Retirement Income & Planning

Is it possible to simultaneously reduce risk, taxes, and fees while improving performance and transparency? I think so.  Below I describe my building blocks approach to target a robust and growing stream of income.

Retirement Income

If you would like to formulate a robust plan for retirement income, my building blocks approach to income provides a refreshing alternative to the statistical approaches used by most other advisors.

Rather than chiseling away from your portfolio and being at the mercy of the market, my approach effectively pre-chisels much of your retirement income upfront. In particular, we use the low-risk side of your portfolio to purchase a baseline of income that can last as long as you live - basically a personal pension.

We then focus the riskier side of your portfolio on high-quality stocks that have paid and increased their dividends for many years. While many investors may not realize it, dividends are significantly more stable than market prices and can be a great tool to combat the deleterious effects of inflation. However, as I illustrate in my research, many funds and portfolio managers unknowingly destroy these beautiful streams of increasing income with their portfolio rebalancing strategies.

So now we have created a level stream of income from the low-risk side of the portfolio and targeted an increasing stream of income from the stock dividends. Intuitively, you can think about just stacking these sources of income like building blocks.

Rather than chipping away at principal to generate synthetic dividends, this approach lets the portfolio generate your income naturally. This can mitigate, if not eliminate, the need for portfolio management. As a result, this can significantly reduce costs. Moreover, less rebalancing translates into less capital gains - thereby increasing tax efficiency too.

To learn more about this strategy, you can read my Income Generation 101 for Retirees article or my longer and more technical paper here.

Low Costs

As mentioned in the previous section (Natural Income), my building blocks approach to income can mitigate or possibly eliminate the need for portfolio management. As such, one may not need to pay an advisor to rebalance or manage their portfolio. This alone can create significant cost savings.

Consider one who is withdrawing approximately 4% of their portfolio each year in retirement. If a financial advisor is charging a portfolio management fee of 1%, then they are effectively taking 25% (1% out of 4%) of their client's retirement income. If they are using higher-cost funds, then those retirees might be splitting their retirement income 50/50 with the financial services industry (e.g., 1% advisor fee + 1% fund fees = 2%). Unfortunately, this is more common than most people realize.

My building blocks approach to income typically uses low-cost index funds and direct investments (stocks, bonds, CDs, etc.) for most of the portfolio. To be clear, the direct investments involve no fees and the ETFs or index funds we use are typically have management fees around 0.05% per year. This makes it drastically cheaper than the overpriced mutual funds found in many portfolios.

The most expensive element is typically a deferred income annuity used to make sure the fixed income stream lasts as long as you do. However, income annuities are significantly more efficient than building your own ladder of bonds and CDs since you do not know how long you will live. That is, you would generally have to purchase income well beyond your expected or actuarial lifespan to make sure you did not run out of money ( just in case you happened to live longer than average).

Moreover, income annuities have become increasingly competitively priced in recent years. For example, Morningstar recently pointed out that some annuities were actually cheaper than treasury bonds. To be sure, we like to use a third-party calculator to objectively analyze the costs embedded into income annuities and how efficient they are relative to purchasing your own ladder of bonds and CDs.

On balance, we target total costs of approximately 0.10% per year for our building blocks approach to income. We figure less money going to the financial services industry means more money for you and your retirement!


As mentioned in the first section (Retirement Income), my building blocks approach to income can mitigate or possibly eliminate the need for portfolio management. Accordingly, this can significantly reduce capital gains triggered from rebalancing the portfolio. Moreover, I typically use index funds or ETFs which are generally more tax-efficient than most mutual funds.

I can also engineer further tax benefits by structuring much of the income via income annuities. As I explained in this article, these products can be used to defer and reduce taxes.

On balance, my building blocks approach to income can reduce investment-related taxes by approximately 30% relative to the standard approach of rebalancing to fixed asset allocations.