Why investors in retirement may want to consider an income approach

Key takeaways

• As multi-asset income investors, we seek to help a wide range of clients meet their income needs.
• The benefits of an income-centric approach are especially relevant for investors as they enter retirement – and that’s especially true today.
• We bring that to life with two case studies that examine the accumulation vs. decumulation story and emphasis the importance of utilizing the right investment strategy at each stage.

Why an income-centric approach matters in retirement: The accumulation vs. decumulation distinction

First, meet dollar-cost-average “DCA” Jay. He’s in his early 40s, in the middle innings of his career with another roughly 20 years before retirement. He’s squarely in the ‘accumulation’ phase of his investment journey, contributing regularly to his savings. On the other hand, we have “Distribution Deb,” a recent retiree. Since she is no longer earning a salary, she is relying on income from her investment portfolio to meet her cost-of-living expenses (in addition to income from other sources like social security and an annuity).

What's the proper portfolio for you?

It depends on what phase of life you're in.

Now let’s see what types of portfolios are most suitable for these two very different life phases:

In accumulation, imagine that DCA Jay starts with $100,000 in the year 2000 and he manages to consistently contribute an inflation-adjusted $4,000 annually to his savings over the course of the next 20+ years. Despite weathering multiple storms over this accumulation period, be that the tech bubble, the Global Financial Crisis or Covid, he would have been better off investing in the broad S&P 500 Index compared to a 60/40 balanced portfolio or an income-tilted portfolio (assuming he stayed invested throughout).

In accumulation, Jay was better off
stocking up on equities

In the decumulation phase, it’s a very different story. Imagine that Distribution Deb has $1 million saved and a $40,000 annual portfolio income need. Starting at the same point in time as DCA Jay, weathering all the same market ups and down, her potential portfolio outcomes are vastly different. Had she invested fully in the S&P 500, her starting portfolio would have lost over 90% of its value. Why? The reason is something we refer to as “sequence of returns risk.” In the early days of Deb’s retirement, markets - and her portfolio - suffered a major downturn with the tech bubble. Nonetheless, Deb still would have needed to meet her distribution needs (which are not met through the relative low yield on the S&P 500 Index), meaning she had to sell principal at exactly the time when her portfolio value was down, locking in these financial losses and preventing her portfolio from fully recovering as the market rebounded. Instead of dollar cost averaging, she experienced something we call “dollar cost ravaging”.

Fortunately, there is another story for Deb with a much happier outcome. If, instead of investing fully in the S&P 500, Deb had chosen to transition to a diversified income-oriented portfolio when she entered retirement, she would have been able to meet her annual income need primarily from the cash flow generated by the underlying investments, allowing her to leave her principal more intact and to ultimately participate in the market rebound over the coming years. In fact, her ending portfolio value would have actually grown from $1mn to $1.1mn over her decades long retirement, all the while taking $40,000 in distributions each year.

In decumulation, Deb was rewarded
seeking income

Why does this matter today?

The same sequence of returns risk that we saw impact Distribution Deb in the early 2000s is playing out as we speak. Following a challenging year like 2022 when both equities and fixed income delivered negative returns, Distribution Deb’s savings would have been particularly damaged had she remained invested in a non-income producing portfolio at the time of her retirement. Why? She would have started withdrawing principal when her portfolio value was down, which would have resulted in fewer future units and limited her participation in the market rally year to date 2023.

Bringing it all together: Take a diversified, income-generating approach in the decumulation phase

So what does this all mean? As an investor’s life phase progresses, so too should their investment portfolio design. While growth equities and traditional balanced portfolios may very well be a good choice in the accumulation phase, a portfolio rethink is warranted for investors once they reach retirement and start to decumulate.

Are your unique needs being met?

As your portfolio grows over time, so do your needs. Make sure they’re being taken care of.

One way of mitigating this dollar cost ravaging, or sequence of returns risk, is by taking an income-centric approach. The BlackRock Multi-Asset Income Models provide a core, diversified option, suitable in our opinion, for investors in their decumulation phase, and can be paired with guaranteed income sources like social security and annuities. These models offer a number of benefits:

• Tap into a broad, diversified universe of income-producing asset classes including dividend stocks, investment grade and high yield bonds, floating rate loans, covered calls and more.
• This diversified approach allows the team to nimbly take advantage of market opportunities, constantly evaluating the income landscape and rebalancing on a quarterly basis.
• A whole portfolio solution available across multiple risk profiles to address the needs of all retirees, ranging from those early in retirement looking for more equity exposure to those focused more on capital preservation.

Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown.

To obtain more information on the fund(s) including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please click on the fund tile. The Morningstar Rating for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Access exclusive tools and insights

Explore My Hub, your new personalized dashboard, for portfolio tools, market insights, and practice resources.

Get access now