Investing 301: 3 Ways To Turn Your Portfolio from Assets to Income

Todd Woods
Todd Woods
View Bio

Welcome to the final piece of First Dakota Wealth and Trust’s investment series!

Now that you've mastered the basics of investing and tax-advantaged strategies, you're ready to take on the world of assets that propel you forward in crafting your plan to draw income in retirement.

The distinction from assets to income is an important one to make because when you shift your focus from saving for retirement to spending in retirement, your investment plan needs to adjust as well.

Here’s how you can start to approach this process with confidence.

Level Up with Total Return Investing

Before you make a plan to withdraw your assets, you first have to get clear on the type of assets you have and where they are stored.

Many retirees like to think that all of their “spending money” will come from their earnings, dividends, or interest and try not to touch the principal. However, that isn’t the most ideal approach for several people.

Why?

For starters, today’s investing environment is facing a critical roadblock: inflation. Low bond interest rates coupled with higher than expected inflation is presenting a problem for many retirees. Investors trying to rely solely on dividends and interest find it challenging to outpace inflation, and many see the real value of their income fall.

Instead of focusing on income solely from dividends, or price appreciation, think of your retirement income from a total return perspective. Focusing on a total return approach brings stability to your retirement distribution plan.

Total return investing means you buy assets that deliver strong capital gains AND impressive income yield. This is often the best strategy for retiree investors who need steady cash flow to pay for living expenses. If you are willing to sell assets for that income stream and not rely entirely on dividend yield or interest, your cash flow will be more consistent and more efficient long term.

However, to do this successfully, you need a diversified portfolio that includes a variety of bonds and stocks. A proper asset allocation and disciplined diversification are crucial for this approach.

To take the total return approach up a notch, bake tax planning into the mix. Consider how you can take advantage of more favorable capital gains rates, Roth conversions, and other wealth-building strategies.

Leveraging long-term capital gains, which are taxed at more favorable rates than ordinary income, can improve your tax situation in retirement. Many income-producing assets that pay dividends, interests, etc., are taxed at ordinary income rates. Taking advantage of capital gains means you could realize more gains at a lower tax rate.

As a general rule of thumb, using a 4-5% annual distribution from your portfolio will allow you to enjoy retirement and not outlive your assets.

Additional Income Streams for Your Portfolio

Your investments usually aren’t your only source of income once you're retired. Much like a total return approach to investments, consider all your sources of income when you plan out your ideal retirement income strategy. The way you treat your investments depends on your other sources of income in a well-integrated strategy.

Common sources of retirement income include:

  • Social Security Benefits. Ensure you've planned for this income in your retirement calculations. Social Security is a guaranteed source of income that isn’t dependent on stock market performance, so it’s an excellent source of income diversification. Also, don’t just rely on your estimated benefit statement from the Social Security Administration. Those estimates are based on reasonable assumptions about how long you may work and when you may file, but you can calculate your benefit based on when you actually plan to quit working or file.
  • Pension. Do you have one? Incredible! Make sure that's part of your plan. A pension often provides a solid base of income in retirement. It also creates a floor of taxable income that may affect the minimum tax bracket you’ll fall into in retirement. This is helpful to plan out your tax strategy on our investments.
  • Annuities. Annuities often get painted in a bad light, but not all annuities are the same. Fixed, immediate annuities can be an excellent option for retirees looking for a steady income stream beyond what is available from Social Security or a pension.

As you prepare for retirement, maximize all sources of income, including Social Security, pensions, personal savings, and rental income from real estate, and make sure they are integrated into a cohesive plan.

Documenting all sources of income will provide you with a clearer picture of your options in retirement and help you plan a strategy that can put your fears to rest.

Your Comprehensive Investing Plan

Now you know the key points of each stage of your investing life—from maxing out your 401k to being smart about tax breaks to planning for retirement with total return investments.

The key to putting this all together is to have a plan. Make sure you capture your goals, objectives, and next steps by writing them down and making them happen, and First Dakota can help!

Each of our clients are unique; whether you are married, have siblings, or have children (young or grown), you have your own goals, desires, and wishes, which go beyond investments.

We provide a professional and personal experience customized to our client’s needs while navigating through changes in laws, the economy, and, most of all, life.

With numerous complex terms, strategies, and "financial jargon," retirement and investment planning can be overwhelming, but it doesn’t have to be scary. We will help you translate the "financial jargon" into an easy-to-understand message that enables you to maximize your wealth along with being comfortable in retirement.

Reach out to our team today!

Disclaimer

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department or its employees provides tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.