How to Pay Yourself in Retirement
For ETF investors, the key retirement lesson is that โincomeโ and โspending powerโ are not the same thing. A portfolio built only to maximize current yield can quietly shift risk into the very sleeve meant to provide stability. In practice, retirees using ETF portfolios often need to think less about chasing the highest distribution and more about preserving a dependable asset mix that can support withdrawals across changing rate environments.
That makes the bond allocation more important than the headline yield. High-quality bond ETFs can serve as a spending buffer, but the point is not simply to collect coupons. The point is to hold assets that are less likely to behave like equities when markets are stressed. Yield-oriented credit funds may look attractive on paper, yet they can create a false sense of income if their price volatility turns them into stock surrogates.
Withdrawal discipline also matters as much as fund selection. A flexible spending framework can reduce the pressure to overbuild yield into the portfolio, which is especially relevant for ETF investors who rebalance regularly. When markets fall, trimming withdrawals rather than forcing sales from risk assets can preserve the long-term structure of the plan. That is a behavioral edge, not a forecast.
For long-term portfolio construction, the practical question is how each ETF contributes to the spending system. Equity ETFs may still be essential for growth, but retirement portfolios often work best when the income sleeve is designed for resilience, not maximum payout. Investors reviewing their ETF lineup should ask whether each holding supports cash flow, diversification, or downside controlโand whether any one role is being asked to do too much.
Key Takeaways
- One of the top common mistakes for retirees is anchoring on current income and trying to subsist on whatever income their portfolio organically generates.
- A lot of research has pointed to the value of being flexible in terms of how much you pull from your portfolio.
- Higher inflation is not great for retirement plans.
- Higher interest rates are a positive for retirement portfolios. They make retirement spending easier.
- Annuities make sense as part of your retirement income survival kit.
Common Mistakes People Make With Retirement Income
Kephart: At this yearโs Morningstar Investment Conference, youโre talking about retirement income with some peers from Pimco and T. Rowe Price. Itโs a hot topic right now. A record number of Americans are set to turn 65 over the next few years. And thereโs nothing harder than making the transition from getting a paycheck to having to pay yourself off your savings. When you think about retirement income, what are some common mistakes you see people make when theyโre thinking about how to pay themselves? Benz: Well, at the top of the heap would be just anchoring on current income and trying to subsist on whatever income my portfolio organically generates. There are a couple of problems with that. One is that when yields are higher as they are today, youโre living higher on the hog. But when yields are really, really low, as they were for a good part of the past decade, youโre forced to subsist on a lower income stream. So, thatโs a big issue, just getting buffeted around by whatever is going on in the interest-rate environment. And then another related pitfall is that in order to generate a subsistence level of income, people oftentimes gravitate to very risky-looking portfolios. We oftentimes see portfolios that instead of holding that high-quality bond portfolio, people might hold a portfolio thatโs kind of junky in its complexion. And so they end up with bonds that kind of act like the stocks in the portfolio. So, thatโs the main thing that I see in investor behavior with respect to retirement income.Flexible Withdrawal Strategies in Retirement
Kephart: I think the risky bond thing is something to definitely keep an eye on. Youโve done a lot of really cool research on different withdrawal strategies. How important is it to have a flexible withdrawal strategy in retirement? Benz: Right. A lot of the great research thatโs been done over the past couple of decades has really pointed to the value of being willing to be flexible in terms of how much you pull from your portfolio. So especially after a down year, if youโre willing to take less from that portfolio, that redounds to the benefit of a higher standard of living over the whole of your retirement. That means that you can take a higher starting withdrawal rate, oftentimes, and you can also take a higher lifetime withdrawal rate. So, just an example, we tested a variety of different flexible strategies in our retirement-income research. Our baseline conclusion was that people who want a very stable stream of income can take 4% initially if they want their money to last over 30 years. But for people who are willing to use a flexible strategy, they can take a starting withdrawal rate as high as over 5%. So, itโs a big deal. It can make a big difference in terms of peopleโs quality of life.How Investors Should Factor in Inflation in Retirement Portfolio Withdrawals
Kephart: Another risk to the quality of life over time is inflation and what that can do to your savings over time. And inflation just keeps making headlines for all the wrong reasons, unfortunately. How should the investors factor in inflation into how theyโre withdrawing from their portfolio? Benz: Itโs definitely an important consideration. And higher inflation is not great for retirement plans. I think it really points up the importance of thinking of inflation as another sequence risk. So, if high inflation occurs early on in your retirement, thatโll mean that the prices that youโre paying initially to buy all the things that you need to buy to fund your quality of life, that those will just kind of build upon themselves. And so itโs a negative, all else being equal, if youโre expecting high inflation throughout your retirement time horizon. Youโd want to be more conservative in terms of that starting withdrawal percentage, but I would say one countervailing force and a positive for people when theyโre thinking about retirement planning is that when we look at retirees spending over the lifecycle, retirees donโt spend in line with inflation. They tend to spend a little bit less as they move into their mid-70s and 80s and beyond. They spend less than the inflation rate. So, that is, I think, some comfort that arguably you could spend a little bit more initially if youโre OK with that assumption that you wonโt necessarily keep up with the inflation rate in terms of giving yourself increases in your paycheck.How Higher Interest Rates Can Impact Retirement Portfolios
Kephart: One of the other factors that inflation has caused is interest rates are a lot higher now than they have been in a very long time. You mentioned how people in the past have kind of been forced to stretch for riskier credits to maybe get that income, but now that interest rates are higher for even high-quality credit, how should that impact how investors think about their portfolio? Benz: Well, itโs definitely a positive. It makes almost every other aspect of retirement planning easier. So when we initially did our retirement income research, we came out with the idea that if retirees wanted their money to last over a 30-year horizon, they should start with like a 3.3% withdrawal rate, that was back in 2021. When we revisited that same research, the same sort of baseline assumptions in 2023, we found that a 4.0% initial withdrawal percentage was safe. Interest rates explain most of that differential. They make retirement spending easier. They also mean that, all else equal, retirees can use a safer portfolio. Then would be the case when interest rates are really low. When we plug all of our data into our Monte Carlo simulations, they gravitate to a balanced portfolio because of that safe cash flow that you can get from safe securities today. So the highest safe withdrawal rate over a 30-year horizon actually corresponded with an equity allocation of just 20% to 40% in equities.Should Annuities Be a Part of Your Retirement-Income Strategy?
Kephart: Annuities are tools that are designed to guard against longevity risk, but they can be very complicated, and it can be really hard to tell if youโre getting a good deal or not. Do annuities make sense as part of your retirement-income survival kit? Benz: This is a controversial topic, but I would say that they do. I think especially the very vanilla annuity types, immediate annuities, just a single-premium immediate annuity where youโre getting that stream of income over the rest of your life, or perhaps a deferred-income annuity. Those would be the main things I would start with if Iโm looking to increase my baseline of lifetime income. The annuity might go hand in hand with someone employing a flexible withdrawal strategy. So, if you have your sort of basic living expenses locked down with a combination of Social Security and possibly an annuity, that can give you more comfort. It can just make it easier to perhaps tighten your belt after a year like 2022 when stocks and bonds both fell simultaneously. I actually think those two things work really nicely together where youโve got more-stable lifetime income paired with a portfolio where youโre potentially going to be a little bit flexible in terms of those withdrawals. Kephart: Well, thanks, Christine. Iโm feeling a lot better about my odds of success in retirement now, and I hope our viewers are, too. Benz: Well, thank you so much, Jason. Watch more from the Morningstar Investment Conference 2024 here.Enjoyed this article? Sign up for our newsletter to receive regular insights and stay connected.