,200 in 2023, the graduated federal income-tax rate of 24%, our taxable equivalent is 2.96% divided by 0.76, which is a taxable equivalent of 3.89%. With U.S., you can make more money than that. Government securities with a range of maturities are tax-free on the interest they earn.

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You may locate bonds issued by your state or municipal authorities inside it with attractive-enough tax-exempt yields if you are in one of the top federal tax brackets and live in a state with a high income tax.

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Bonds are not the only source of income; preferred stock dividend yields have increased dramatically. How to choose the best ones for your portfolio is as follows.

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Investment In Stocks

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Stocks can be used in a variety of ways to generate income, including exchange-traded funds and individual dividend-paying equities.

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But keep in mind that stock dividends could be discontinued at any point. An extremely high dividend yield may be a warning sign for investors. Sometimes years before a company's management team decides to reduce its dividend, stock market investors may drive a company's shares lower if they detect issues (or even eliminate the payout).

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Yet, dividends (and your income) can also increase over time, so even if present yields are modest, think about investing in shares of solid firms that keep increasing payouts. These are 14 equities that saw price growth of twice as much in five years as dividend growth.

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Instead of focusing on dividend yields, you can think about focusing on quality. For instance, the Amplify CWP Enhanced Dividend Income ETF DIVO maintains a portfolio of around 25 equities of businesses that have consistently boosted their dividends and are thought likely to do so in the future.

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In order to boost income and reduce risk, this fund also uses covered-call options. Income from covered-call options varies and is generally higher when the stock market is experiencing greater volatility, as we have over the past year. This fund's 12-month distribution yield was 4.77%, according to Trade Algo.

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In this article about the JPMorgan Equity Premium Income ETF JEPI, which owns roughly 150 equities chosen for quality (regardless of dividends) by JPMorgan analysts, you can learn more about how the covered-call strategy functions and see a real-world trade example from Roberts. The 12-month distribution yield for this ETF was 11.35%, per FactSet. Investors should anticipate distribution yields in the "high single digits" in a less volatile market, according to Hamilton Reiner, the fund's co-manager.

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While most businesses that pay stock dividends do so quarterly, as do the majority of conventional mutual funds, it can be advantageous that both of these ETFs pay dividends on a monthly basis.

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Each strategy has benefits and drawbacks, and JEPI is only a few years old. Remember that when dividends are taken into account, funds that use covered-call strategies should be anticipated to underperform the broad index during bull markets and to outperform it during periods of higher volatility.

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Altfest says he would still want a client to have roughly one-third involved in stocks for the investor who wants to switch from a portfolio that is mostly invested in equities to an income portfolio. But, Altfest says he leans heavily toward bonds in this market. He would advise a client who already owned certain individual stocks to sell the more growth-oriented businesses and hang onto the ones with respectable dividend yields, while also taking into account how much profit would be made when selling stocks that had significantly increased in value.

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"You are more likely to keep those" than "if you sell where you have established a substantial nest egg with capital gains," he advises. This is because you will be saving some money on taxes for the year.

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And based on the typical price the investor has paid for shares over the years, some of those equities may already be producing a sizable income.

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You might still wish to buy some stocks for dividends after making modifications. In that circumstance, Altfest advises investing in businesses whose businesses are anticipated to be robust enough to support rising dividends over time, despite their low dividend yields.

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Keep in mind that every stock screen has its restrictions. If a stock clears a screening you find acceptable, then a new kind of qualitative evaluation is required. How confident are you that a company's business plan will keep it competitive for at least the next ten years?

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While addressing the outcomes of this stock screen, for instance, Altfest claims that he would take AbbVie off the list due to the threat that greater competition poses to earnings and dividends as the patent on the company's anti-inflammatory drug Humira approaches expiration.

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Because "the push toward health internationally might bring earnings and dividends down," he also says he would get rid of Philip Morris.

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