Much of the retirement guidance I’ve read of late continues to treat baby boomers the same as the rest of the investing public. Even after the first six months of 2022, when the traditional 60/40 stock/bond portfolio plunged more than 20%.
I can’t argue with the traditional approach for investors who are 25, 35, or 45 years old accumulating savings for retirement or their kids’ college education. As we know, markets have historically rallied and younger investors who have time to recover from market corrections benefit from dollar cost averaging.
But boomers who are retiring or already retired have different needs than any gens that have come after them: They may not be able to wait for their depressed accounts to grow again. For Boomers, income is the key consideration—income that remains stable and grows through the decades of retirement.
Where to find income.
Economic downturns always bring winners alongside the many losers, and annuity payment contracts (also called annuity payments), which have increased payouts on new contracts as interest rates have risen, are the current winners. From August 15, 2022, new purchases of income pensions at certain ages are bringing in 20% to 50% (depending on income entry age) more than at the start of the year, and that could increase further. They are almost the mirror image of mortgage rates, which are also rising.
How much do you think a 20% increase in pension payments is worth? Imagine that your initial Social Security benefit that you could claim next year went from $3,000 to $3,600 a month. Would that get your attention?
Yet most financial experts still only talk about fixed assets, not income. Maybe because it’s easier, not because it’s better to lump these Boomers in with everyone else.
Another Type of Allocation is Needed for a Retirement Income Plan.
While a 60% stocks/40% bonds allocation may not suit boomers, another type of 60/40 allocation may be: one that includes a mix of stocks and bonds along with income annuities. We call this a Go2Income plan.
When you create a Go2Income retirement income plan, you can start with 60% of your retirement savings in investment portfolios and 40% in income annuities. But this split differs from the 60/40 mentioned above.
- It is based on output and not input, and in a Go2Income plan you might end up with splits of 67/33, 75/25 or another allocation.
- The split will change over time, with an increasing allocation to income annuities — to assure lifetime income.
- Most importantly, the split is designed to meet your personal objectives and priorities and not your neighbors’.
Allocation of Investment Portion of Go2Income Plan.
A Go2Income plan uses a portion of the investment portion of your retirement savings as a source of secure income, not just a source of capital growth.
In the Go2Income strategy there are three types of portfolios:
- High Dividend Portfolio: This is primarily a source of increasing tax-advantaged income plus growth of capital and is invested in an account with after-tax or non-qualified savings.
- Fixed Income Portfolio: A source of fixed income plus general safety of capital, replaced in part by guaranteed annuity payments. It will be invested in your non-qualified retirement savings account.
- Balanced Portfolio: A source of withdrawals of capital from your rollover IRA account to achieve increasing income and at the same time meet RMDs. This will be a blend of a growth portfolio and a fixed income portfolio to reduce withdrawal risk.
Allocations to stocks within investment portfolios can be high, medium, and low, but you should consider what percentage of your overall portfolio your stocks represent. A high allocation to equities within the 60% in investment portfolios can often be selected if a high allocation to income annuities is selected within the 40% portion. The overall impact of these two elections is a higher allocation to fixed income assets, mainly fixed income.
Tactical Allocation within Each Portfolio.
The tactical implementation of the investment portfolios within a Go2Income plan must consider (1) whether you are using an outside advisor or setting up a self-directed investment account, (2) the investment types (ETF, mutual funds, or individual securities), and (3) the allocation to specific market sectors .
We start with the premise that you want to meet your income goals with low fees and low planning risk while still meeting your legacy goals. We’re adding easy plan monitoring and plan management so you might be able to manage portfolios yourself. Either way, creating a personal Go2Income plan will help a DIY enthusiast decide what questions to ask an advisor.
Some investors may research and buy individual stocks and bonds in these portfolios, but there are other options for the investment portion of a retirement income plan that may be easier to manage and understand, including mutual funds and ETFs
Portfolios Designed Specifically for Go2Income.
In addition to mutual funds and ETFs for the investment portfolios, there are other pooled investments that can be aimed at a specific goal and managed with the help of artificial intelligence (AI) tools. We decided to explore this option for Go2Income.
We consulted with a company, FolioBeyond, which is a quantitative manager that uses advanced algorithms, including artificial intelligence (AI) tools, to create portfolios. Quantamental investors use quantitative methods, tools and technologies to make investment decisions.
FolioBeyond was asked to design the high-yield, fixed income and balanced portfolios to be consistent with Go2Income planning. The goals of each portfolio were to match the interest and dividend yields of comparable low-cost ETFs and to outperform those ETFs by 1% to 2% per year on a total return basis. We also wanted them to keep fees low.
Below are backtested investment results of these portfolios versus benchmark indices for the first seven months of 2022 and the 10 years since 2012.
The FolioBeyond portfolios outperformed both the return and the total return of comparable benchmarks (see FolioBeyond Advantage) in most scenarios. Of course, backtest results are obtained while knowing what has happened in past markets and cannot be used to predict future performance. See the discussion below for additional caveats.
The return history shown above is based on backtesting simulations prior to February 2021 for the equity model and November 2020 for the fixed income model. Actual performance for client accounts may be significantly lower than that of the modeled portfolios.
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