The reason people take the risks of investing in the first place is the prospect of achieving a higher “realized” rate of return than can be achieved in a risk-free environment … that is, a bank account FDIC-insured with compound interest.

• For the past ten years, such risk-free savings have been unable to compete with riskier media due to artificially low interest rates, forcing traditional “savers” to enter the market for mutual funds and ETFs.
• (Funds and ETFs have become the “new” stock market, a place where individual stock prices have become invisible, questions about the company’s fundamentals are met with blank stares, and commentators from media tell us that individuals are no longer in the stock market).

Risk comes in various forms, but the average income investor’s main concerns are “financial” and, when investing for income without the proper mindset, “market” risk.

• Financial risk involves the ability of corporations, government entities, and even individuals, to meet their financial commitments.
• Market risk refers to the absolute certainty that all marketable securities will experience fluctuations in market value … sometimes more than others, but this “reality” must be planned and addressed, never feared.
• Question: Is it the demand for individual stocks that drives funds and ETF prices up, or vice versa?

We can minimize financial risk by selecting only high-quality (investment grade) stocks, diversifying appropriately, and understanding that changing market value is actually “harmless to earnings.” By having an action plan to deal with “market risk”, we can turn it into an investment opportunity.

• What do banks do to obtain the amount of interest that they guarantee to depositors? They invest in securities that pay a fixed rate of income regardless of changes in market value.

You don’t have to be a professional investment manager to professionally manage your investment portfolio. But, you do need to have a long-term plan and know something about asset allocation … an often misused and misunderstood portfolio planning / organizing tool.

• For example, the annual “rebalancing” of the portfolio is a symptom of dysfunctional asset allocation. Asset allocation should control all investment decisions regardless of the year, each year, of changes in market value.

It’s also important to recognize that you don’t need high-tech computer programs, economic scenario simulators, inflation estimators, or stock market projections to properly align with your retirement income goal.

What you do need is common sense, reasonable expectations, patience, discipline, gentle hands, and a large driver. The “KISS principle” should be the foundation of your investment plan; Composite gains the epoxy that keeps the structure safe and secure during the development period.

Additionally, an emphasis on “working capital” (as opposed to market value) will help you through the four basic portfolio management processes. (Business students, remember PLOC?) Finally, a chance to use something you learned in college!

Planning for retirement

The retirement income portfolio (almost all investment portfolios eventually become retirement portfolios) is the financial hero who appears on the scene just in time to fill the income gap between what you need for retirement and the guaranteed payments you need. will receive from the uncle and / or from the past. employers.

However, the power of the superhero’s strength does not depend on the size of the market value; From a retirement perspective, it is the income produced within the disguise that protects us from financial villains. Which of these heroes do you want your wallet to carry?

• A million dollar VTINX portfolio that produces about $ 19,200 in spending money annually.
• A well-diversified, millionaire income CEF portfolio that generates more than $ 70,000 a year … even with the same capital allocation as the Vanguard fund (just under 30%).
• A million dollar GOOG, NFLX, and FB portfolio that doesn’t waste any money.

I’ve heard it said that a 4% withdrawal from a portfolio of retirement income is almost normal, but what if that’s not enough to fill your “income gap” and / or more than the amount produced by the portfolio? If both “what if” were true … well, it’s not a pretty picture.

And it gets uglier pretty quickly when you look inside your real 401k, IRA, TIAA CREF, ROTH, etc. portfolio and realize that it is not producing even close to 4% in real income to spend. Total return, yes. Income to spend realized, fear not.

• Sure, your portfolio has been “growing” in market value for the last ten years, but chances are, no effort has been made to increase the annual income it produces. Financial markets are based on market value analysis and as long as the market goes up every year, we are told that everything is fine.
• So what if your “income gap” is more than 4% of your portfolio? What if your portfolio produces less than 2% like the Vanguard Retirement Income Fund? Or what if the market stops growing at more than 4% per year … while it is still depleting capital at a 5%, 6% or even a 7% cut ???

The less popular closed-income fund approach (available only in individual portfolios) has been around for decades and has all the “what ifs” covered. They, in combination with Investment Grade Value Stocks (IGVS), have the unique ability to take advantage of market value fluctuations in either direction, increasing the portfolio’s income output with each monthly reinvestment procedure.

• Monthly reinvestment should never become a DRIP (Dividend Reinvestment Plan) approach, please. Monthly income should be pooled for selective reinvestment where the most “bang for the buck” can be achieved. The goal is to lower your base cost per share and increase position performance … with a click of the mouse.

A retirement income program that focuses only on market value growth is doomed from the start, even at IGVS. All portfolio plans need a revenue-focused asset allocation of at least 30%, many times more, but never less. All individual security purchase decision making should support the “growth purpose versus income purpose” asset allocation operating plan.

• The “Working Capital Model” is a proven autopilot asset allocation system that has been proven for over 40 years that virtually guarantees annual revenue growth when used correctly with a minimum revenue allocation of 40%.

The following points apply to the asset allocation plan that runs individual taxable and tax-deferred portfolios … not 401k plans because they typically cannot produce adequate income. Such plans should be assigned to the maximum security possible within six years of retirement and transferred to a personally directed IRA as soon as physically possible.

• Asset allocation for “income purpose” begins regardless of 30% of working capital, portfolio size, investor age, or amount of liquid assets available for investment.
• Starting portfolios (less than $ 30,000) must not have a capital component and must not exceed 50% until six figures are reached. From $ 100,000 (up to age 45), only 30% of income is acceptable, but it is not particularly productive in terms of income.
• At age 45, or $ 250k, move to 40% of income purpose; 50% at age 50; 60% at age 55 and 70% values ​​for income purposes starting at age 65 or retirement, whichever occurs first.
• The income purpose side of the portfolio should be kept as invested as possible, and all asset allocation determinations should be based on working capital (ie, the cost basis of the portfolio); cash is considered part of the capital stock or “growth purpose” allocation
• Investments in stocks are limited to CEF stocks with seven years experience and / or “stocks with investment grade value” (as defined in the book “Brainwashing”).

Even if you are young, you need to quit smoking a lot and develop an ever-increasing stream of income. If you keep the revenue growth going, the market value growth (which you are expected to love) will take care of itself. Remember, a higher market value may increase the size of the hat, but it doesn’t pay the bills.

So this is the plan. Determine your income needs for retirement; start your investment program with a focus on income; add stocks as you get older and your portfolio becomes more meaningful; When retirement looms, or portfolio size gets serious, make your income purpose allocation serious, too.

Don’t worry about inflation, the markets, or the economy … your asset allocation will keep you moving in the right direction as you focus on increasing your income each year.

• This is the crux of the whole “retirement income availability” scenario. Every dollar added to the portfolio (or earned by the portfolio) is reallocated according to the “working capital” asset allocation. When the income allocation is above 40%, you will see that income magically increases every quarter … regardless of what is happening in the financial markets.
• Please note that all IGVS pay dividends which are also divided according to asset allocation.

If you are within ten years of retirement age, what you want to see is a growing income stream. Applying the same approach to your IRAs (including 401k rollover) will produce enough income to pay the RMD (Required Mandatory Distribution) and put you in a position to say, without reservation:

Neither a stock market correction nor an increase in interest rates will have a negative impact on my retirement income; in fact, I will be able to increase my income even better in any environment.