Turning Investments into a Retirement “Paycheck”

Retirement marks a significant shift from earning a paycheck to relying on your savings and investments for income. Creating a reliable retirement paycheck from your portfolio requires a strategic blend of investment types that generate steady returns while protecting your wealth from inflation and market downturns. Below, we’ll explore four key strategies that can help transform your savings into a sustainable income stream, along with average rates of return and realistic income distributions for each.

1. Yield Strategies: Fixed Income and U.S. Treasuries Coupled with Dividend-Producing Stocks

Yield strategies focus on conservative investments that offer consistent payouts, including fixed income securities, U.S. Treasuries, and dividend-paying stocks. These investments form the backbone of a reliable retirement paycheck, providing a blend of stability and income.

Fixed Income and U.S. Treasuries: These investments typically offer lower but predictable returns. Historically, U.S. Treasuries have provided an average annual return of about 2% to 3% for short-term bonds and 3% to 4% for longer-term bonds. Corporate bonds and municipal bonds offer slightly higher returns depending on credit risk, ranging between 3% and 5% annually. Reasonable income distribution from a fixed-income portfolio could range from 2% to 4% annually, depending on the types of bonds chosen and their maturity.

Dividend-Paying Stocks: Dividend stocks provide both regular income and the potential for capital appreciation. Large-cap, blue-chip companies with a history of stable dividends generally offer yields ranging from 2% to 5% annually. Additionally, the average annual total return from a dividend-producing stock portfolio, when accounting for growth and reinvestment, has historically ranged between 6% to 8%. A reasonable withdrawal from dividend income could fall between 3% and 5% annually, depending on the portfolio’s performance and allocation.

By combining these income-generating investments, retirees can enjoy a predictable and stable flow of income, typically yielding 3% to 4% annually on average across both asset classes.

2. Total Return Strategies: Growth with Income Distribution

Total return strategies focus on maximizing both capital appreciation and income generation. This approach leverages equity investments to participate in market growth while providing income through regular rebalancing and withdrawal strategies.

Equity Market Strategies: Historically, the average annual return from a well-diversified stock portfolio has been around 8% to 10% over the long term, although market volatility can lead to periods of lower or negative returns. By employing a total return approach, retirees can focus on capturing gains during favorable market conditions and rebalancing their portfolio quarterly. This enables them to harvest gains while maintaining their equity allocation for future growth.

Cash Buffer: A key feature of AWP’s total return strategy is maintaining a cash buffer of 3 to 5 years of living expenses. This buffer, typically held in conservative reserves like money market accounts or short-term Treasuries, ensures that income needs can be met during market downturns without having to sell stocks at a loss (this is where most people get hurt!). The returns from this portion of the portfolio are modest, generally ranging from 2% to 4% annually, but they serve to protect your portfolio’s longevity.

A reasonable income distribution from a total return strategy can range from 4% to 5% annually, which combines income from growth and cash buffer withdrawals in down markets. This strategy works well when retirees aim to balance immediate income with long-term portfolio growth.

3. Asset-Backed Structured Equity

Asset-backed structured equity strategies offer an alternative for retirees seeking a balance between income generation and capital protection. These investments are typically tied to tangible assets like real estate or infrastructure, and they offer structured returns with downside protection.

Structured Equity Investments: These vehicles are typically customized to provide income and some level of capital protection. Structured equity investments may include downside protection in exchange for limited upside participation, creating a predictable income stream. Returns can vary widely based on the structure, but these investments often offer 4% to 8% annual income, depending on the underlying assets and market conditions. The trade-off is generally lower growth potential, but they provide steady income with less volatility.

For retirees seeking a blend of income and stability, structured equity products can generate 4% to 8% in annual income distributions, and in some cases an opportunity for an additional 4% to 6% in long-term capital appreciation. These vehicles have unique features offering protection against significant market downturns of equity market exposure.

4. Income-Producing Real Estate: Direct Investments and Private Real Estate Funds

Real estate is an attractive option for retirees looking for stable, inflation-protected income. Direct ownership of rental properties and investments in private real estate funds provide consistent cash flow and potential long-term appreciation.

Direct Real Estate Investments: Purchasing and managing income-producing properties, such as residential or commercial rentals, allows retirees to generate a regular stream of income through rental payments. The historical return on direct real estate investments has averaged 7% to 10% annually, including both rental income and property appreciation. Rental income alone typically yields 4% to 6% annually, depending on location, property type, and market conditions. After factoring in property management costs and maintenance, retirees can reasonably expect to withdraw 4% to 5% of net rental income each year as part of their retirement paycheck.

Private Real Estate Funds: For those who prefer not to manage properties directly, private real estate funds offer exposure to income-producing properties without the day-to-day hassles of property management. These funds pool investor capital to purchase commercial or residential real estate, generating income from rent and potential appreciation. Private real estate funds have historically delivered annual returns in the range of 8% to 12%, depending on the fund’s strategy. Distributions from these funds generally range from 5% to 7% annually, making them a strong income-producing option for retirees looking to diversify beyond traditional stocks and bonds.

Crafting Your Retirement Paycheck

Creating a steady retirement paycheck from your investments requires a careful balance of risk, return, and income needs. Each of these strategies — yield-focused investments, total return strategies, asset-backed structured equity, and real estate — offers distinct benefits and challenges.

The key is selecting the right combination that aligns with your retirement goals and risk tolerance and to get your distributions set up in a way that feels like your typical “paycheck” and allows you to manage your lifestyle expenses comfortably.

• Yield Strategies: Offer stability with 2% to 4% income distribution annually.
• Total Return Strategies: Focus on both growth and income with 4% to 5% annual withdrawals.
• Asset-Backed Structured Equity: Provides consistent income with 4% to 8% annual returns.
• Direct Real Estate: Generates reliable cash flow, yielding 4% to 6% from rental income and potential appreciation with average long-term returns ranging from 8% to 12% annually.