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Are You Adhering to the 4% Retirement Income Rule? Exploring an Alternative Portfolio Approach Could Be Beneficial

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The 4% rule has long been a trustworthy guideline for retirees, offering advice on how to sustain a safe withdrawal rate from retirement accounts. However, given the current landscape of low bond yields and the unpredictable nature of the stock market, this once-steadfast rule is increasingly open to adaptation. John Hancock Investment Management has unveiled an original strategy that promotes the utilization of diversified multi-asset income portfolios. The core aim is to establish dependable and resilient income streams, all while providing protection for retirement funds in the midst of market fluctuations.

What Are Multi-Asset Income Portfolios?

Multi-asset income portfolios are designed to generate stable cash flows by combining a variety of assets. Typically, these portfolios include a mix of bonds, such as government, high-yield, and investment-grade corporate bonds. These portfolios might also include dividend-yielding equities, real estate investment trusts (REITs), master limited partnerships (MLPs), as well as alternative income sources such as private equity and infrastructure securities.

Diversification across multiple income sources is a defining feature of multi-asset strategies. This diversification aims to offer higher yields to investors while mitigating the risk of overexposure to any single asset class or market sector. Portfolios combine assets that carry greater risk but offer higher yields with those that are less risky to achieve a balance between seeking returns and risk management.

Multi-asset income strategies offer an avenue for everyday savers, investors, and retirees to enhance their ability to withstand market downturns when contrasted with solely relying on the 4% rule for the long haul. The traditional 4% rule suggests withdrawing 4% of retirement savings in the first year of retirement and adjusting the withdrawal amount annually to account for inflation.

However, with long-term bond yields continuing to fall short of historical standards, a conventional 60/40 stock/bond portfolio might not produce returns sufficient to support a 4% withdrawal rate. Moreover, stock market volatility introduces uncertainty about the safety of a 4% withdrawal rate throughout one’s retirement.

In contrast, multi-asset income portfolios have consistently delivered more stable payouts and lower volatility, even in demanding market circumstances, as outlined in the report from John Hancock, which includes the 2008 financial crisis, the market turmoil caused by the 2020 pandemic, and the 2022 stock and bond market correction, an examination conducted by Manulife Investment Management, as mentioned in the report, indicated that investors in these portfolios experienced an average yearly income slightly exceeding 4% during most of these turbulent periods.

 

Who Should Consider This Approach?

While multi-asset income investing may not suit every individual approaching retirement, it is worth considering for those looking to generate reliable cash flow to support their lifestyle. Multi-asset diversity helps spread risk for those who are uncomfortable relying solely on dividend stocks or high-yield bonds to fund their retirement. According to data from Manulife Investment Management, these portfolios have consistently delivered stable payouts for years, likely with lower levels of volatility than stocks.

The suitability of a multi-asset income portfolio depends on individual investors’ income requirements, risk tolerance, and withdrawal rate needs. Although past performance doesn’t guarantee future results, the track record of resilience during recent stock and bond market upheavals suggests that multi-asset funds could be a viable option for many.

Limitations and Risks of Multi-Asset Income Portfolios

Despite the benefits that multi-asset income portfolios offer in comparison to the 4% rule, they do come with certain limitations. There is no assurance of consistent income each year, and future returns might not meet historical benchmarks. Additionally, the inclusion of various securities results in higher management fees compared to simple index funds, as investors pay for the active oversight of these more intricate strategies.

Determining the right asset mix that aligns with your income goals and risk tolerance requires expert guidance. There’s no one-size-fits-all portfolio allocation that suits every investor’s needs. Additionally, the process of converting specific investments, like private equity or real estate, into assets that generate income can be a gradual procedure that includes associated transaction expenses.

In conclusion, the long-standing 4% retirement income rule, while once a trusted guideline for retirees, faces new challenges in today’s financial landscape marked by low bond yields and market unpredictability. In light of these evolving circumstances, the innovative concept of diversified multi-asset income portfolios, as presented by John Hancock Investment Management, presents itself as a practical alternative. These portfolios are designed to establish reliable and robust income streams while ensuring the protection of retirement funds. While they do have specific intricacies and constraints, they present an attractive option for individuals in search of a more secure income during retirement, particularly when contrasted with the conventional 4% rule. This renders them a compelling choice for those with diverse income requirements and risk tolerances.



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