Client Snapshot
A retired couple was living primarily on investment income. The wife's investment strategy was very conservative. She never wanted to take risks with their portfolio and invested most of their assets in Certificates of Deposit. The goal was to accumulate enough money to generate a safe income to supplement their social security.
Situation and Outcome
Bothered with low bank interest rates and limited income, the woman investigated other income-producing opportunities. She and her husband met with planners at Annuity Strategic to help them explore various options. The planners reviewed their portfolio and helped the couple determine overall asset allocation. In addition, they studied past tax returns to determine their marginal tax bracket. Planners examined the couple's risk tolerance levels and annual expenses. After thorough analyses, alternative investments were suggested.
Several fixed income investments were considered, such as municipal, government and corporate bonds. Most of these investments should provide a higher interest rate, yet still considered conservative. The planners recommended different maturities for bonds to help protect principal if interest rates rise. Only investment grade bonds were proposed to help reduce risk of possible default of the underlying issuer. Annuity Strategic shared pros and cons of individual bonds versus mutual funds, which utilize professional management and can provide diversification to help reduce risk.
The planners also presented additional ways to assist in obtaining a dependable retirement income. One method is a systematic withdrawal from a mutual fund. This withdrawal provides a fixed dollar payment amount that can be direct deposited monthly to a personal bank account. Shares of the fund are sold periodically to produce necessary cash needed to support withdrawals. Dividend income and anticipated appreciation can help sustain the principal on an ongoing basis.
Another concept offered to the couple concerned total return of an investment. In the past, they had only considered spending the income or dividends from their investment because they did not want to touch the principal. Fortunately their portfolio had increased in value due to market conditions. Thus, drawing a portion of capital appreciation each year could be another way to gain additional income.
Results & Lessons Learned
The planners helped the couple increase cash flow from their investments without substantially increasing their risk. The additional income enabled them to help maintain their desired lifestyle and still be financially comfortable.
The Moral of the Story: Income can be increased through various investment strategies.