Most investors are familiar with the principles of diversification. By relying on all four sources of retirement income – including interest income, dividends, capital gains and principal – investors can give themselves the best potential to realize income without taking on excessive risk or concentrating their portfolio in a few different asset classes.
That said, some advice may need to be adjusted given the current environment. A retirement portfolio following the 60/40 strategy – or 60% equities and 40% bonds – could see limited income from bonds and a steep decline in the portfolio’s value if yields rise. These investors may want to consider making some changes to de-risk their portfolio.
Municipal bonds, convertible bonds and preferred stocks may provide less risky after-tax income, while a diversified portfolio of dividend stocks can boost equity-related income. While chasing higher yields from riskier issuers may boost income, risk-adjusted returns could suffer if these issuers start to default in a rising rate environment.
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