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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 16 Investment Income for Retirement

Some employees are lucky enough to have a defined benefit pension that provides a steady stream of income in retirement. Those fortunate employees include most state and local government workers as well as those working for the minority of corporations that have maintained defined benefit plans. Most employees, however, must be content with defined contribution retirement plans like the 401(k) plus Social Security. The savings made within defined contribution plans plus whatever other savings the employees make outside of these plans provide the basis for their retirement. This chapter will discuss whether these savings can replace the steady stream of income of old style pensions.

Baby boomers will find the new retirement system quite challenging. How do they replace the guaranteed income provided by the old system? Will income from investments suffice? After all, interest rates are at all-time lows and stock dividend yields are miserably low. To give readers fair warning, our search for income will come up short. But we will explore what is available in today’s markets.

Before we begin to explore sources of income, it’s important to explain what I regard as “best practice” in retirement planning. It’s not wise to base retirement spending entirely on income generated within the portfolio. Instead, retirees should fund their spending out of the total return on the portfolio. Spending the income from the portfolio might mean that retirees ...

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