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The 4% rule has long served as a guide for retirees on how to maintain a safe withdrawal rate from retirement accounts. But with today’s low bond yields and volatile stock markets, that once-consistent rule of thumb seems increasingly likely to change. One approach detailed by John Hancock Investment Management suggests using diversified, multi-asset income portfolios. The idea is to provide more sustainable and abundant income streams while better protecting savings in volatile markets.
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What are Multi-Asset Income Portfolios?
Multi-asset income portfolios combine a variety of assets with the goal of generating stable cash flows. They typically hold a range of bonds, including government bonds, investment-grade corporate bonds and high-yield bonds. They may also include dividend-paying stocks, real estate investment trusts (REITs), master limited partnerships (MLPs) and alternative income generators, such as private equity and infrastructure securities.
Diversification across multiple income sources is the hallmark of multi-asset strategies. It aims to deliver higher returns to investors, while controlling the risk of overexposure to a particular asset class or market sector. Portfolios combine higher-risk, higher-yielding securities with lower-risk securities to balance the search for yield and risk management.
Multi-asset income strategies offer today’s everyday investors, savers and retirees the opportunity to develop greater resilience to market downturns rather than simply relying on the 4% rule over the long term. This rule of thumb suggests withdrawing 4% of retirement savings in the first year of retirement and increasing the withdrawal amount each year based on the rate of inflation.
With long-term bond yields still low by historical standards, however, a traditional 60/40 stock/bond portfolio may produce insufficient overall returns to support a 4% withdrawal rate. Stock market volatility also adds uncertainty around the idea that 4% will be a safe withdrawal rate for decades after retirement.
By contrast, multi-asset income portfolios have delivered more consistent payouts and lower volatility during the last three market downturns, according to the John Hancock report. Those included the 2008 financial crisis, the 2020 pandemic-induced selloff and the 2022 equity and bond selloff. Investors in these portfolios enjoyed average annual payouts just above 4% during most of that turbulent period, according to an analysis by Manulife Investment Management cited in the report.
Who should consider this approach?
Multi-asset investing may not be suitable for everyone considering retirement. The wide variety of assets (stocks, bonds and alternatives) increases the costs and complexity of the portfolio compared to holding a simple index fund. It also requires active management of asset allocation, as market risks change over time. In addition, yields fluctuate, so income cannot be guaranteed as promised by bond coupons.
But for retirees looking to generate sustainable cash flow to support their lifestyle, multi-asset income strategies are worth considering. For those who don’t want to rely solely on dividend stocks or high-yield bonds to fund their retirement, multi-asset diversity helps spread risk. According to the aforementioned data from Manulife Investment Management, these portfolios have generated consistent payouts for years, with likely lower levels of volatility than stocks. Consider talking to a financial advisor about your investment options and what might be right for your goals.
Individual investors’ income needs, withdrawal rate requirements and risk tolerance all factor into whether a multi-asset income portfolio is suitable. While past performance is no guarantee of future results, the resilience investors have shown in the face of recent stock market and bond storms suggests that multi-asset funds could be a viable option for many.
Limitations and risks of multi-asset income portfolios
While multi-asset income portfolios do a better job of limiting risk than the 4% rule, they do have limitations. Income is not guaranteed from year to year, and future returns may be lower than historical averages. In addition, the diversity of securities involved means higher management fees than simple index funds, because investors are paying for active oversight of these more complex strategies.
Finding the right mix of assets based on your income goals and risk tolerance requires guidance. No standard portfolio allocation will meet the needs of all investors, so it may be prudent to consult a financial advisor. Additionally, transforming some assets, such as private equity or real estate, into income-generating assets can take time and involve transaction costs.
Tips for retirement
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If you have questions about how to manage your money in retirement, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three licensed financial advisors who serve your area, and you can get a free introductory call with your advisors to decide which one is best for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that isn’t exposed to major fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high-interest account lets you earn compound interest. Compare savings accounts from these banks.
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The article Are You Following the 4% Rule for Your Retirement Income? You Might Consider This Portfolio Style appeared first on SmartReads by SmartAsset.
