Fact or Fiction: Retirees need “income”

Thirty-five years of experience with retired investors has taught us that what retirees need in retirement is cash flow, not income. The distinction is that income comes from dividends and interest, and cash flow comes from harvesting the total return of your portfolio. The total return is dividends, interest, and growth.

Our DIESEL System combines an optimized portfolio, which attempts to earn a specific total return with the least amount of risk, with a rebalancing process that harvests proceeds from the portfolio and distributes that as cash flow.

How Diesel Works

Rebalancing takes money from asset classes that are above their target allocation and adds the proceeds to asset classes that are below their targets, with a goal of maintaining the risk/return profile you specified in your investment policy statement. DIESEL adds a step:  We take money from asset classes above their target and use some of the proceeds to add to classes that are below their target, and then send the difference to you as a distribution.

Although DIESEL is not guaranteed to generate sustainable income, historically it has been reasonably reliable. Our peer-reviewed study showed that a combination of optimized portfolios, rebalancing, and harvesting allowed larger potentially sustainable distributions than a portfolio reliant solely on income. Note: A portfolio that emphasizes dividends and interest is not going to be properly diversified since it will be dominated by bonds and high dividend stocks. Surprisingly, such portfolios may actually be riskier at a number of levels than a more broadly diversified portfolio which will have more in risk assets. Remember, retirees’ greatest risk is not portfolio fluctuations, it is longevity. Risk is a necessary component of a long-term retirement strategy.

To potentially increase the likelihood that retirees will not deplete their portfolios in the event of a persistent downturn, withdrawals may have to be reduced to more fully assure sustainability. Our staff monitors DIESEL withdrawals systematically to make sure clients are not withdrawing too much. If this happens, we will alert you that your withdrawals are too high and need to be reduced. Although these conversations are rare, they are occasionally necessary to potentially protect retirement cash flow.