Living on portfolio income is living the dream. Although many retirees are woefully short on savings, some manage to kick off their golden years with plenty of money. But having a giant nest egg doesn’t guarantee that it will last. And that’s a significant concern for retirement planning.
A 2024 Allianz Life survey found that 63% of Americans are more worried about depleting their savings than dying. And while implementing a strategic withdrawal strategy can mitigate that risk to some degree, there are no guarantees.
One way to potentially guarantee that you won’t ever run out of savings, though, is to live on portfolio income only.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What is portfolio income?
Portfolio income, sometimes called investment income, is generated by dividends, interest, and capital gains on investments. It's one of three broad types of income: the other two are passive income (such as from rental properties) and earned income (such as from a job).
Let's look at how portfolio income could fund your retirement. As a very simplified example, if you have a $1 million portfolio that generates 4% a year, and you can live on $40,000 plus whatever amount Social Security pays you, then there’s no need to touch your $1 million principal. Keep that up throughout retirement, and not only do you lower your risk of depleting your savings, but you’re also then able to leave a legacy behind to your heirs.
It’s a good idea in theory. But does it work in practice? It depends.
Interest rates must cooperate
Living on portfolio income alone is possible, says Dan Wilson, managing partner of Skyeburst Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, LLC. But it depends on the interest rate environment.
Wilson explains that the 4% rule has been popular for many years because, under it, “you can pull 4% a year against your portfolio, and your money will last 30 years 90% of the time.”
But then bond rates fell for a period of time, so much so that many experts changed their tune on the 4% rule. Morningstar, for example, concluded that 3.3% was a more realistic withdrawal rate for 2021, while it rose to 3.8% in 2022.
In today’s environment, Wilson thinks 4% isn’t unreasonable. “Bond rates are more normalized again,” he says. And so living on interest only has gotten easier now that interest rates are higher. However, if bond yields slide again, this strategy may not hold up as well.
It takes a lot of money
The 4% rule is not meant to leave portfolio principal untouched. Living on portfolio income alone is an entirely different strategy. And it could take a large savings balance to pull off.
Domenick D’Andrea, Co-Founder/Financial Advisor at Cetera Investors, says that while not touching principal is difficult for many people, “if you have a combination of considerable assets and low expenses, a plan like this can work for you.”
“With this combination, you may be able to generate more income than you need to cover your expenses so market downturns may not affect the need to make changes, and you could still live off the decreased income until the market rebounds,” he says.
Douglas A. Boneparth, Financial Advisor and President at Bone Fide Wealth, LLC, agrees. “It’s possible to live solely on portfolio interest and income in retirement without dipping into your principal, provided you’ve built a sufficiently large and well-structured portfolio,” he says.
Boneparth continues, “A $2 million portfolio with a 4% yield could produce $80,000 annually before taxes, which might suffice for some people to live a comfortable lifestyle, depending on needs and location.”
But while $80,000 a year may be enough income early on in retirement, as living costs rise, it may fall short, especially as healthcare needs evolve. And there’s also the risk that over time, an $80,000 income won’t hold up as well due to inflation.
Setting up your portfolio to live soley on income
If your goal is to live solely on portfolio income in retirement, you’ll need the right investment mix.
“The key is generating consistent, reliable cash flow — think dividend-paying stocks, bond interest, or rental income — that covers your living expenses, adjusted for inflation and taxes,” says Boneparth.
Of course, the only way to truly ensure that you won’t see a reduction in your portfolio’s principal is to move all of your assets into cash and spread your money across enough accounts to secure FDIC protection. However, that strategy is unlikely to work in the long run as interest rates fall.
Boneparth says a better plan is to “diversify across asset classes, and reinvest excess early on to compound returns.”
Should you plan to live solely on portfolio interest?
The peace of mind you get from not touching your portfolio’s principal in retirement could be offset by a more limited lifestyle. If you’re too nervous to touch your principal at all, you could end up denying yourself comforts and experiences you can both enjoy and afford — the opposite of the "die with zero" rule of retirement.
So whether it's a good idea to live on portfolio income alone or not depends on your specific goals, says Wilson. “If leaving a legacy is important, it's a good thing,” he explains.
But it’s not necessarily a great thing to declare your portfolio’s principal off-limits out of fear. And talking to a financial adviser specializing in retirement planning might change your approach to how you use your money.
“There are investment vehicles that can help you not outlive your assets,” D’Andrea says. “I would suggest talking with a financial professional to see how you should best plan for your retirement.”
Read More
-
Eight Ways To Save on Your Next Luxury TripLooking for ways to stretch your retirement dollars? Follow these tips to get a deal on your next vacation.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Eight Ways To Save on Your Next Luxury Trip
Looking for ways to stretch your retirement dollars? Follow these tips to get a deal on your next vacation.
-
Donating Complex Assets Doesn't Have to Be Complicated
If you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Retire in Costa Rica for Expat HeavenWhen you retire in Costa Rica, you get natural beauty, ease of relocation and affordability. Will you become a part of its thriving expat community?
-
Over Half of Americans Stumble Financially After Losing a Loved One. Are You Prepared?Losing a loved one can be overwhelming, and for many, it also puts an unexpected strain on their finances, a study shows
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Want to Avoid High Blood Sugar as You Age? Stay MarriedA healthy blood sugar level can help you avoid type 2 diabetes as you age. If you're married, you can thank your spouse for making that a little bit easier.
