“The higher the reward, the higher the risk”
Investment comes with risk. However, keeping our investment in safe instrument like Government Treasury Bills will not help us in battling inflation in the long term. Investment is a big topic and we make the assumption that the reader is not an investment expert and will like to use investment to build up the retirement income. Tri-O Retirement Plan proposes an strategy that is simple, sustainable and passive.
We mentioned to keep two portfolios within the INVESTMENT “O”. An income portfolio and a growth portfolio.
An income portfolio, as the name implies, provides a regular income to you during retirement. Instruments that can be included in the portfolio include
a. Dividend paying stocks
b. Multi asset income funds
c. Exchange traded funds (ETFs)
d. Bonds or Bond funds
f. REITS or REITS Funds
g. Physical real estates
If we are not going to pick individual stocks, bonds, REITS or physical real estate, we can depend on mutual funds or ETFs to provide the necessary diversification. Diversification reduces concentration risk. For eg, instead of putting $100 into one stock, the fund may use $100 to buy a hundred stocks. If something happens to the company stock, the impact to the fund is limited. Of course, the upside of owning funds versus stock is also lower. Additionally, funds will levy a fee so it eats into the gains as well.
Another part of Tri-O Retirement Plan is to diversify across time. In the accumulation phase, we are proposing that monthly savings be used to invest in funds via a Regular Savings Plan (RSP). A RSP can be used to automate the purchase of funds on a monthly basis. Most banks and investment platforms provide investment via RSP.
The investment will fluctuate according to market conditions. Using RSP in the long run, a sufficiently diversified stock portfolio will increase its value over time.
The funds can provide dividends on a monthly, quarterly or annual basis. In the recent history, the dividend yields of a pure equity funds is about 2%- 4%, a multi-asset income fund (mix of equity and bonds) is about 3% – 6%, a pure bond fund is about 4% to 8% and a REITS fund is about 5% – 7%. They have also different capital appreciation characteristics with equity having a higher probability of growing over time than other instruments. It is good to invest in more than one type of fund for diversification purposes.
Assuming we build up an income portfolio of $100,000 with an average dividend yield of 5%, we can receive $416 of passive income per month. A $500,000 portfolio with the same dividend yield will provide $2083 of passive income per month.
Depending on when we start, the accumulation phase can last 30 to 40 years and the decumulation phase can also be as long. Tri-O Retirement Plan is structured around convenience. In the accumulation phase, RSP automates the investment process and in the decumulation phase, dividends will be paid automatically to your bank account to fund the monthly expenses.
If you are an active investor, you can pick your own stock, bond, REIT or Real Estate. If you happen to pick a stock that does not provide regular dividend but has grown in value over time, you will have to actively sell a portion of the stock on a regular interval during the decumulation phase to fund your retirement. Similar to owning a physical rental real estate. There is more work involved in looking for tenants, collecting rental and upkeeping the physical property. No right or wrong answer. It all depends on whether you will like a passive or active strategy.
We covered the income portfolio. Next is the growth portfolio. As the decumulation phase can be long, we need to make sure that the dividend from the income portfolio can grow during this phase to battle inflation. Having a growth portfolio in addition to an income portfolio addresses this requirement.
A growth portfolio consists of instruments that have potential for higher capital appreciation. They usually do not provide dividends and are subjected to bigger fluctuations. Tri-O Retirement Plan proposes funds or ETF investing in these growth industries like technology, clean energy, biomedical etc. Investing in funds or ETFs provide better diversification and risk management compared to individual stocks. Of course, if you are confident of a new technology firm’s prospect, there is no harm investing directing in the stock.
During the decumulation phase, to increase the dividend from the income portfolio to counter inflation, we may have to sell assets in the growth portfolio to purchase assets in the income portfolio to increase dividend payout. Tri-O Retirement Plan proposes that the INVESTMENT “O” consists of 80%-90% of income portfolio and 10%-20% of growth portfolio.
TRI-O RETIREMENT PLAN is a simple way to help you get started on your retirement planning. Learn the FUNDAMENTALS and HOW TO GET STARTED. There is also a spreadsheet to help you CALCULATE your monthly savings and your project monthly income at retirement. You can check out our BLOGS on topics pertaining to retirement planning. Feel free to CONTACT US if you have any questions or comments.
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