Transcript:
Tom Vaughan:
Hey, everybody, welcome to Wednesday. This particular video is actually pre recorded, I will be back tomorrow, Today’s my birthday. So with any luck, I’m coming back from the beach, which I haven’t done for quite a while. So really looking forward to doing that. But I did want to cover something today that comes up quite often actually, within the strategy sessions that I have with clients. And that is especially how do we generate income in retirement? You know, lots of other questions come up about retirement, do we have enough money? And that’s where really where the financial plan comes in and the MonteCarlo simulation, but in terms of just how do we generate income? How do we start to get income, I’m getting a paycheck, and now I’m going to be retired, and how do I live. And so this is something that I have been doing for the last 35 years. I merged with Cam Neri back in 2005, she had been in the business for 40 years doing exactly the same thing on her own.
So I think this is a strategy that is worth looking at. There’s a lot of different ways of generating income. And some of them I don’t think work as well as others. So let me describe what we’re doing. And and I’ll kind of show you some of the pitfalls or some of the other ones. So I’ll start by sharing my screen here real quickly. And what I’m going to do is just show you, kind of a portfolio here.
So this is our traditional model, this is the all stock portion. And again, we don’t have tons of people in the all stock when we have different mixtures, but this is a good example. And so what you can see here is I have 15 stock market portions in this particular model, and in our in our client base that is withdrawing money to live off of, we have 5% in the money market, we call this the withdrawal model. And so what we do is we say, okay, every single month, we’re gonna have a certain amount of money come out of this portfolio. And eventually what will happen is that this 5% will dissipate, and it will come back down. And then all of these pieces will continue to be managed this normal, some of them be replaced, some won’t, but some will do better, and some will do worse. And so what happens is once this gets down to about 1%, then we rebalance the portfolio and put it back to 5%. And when we’re rebalancing, we’re kind of selling some of the pieces that are high, and really kind of, putting those into that money market. And so it’s a really great way of generating income. And so if we look at more typical portfolio, I know this gets a little bit busy.
But here’s our 60% portfolio got the same 15 pieces on the stock, got our five bond market portions here, here’s our 5% in the money market. And so the key here is that you’re allowed to kind of get a nice balanced portfolio that can grow over a period of time, it has interest, it has dividends, and all of those things are coming into this money market. And if that’s not enough, we’re actually then just kind of doing a rebalance to continuously replace those. And I think this is the most robust way of generating income, there’s a lot of different ways. One way is people will buy very high dividend related portfolios. Well, when you get into high dividend stocks, those can be great. But number one, they can cut the dividend like AT&T just did. But secondly, really, they’re a little bit sensitive to interest rates. In normal times when a dividend stock is sitting there and interest rates go up, the actual value can go down. And sometimes these companies are paying big dividends because they’re not doing that well on the other part of their business. I’d rather have growth that I can get out of this whole portfolio.
And I see other people that do big pieces of bond in order to kind of generate income. Well, of course, the bond market went down in terms of the yield substantially at one point in time. And now that yields coming back, the price is falling apart. Matter of fact, I can show you a chart here. So this, this is a last one year of BND. So BND is the Vanguard Total Bond Market index. I look at this as the overall US bond market. And of course, you know, back in August, is when we saw that kind of peek out and look at this fall that it’s had. So if you had like an over abundance in the bond market trying to generate income, really you’re just kind of out of balance in that regard. And that can lead to some disappointing results. So I much prefer having a portfolio and basically just withdrawing from the money market, and then replenishing that money market. And this is the I think this is the best way and we could be quite conservative. We could have more bonds we could have more stock whatever that situation is.
But that I think is the best way to really kind of see what we might be able to do in terms of generating income out of a portfolio. So, again, this is time tested, we’ve been doing this for a really long time, how much you take out is, is kind of dependent upon what you need, and then what your plan says you can actually afford those two things are checked out. And then once that’s figured out, then we kind of go forward and, and really set that up. And people seem to like monthly pay, instead of quarterly or annually, because that’s how we all get paid when we were working what have you. So that’s nice, you can get it at different points of the month to the 15th to the first or what have you. So really, really good situation as far as that goes. And that’s what we set up for distribution of income. So, again, I’ve presented this before I still get some questions about it.
And that’s why I brought it up again, but I think it’s an important component of what you’re going to deal with. And you can really kind of mess up your retirement if you’re not a little bit careful about how you withdraw that income, because you still want to get sort of a balanced portfolio, which I think is the most important part the income is secondary to the overall balance portfolio that you might be able to achieve there. So anyway, I look forward to talking to you tomorrow, and I’ll be back. Thank you.