There was a time when creating a retirement income plan was easy – simply invest in government bonds and sit back to collect the income.
Today, and for the foreseeable future, investors will need to maximize their retirement income potential by diversifying their savings into other investments. Planning a strategy to obtain higher yields, tax advantages, and long-term growth is the key to funding your future obligations.
To help you better understand how different asset classes work together to generate income in modern, well-diversified income portfolios, we’ve highlighted some of the key attributes of each class below:
Modern income portfolio checklist:
- Equities
- Dividend-paying equities
- Real estate investment trusts (REITs)
- Corporate bonds
- High yield bonds
- Global bonds
- Bond ladder
How equities contribute to your retirement income plan:
In today’s environment, equities provide growth opportunities to a well-diversified income portfolio. Growth is required to protect the portfolio from inflation and help expand the value of the portfolio to help ensure the money will last. Additionally, capital gains from equity investments are taxed at a lower rate than interest income.
Key benefits of equities:
- Capital gains potential
- Tax-efficiency
- Diversification
How dividend-paying equities contribute to your retirement income plan:
The role of dividend-paying equities is to provide growth and a tax-advantaged income stream.
The role of dividend-paying equities is to provide growth and a tax-advantaged income stream.
Growth in the underlying company may also lead to higher dividend payments over time to help offset inflation and to help ensure the money is there when you need it.
Key benefits of dividend-paying equities:
- Potential for higher yields than bonds
- Capital gains potential
- Tax-efficiency
- Diversification
How real estate investment trusts (REITs) contribute to your retirement income plan:
The role of REITs is to provide diversification and higher after-tax yields in a well-structured income portfolio. Due to their unique structure, REITs pay out a significant portion of a company’s profits as tax-efficient dividends, capital gains, and return of capital. REITs are also subject to different market forces, and therefore may provide additional stability to a portfolio containing equities and bonds.
Key benefits of equities:
- Higher yields
- Capital gains potential
- Tax efficiency
- Diversification
How corporate bonds contribute to your retirement income plan:
The role of corporate bonds within an income portfolio is to provide stability through diversification and access to higher yields than government bonds.
While investment-grade corporate bonds tend to behave similarly to government bonds, they do provide additional diversification through exposure to different companies and industries.
Like government bonds, there is also potential for capital gains when interest rates fall.
Key benefits of equities:
- Higher yields
- Capital gains potential
- Diversification
How high-yield bonds contribute to your retirement income plan:
Like their investment-grade corporate bond cousins, the role of high-yield bonds is to capture the higher yields available from loaning money to corporations.
High-yield bonds differ from corporate bonds since they tend to be issued by companies with less stable balance sheets.
While there is a higher risk of default, a well-diversified portfolio of high-yield bonds may prove to be less volatile than equities while providing the benefits of diversification through exposure to different sectors of the economy.
Key benefits of equities:
- Higher yields
- Capital gains potential
- Diversification
How global bonds contribute to your retirement income plan:
Global bonds, much like corporate bonds, provide the benefits of diversification and access to higher yields.
Bonds issued by developing countries often pay higher yields than government bonds issued by developed market economies.
They also provide additional diversification since you gain exposure to different currencies, geographic regions, and sectors that may behave differently at other times within an economic cycle.
Key benefits of equities:
- Higher yields
- Capital gains potential
- Diversification
How adding a bond ladder contributes to your retirement income plan:
Bond ladders play a unique role within a well-diversified income portfolio. They are designed to help maximize income while mitigating the negative effects of rising interest rates.
With rates at or near historic lows, future rate increases appear inevitable. When rates rise, the market value of many income-producing securities will fall.
Because bond ladders consist of a selection of bonds with staggered maturities, the proceeds from a maturing bond can be reinvested at higher interest rates. Bonds may also be held to maturity if desired, protecting capital value.
Key benefits of equities:
- Protection from rising interest rates
- Diversification
We can help you meet the income challenge
If today’s low yields challenge your retirement plans, we are here to help.
Ensuring your portfolio includes exposure to these alternative income-producing asset classes can be critical to the success of a retirement income plan when entering the decumulation phase of your financial life. Talk to your Advisor and discover for yourself the benefits of investing in optimally diversified portfolios designed for a low-yield world.