How To Generate $100,000 Of Retirement Income, Without Selling Your Principal

You’ve worked hard. You’ve built a retirement savings balance of $1 million. You’re ready to retire. And you want $100,000 a year of retirement income, including your Social Security benefit. Is that possible without taking on excessive risk?

High-yield investments can be volatile. Many higher yielding securities face higher risk of default. But many leading financial advisors say reaching this income goal is possible.

One key is to diversify your sources of income. “We recommend diversifying the sources of income in an investor’s portfolio to help bring down volatility,” said Sam Solem, portfolio manager, Private Wealth at Intrepid Capital, in Jacksonville Beach, Fla.

Mix in investments by asset class, geography and investment strategy to cut overall risk. He’s also trimming back on lower yielding broad investments. And he’s boosting holdings of high-yield investments tied to building global infrastructure like energy.

“We recommend investors combine lower yielding but high-quality fixed income with short duration high-yield strategies in order to get the optimal balance of yield and risk,” Solem said.

The benefit of diversification was evident during the stock market’s coronavirus pandemic plunge from Feb. 19 through its March 23 trough. The S&P 500 tumbled 33.5%. Two of the four funds recommended by advisors for this report are bond centric and lost 14.5% and 16.7%. A third fund, which focuses on stocks, fell 24%. The fourth fund, which uses stock-based futures and swaps, backed by long-duration bonds, fell 37.2%. All of that is also a reminder that yield-oriented funds can be volatile.

Retirement Savings Strategies That Can Generate $100,000 Annual Retirement Income

Here are the conditions we asked advisors to work with in recommending income-generating funds:

  • Assume you’d get $32,000 a year from Social Security.
  • Generate the rest, $68,000, from your investment balance. That’s a yield of 6.8%.
  • Avoid excessive risk.

How Much To Expect From Social Security

Getting $32,000 in Social Security benefits is reasonable. It’s how much a worker who is 64 years old — the average U.S. retirement age — earning $136,000 would be entitled to. That’s if they waited until Social Security’s full retirement age of 66-1/2, according to the Social Security Administration’s quick calculator. $100,000 of annual retirement income would be 73% of the worker’s preretirement income. And many advisors tell clients they should aim for 70% to 80% of their preretirement income once they stop working.

Further, the retiree would be used to $100,000 of income. Social Security’s calculator shows that this worker’s income averaged around that in the decade before retirement.

How Risky Is A 6.8% Retirement Income Yield?

But how much risk do you have to take on in your retirement savings to give yourself a 6.8% annual yield? You can get 1.52% from the SPDR S&P 500 ETF (SPY). Higher yield means taking on more risk of default and more volatility.

One way to measure that higher risk is comparing a fund’s standard deviation with SPY’s. SPY’s three-year standard deviation (SD) as of Dec. 31 was 18.73.

Also, SPY’s three-year average annual return was 12.63% as of Wednesday. Its 18.73 SD means that 68% of the time over any three-year period, SPY’s return should be between negative 6.1% and positive 31.36%.

Consider the three-year SD for each fund as of Dec. 31 recommended by advisors. Also weigh each fund’s 2020 total return. You’ll also find its three-year average annual return and its yield or distribution rate, all per

“Investing today is not like the past,” said Morgan Christen, CEO of Spinnaker Investment Group, in Newport Beach, Calif. “It takes creativity. What is risk these days? Having too low a yield is a risk. Inflation is a risk. Running out of money in retirement is a risk. I feel these risks far outweigh those derived from investment risk alone.”

The Role QYLD Can Play In Your Retirement Savings

Global X Nasdaq 100 Covered Call ETF (QYLD): The fund’s payouts include income from covered call writing, says Don Calcagni, chief investment officer of Mercer Advisors, in Denver. Covered call writing involves options for stocks or indexes. That strategy works best in a rising stock market. An investor — such as the ETF — buys a stock and at the same time sells the stock’s potential price gain above a specific price to another investor. The investor originally buying the stock keeps any price gain up to the agreed-to threshold, or strike price. The second investor, who buys the option, gets any gain above the strike price.

For the right to get any gain above the strike price, the second investor pays a “premium.” Mutual funds and ETFs pass those premiums through to shareholders as income. That can provide retirement income.

  • 12-month yield: 11.16% (highest yield in this analysis)
  • 2020 total return: 8.76%
  • 3-year avg. ann. return (on price): 9.13%
  • Standard deviation: 14.40

Pimco Fund Mixes Retirement Savings Strategies

Pimco StocksPlus Long Duration Fund (PSLDX): “The fund uses a combination of fixed income and futures and derivatives to gain equity exposure and distribute yield while having exposure to growth,” said David Bernacchia, partner and managing director, Wealth Manager, at Steward Partners Global Advisory, in New York City. Pair a lower yielding, lower risk fund like this with one or more higher yielding, higher risk funds.

  • 12-month yield: 5.71% (lowest yield in this analysis)
  • 2020 total return: 35.62%
  • 3-year avg. ann. return (on price): 22.08%
  • Standard deviation: 22.37 (highest risk in this analysis)

Pros, Cons Of This Closed-End Fund

Guggenheim Strategic Opportunities Fund (GOF): GOF is a closed-end fund. Like ETFs, closed-end funds trade throughout the day. GOF is “certainly tradable,” Bernacchia said, but it is less liquid than ETFs. Like many closed-end funds, GOF invests in some positions with borrowed money. Leverage can lift a fund’s risk.

Another risk in this closed-end fund: “Stock price can and will trade based on supply-demand, causing the fund to trade at a discount or premium to its net asset value (from time to time),” Bernacchia said.

As for GOF’s strategy, Bernacchia said, “This fund is a more traditional multisector bond fund that will own fixed income securities across all subsectors.” And that includes corporate, high-yield and government bonds.

One key positive: Unlike some closed-end funds, the fund does not cannibalize principal. It doesn’t include return of capital in distributions. Its distributions are all yield, Bernacchia says. (Total distribution rate is comparable to yield.)

  • Total distribution rate: 10.99%
  • 2020 total return: 22.27%
  • 3-year avg. ann. return (on price): 22.08%
  • Standard deviation: 9.38 (lowest risk in this analysis)

Emerging Markets Debt Fund

American Beacon Frontier Markets (AGEIX): Solem likes this fund because emerging markets debt yield generally is higher than the roughly 2% yield on most developed markets debt. A weakening U.S. dollar and thriving commodities “should help EM economic performance and result in good EM equity and debt performance over the next few years,” Solem said. Also, this fund’s relatively short duration of around four years helps limit the fund’s interest rate risk, Solem says. A-class shares (AGUAX) of this fund require a minimum initial investment of $2,500.

  • 12-month yield: 7.39%
  • 2020 total return: 2.59%
  • 3-year avg. ann. return (on price): 3.58%
  • Standard deviation: 11.00

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