Our version of buying bonds for income and stability is best demonstrated using the example of the Required Minimum Distribution. It is broadly known that at now 73—a few years ago it changed from 70 1⁄2 to 73—with very few exceptions investors must begin taking money out of their IRAs. It is sometimes a surprise to people that this begins at only about 4% and very gradually, using IRS mortality tables, increases over the years. It is a modest, albeit taxable amount.
[Note that this same approach can be applied to taxable accounts. If I can approach a 4% income stream from a stock and bond portfolio simply taking interest and dividends for the rest of my life, this becomes a very simple way to confidently approach financial planning.]
Taking IRA Distributions in a Declining Stock Market feels like losing wealth.
One of the worst feelings clients have is taking money out of an IRA in a declining stock market. Every month as they consume that money, and the account goes down if feels like their wealth is declining. My experience is that when a client’s wealth is declining, they begin to ration consumption. It is psychologically harmful. The idea that people want to spend their last dollar on their deathbed is an urban myth.
Taking distributions from mutual funds
Owning a cluster of mutual funds and pulling capital out of them in your 70s feels bad in a declining market. What if instead most or all of those required minimum distributions came from dividends and interest? If my portfolio of stocks and bonds could generate approaching 4%-and-growing in interest and dividends, I really don’t care that much what market prices are doing because I am not giving up what I might be considering my principal. Worried about inflation? This is where the dividend part comes in, it is extremely common for dividend-paying companies to consistently raise their dividends over time. This can lead to building wealth.