Focusing On What Matters: Sustaining Income

Market volatility and the risk of losing money continue to grip the attention of the media and investors, creating a fear that clouds the real issue facing investors at or nearing retirement: sustaining and growing their income. But one of the most important lifetime goals is having enough income to sustain us in retirement, and one we should think about more often.


As the above chart shows, interest rates (as depicted by the 10-year Treasury Yield in blue) have been falling since their peak in 1981. Bond and CD investors today face the lowest rates in more than 50 years. The yield on the S&P 500 also appears to decline, but is distorted by the enormous increase in value of the S&P 500.


Here is the secret you do not see: An investment in an index fund based on the S&P 500 at 1980’s highs of nearly 140 yielded an average dividend of almost 5 percent (for all the stocks in the index). If at the end of 2012 that same index fund was worth 1426.19, the dividend for 2012 would be 30.44. To express that in dollars: $100,000 invested in 1981 paying $4,936 in annual income grew to be worth $1,030,636 paying $21,997 in income.


More than four-dozen market declines of greater than 5 percent frightened investors during those 31 years, with several plunges greater than 30 percent. Yet, during that same period, income declined in only four of the years, and three of those had a decrease of less than 4 percent. In the remaining 27 years, income actually increased. By focusing on the received income — not market value — one could have easily stayed the course and reaped the rewards.


Past performance is not a guarantee of future results.


S&P 500 Index: Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.

The Menashe Morley Group

The Menashe Morley Group

David Menashe is a senior vice president and wealth management advisor, and Bruce Morley is a vice president and wealth management advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, member SIPC, and a wholly owned subsidiary of Bank of America Corporation. The Menashe Morley Group can be reached at 858.381.8113.


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