According to the Investment Company Institute, the assets in retirement plans, accounts and annuities have increased from about 12 trillion dollars in the late 1990’s to nearly 23 trillion dollars currently. With all that capital ready to produce income to sustain living expenses, and with a very low interest rate environment, many are wondering how their assets will fit the bill.
Investor’s Business Daily recently addressed the issue in an article dated August 18, 2014. Three advisors were asked for their recommendations: Joe Centra of Allocation Resource Group, Joe Stein of the online robo advisor Betterment.com, and Bob Phillips of Spectrum Management. The only advisor in this group utilizing annuities was Mr. Centra, and only to the tune of 26% of the portfolio, with 16% of the rest of the portfolio going to private debt, 42% going to publicly traded stocks and about 16% going to REIT’s. Centra claims that one could squeeze 4% annual income out of this portfolio. The breakdown in yield from a $4M portfolio would be $26K from the annuity, $20K from the REIT’s, and $22K and the rest coming from the stocks. However, you might want to watch out for lock-up periods on the private debt and high fees. Also, beware of market concentration risk with this mix. With REIT’s having historically volatile returns, things could turn south if something disrupts that asset class.
My recommendation for income producing portfolios tends to lean more towards those offered by robo advisor Betterment and that of Spectrum. Betterment advises the portfolio be allocated to 56% stocks and 44% bonds in low-cost index funds. The allocation to stocks would decrease down to 30% over the first 15 years of retirement. However, one might want to be careful on the bond mix. Spiking interest rates can sink a bond fund portfolio. Spectrum, out of Indianapolis, keeps a simple allocation of 60% stocks, 37% bonds, and 3% cash. Of the stocks, 60% would be large caps, 10% in MLP’s, 10% in midcaps, 10% in US small caps, and 10% in foreign stocks. Of the fixed income, 15% each would be in high yield and short-term debt, and the remaining 70% in the Barclays US Aggregate index. This would result in a conservative mix that produces somewhere in the range of 2.3%. However, the historical capital appreciation to date of this portfolio versus that of Centra’s above is much greater.
By choosing low-cost index funds or ETF’s, one can produce a portfolio that will potentially capture the appreciation component as well as provide competitive income yield. However, working closely with an advisor that monitors your individual situation is key to long-term retirement success.