“How much can I spend in retirement without running out of money?”
Sustainable income, as an objective, usually relies on the relative stability of an underlying portfolio and a diversified mix of income sources, including bond interest, (taxable or tax free), alternatives, and dividend income. Many clients also incorporate annuities as part of the income portfolio.
The big question is whether the portfolio can support an inflation adjusted distribution at 3% or 4% over time, and whether the client requires a distribution draw down rate which exceeds these relatively conservative percentages over time. As part of this question, the tax character of the portfolio must be considered. The income tax rates on the portfolio income must be taken into consideration: how much of the distribution is ordinary income vs. qualified dividend income? How much may be planned as capital gains? And, can we blend municipal bonds into the mix to reduce the overall impact of marginal tax and internal expenses?
The backdrop for income discussions today is the historically low yield environment and the prospect for higher taxes and inflation. Some experts have liked the environment – low interest rates and high valuations – to walking along a cliff. Today’s retirees are walking along the edge, which, requires more caution and monitoring, but doesn’t mean they will fall off.