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Private Client Group Newsletter Q4

By: Vince A. DiLeva, MS, CFP®, AIF®, Senior Partner


How should I balance my portfolio’s need to generate cash flow with my desire for principal growth to leave a legacy for my children?


These are two very common primary concerns in retirement. Tackling the dilemma of providing cash flow to meet expenses is a process, and you need to start in the months prior to your retirement date so you can build your portfolio’s structure to meet your income goals. The first thing you need is a budget/spending expectation in your retirement years.

Some retirees may make the mistake of being too conservative or stay too aggressive in their portfolio construction. There is no set rule on how your portfolio
should be allocated in retirement. Each person’s situation is unique, so instead, we’d prefer to build your strategy to be customized according to your cash flow needs.

To do this in retirement, we need to plan on creating different “buckets” of money in the portfolio. The investor will have a portion of their portfolio in Fixed Income. This portion of the allocation provides part of the steady stream of retirement income and is intended to offset stock market volatility. You may have a short-term bucket which is a portion of the money that you will spend over the next 5 years, which is constructed using individual investment grade bonds maturing each year for the next 5 years. The remaining allocation to fixed income could include junk bonds, mortgages, TIPS and international bonds.

A portion of the portfolio may include Alternative assets. This could include private real estate, private debt, covered call strategies and other non-traditional strategies that would not correlate as much to the equity and fixed income markets. As such, this category is designed to both help augment income, and provide smoother portfolio volatility over time.*

Now, to help make sure the principal can sustain these annual expenses, but also leave some desired legacy to your children, you need to have enough money in equities to provide for your long-term appreciation. Your equity portion of the portfolio is your 10+ year money. The goal of these assets are to help keep pace with inflation and leave the legacy to your children. The equity portion of the portfolio could represent 40% to 60% of the portfolio depending on client’s needs
and objectives.

As we construct the total portfolio with all these aforementioned asset classes, we target a yield from interest and dividends from all assets combined. This yield becomes a portion of the spendable income for the client in retirement in combination with the individual bonds maturing.

The goal of this strategy will allow you to live on your portfolio’s cash flow and provide your equity/risk assets to appreciate over time to leave a legacy to your children.