How retired clients can generate income without drawing down capital

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Running out of money is a perennial concern for retiring clients. Reducing that stress by building a sustainable retirement income plan is often job number one for advisors.

One solution is to construct a plan that allows portfolios to generate enough income from the underlying investments, so clients don’t need to draw down the invested capital. It’s called a target distribution strategy, but Daryl Diamond, chief retirement income strategist at Dynamic Funds, prefers the term Paycheque Portfolio™.

“It enables retirees essentially to receive a paycheque every month and not be worried about selling investments in down markets,” says Mr. Diamond, a veteran retirement income planner and former advisor, who previously used the strategy for more than a decade with his clients.

The Paycheque Portfolio approach has one central focus: deliver consistent income in bull and bear markets alike. It involves building a portfolio comprised of income-producing assets such as dividend stocks, bonds and alternatives that generate coupons and dividends. This strategy enables the retirement cash flow retirees need, without them having to sell the investments that are generating that income – especially when those investments are down in value.

“One of the biggest upsides of this approach is it eases clients’ worries about markets, investment returns and volatility,” Mr. Diamond says.

At the core of the strategy are target income mutual funds and exchange-traded funds (ETFs) designed to pay monthly distributions based on the number of units clients own.

Advisors have a lot to choose from, and Mr. Diamond has used many asset managers offering a diversity of funds over his career. He says Dynamic is a leader in this space, offering an extensive lineup of products with a range of yield and risk profiles.

“Dynamic’s funds have often been the core investments we’ve used for clients for these reasons,” Mr. Diamond says. “As well, their managers have the track record of executing on providing a steady income for their investors.”

A retiree’s income-producing investments may consist of two or more monthly income funds. Some of those mutual funds in the lineup include Dynamic Equity Income Fund, with a 4.5 per cent plus yield, and Dynamic Global Strategic Yield Fund, with an annual yield of more than 5.9 per cent.

“One advantage with working with Dynamic is the number of fund choices, so you can plug and unplug income solutions to suit client needs,” Mr. Diamond says.

Designed to provide reliable monthly income, these funds can form the foundation of retirees’ portfolios, complemented by smaller allocations to growth and cash. Besides providing a steady income stream, a key benefit of the Paycheque Portfolio strategy is advisors are no longer faced with making almost day-to-day portfolio decisions to create income for clients.

“When I was an advisor, that was one less task on my plate,” he says.

Instead, advisors can focus on helping clients refine their retirement plans as opposed to worrying whether portfolios will generate consistent income to support those plans.

When advisors talk to clients about their retirement years, the discussion often turns to worries about outliving their money, the way inflation and volatility can chip away at their investments, the rising cost of living and affordability.

A big part of the value advisors provide comes through in quelling investor concerns, and Mr. Diamond says this approach prompts a different type of conversation that resonates with clients.

“It’s a dollars and cents strategy they can easily grasp. Here is the income you need each month, and here’s the income created using the Paycheque Portfolio strategy by these funds.”

He says that’s a much more understandable approach compared with trying to explain to a client, for example, how they need $4,620 of monthly income from a diversified portfolio of investments worth $897,000.

While distribution levels are not guaranteed from these funds, Mr. Diamond has never experienced a situation for clients in which a fund manager reduced monthly distributions. No clients have had to sell units, which could decrease the strategy’s overall ability to generate steady income in the future.

Advisors can also use the Paycheque Portfolio approach to an advantage for clients getting close to retirement. Here, distributions are reinvested to purchase more fund units, which can potentially increase the income generated from the strategy once clients retire.

“This, in turn, can abate the impact of the negative sequence of returns that can hurt clients’ financial prospects just before retiring,” Mr. Diamond says. “As a result, the client won’t face buy-and-sell decisions, and the advisor isn’t backed into the corner feeling the need to sell something to mitigate losses in a down market.”

By using a proactive method for retirement income generation, advisors can find that clients become more confident their financial plan will be resilient, no matter the market conditions.

“We see this as a solution to the client question: ‘What do I do when markets drop?’ And the answer from the advisor is this: ‘Let’s put the right strategy in place at the outset to produce a steady income, regardless of what happens.’”

Learn more about the benefits of Dynamic’s Paycheque Portfolio approach for both your clients and your practice.

Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.