How To Invest $1 Million For Steady Income And Growth

What About $1 Million?

We often read articles and stories on why you should save at least a million dollars for retirement. However, a million dollars is just a milestone. Moreover, a million dollars is not the same as it used to be due to high inflation recently. According to a study by the Swiss bank UBS, as of 2022, the number of millionaires in U.S. dollar terms has grown to 59 million people worldwide, out of which nearly 22.7 million reside in the U.S.

All that said, the retirement targets should be decided based on individual needs and situations. One million dollars in retirement savings can be more than sufficient for many, while at the same time, it may not be enough to meet the needs of others, especially those who live in high-cost states.

Even then, after all the rising costs and inflation, a one million dollar remains a milestone for so many. For some, it could be a question of how you can get to your first million. In this article, we will base all of our assumptions and calculations on one million dollars to keep things simple to understand.

So, You Have Saved $1 Million; How to Invest It for Retirement?

Congratulations! You have already saved one million dollars. It definitely gives a good feeling when you see the total of all your brokerage accounts (or other assets) add up to more than seven figures. Let’s also say you are 65 years old and want to retire as soon as possible, and that makes it important to invest this capital in a way that not only generates sufficient and regular income for your needs but also can grow at a rate that exceeds inflation. Another highly desirable goal would be to conserve capital in a downturn or outright market crash; however, this cannot be achieved easily. Markets are inherently volatile, and we cannot eliminate the volatility; we can only try to minimize it.

So, let’s summarize our goals:

1. Our capital should be able to generate sufficient income to meet the needs of retirement. Let’s assume we need a 5% income.
2. After the income withdrawal, our money must grow at a rate that exceeds the rate of inflation. Assuming the long-term inflation to be 3% (though currently, it may be higher), our money must grow more than 3%, preferably 4% or higher.
3. The last goal that is not a must-have, but a desirable feature of our retirement planning, would be to minimize the volatility of our portfolio without hurting our growth goals. We should target the volatility to be nearly 70% to 80% of the broader market’s volatility.

Plan for a Long Retirement

The first thing that we want to recommend for future and near-term retirees is to plan for a long retirement. The retirement age of 62-65 is, after all, arbitrary. Moreover, it was determined before many of the modern medicines were discovered that have prolonged the human lifespan. We know that the human lifespan has gradually been increasing for decades (with a recent pause). Well, that’s a good thing, not bad. Now, you can enjoy many more years of relaxed lifestyle; however, it must be planned properly. Do not cut short your retirement lacking planning. It can’t be anything worse than running short on your money or meeting your basic needs in your 90s. Everyone, irrespective of their underlying health conditions (except in some extreme situations), should plan for at least 30 years of retirement, if not more. The worst thing that could result may be that you will leave more money than you planned for to your heirs or charitable causes. After all, that’s not a bad outcome.

Why is Predictable Dividend Income Better than Selling Shares to Raise Income?

We often hear arguments from some well-meaning folks about why we need to generate income through dividends or distributions. Why can’t we simply sell some shares of our investments every time we need some money? It is not a totally hollow argument. After all, some of the income-generating funds essentially do the same. Many people can do it successfully, but most can’t. But here is the argument we make on behalf of a common investor or retiree.

First, a common investor is not an investment advisor or a fund manager. Fund managers generally manage a vast pool of funds and have many years of experience in doing this.

Secondly, it is not easy to handle the emotional stress of deciding when to sell, how much to sell, how much cash reserve to keep, etc. Most retirees do not want to handle this stress and often can make mistakes due to emotional stress. The biggest argument is why we should go on this uncertain path when we have a proven and easier method available to us. That is, to raise the income through dividends and distributions.

Planning for an Investment Model:

First, let’s make some real-life achievable assumptions:

Assumptions:

1. Our investor retiree is a couple, with both nearing the age of 65. They want to retire as soon as they can work out a decent plan.
2. Their combined savings for retirement have just crossed a one-million-dollar mark.
3. In addition to their retirement savings, they have a house that has just been fully paid.
4. They have calculated their spending needs and, after making adjustments, for a slightly different lifestyle in retirement. They have reached an annual figure of $80,000.
5. They decide that they will not tap into their social security benefit until the age of 67 (considered the full benefits age for social security). At age 67, they will be entitled to roughly $55,000 of social security annually. This also means that they will not have access to these benefits in the first two years of retirement (if they retire immediately).
6. Since they will be reaching age 65 soon, they will be entitled to Medicare benefits. Sure, they will have to pay the required premiums and possibly have to sign up for supplemental insurance.

With the above assumptions in place, they decide that they would need a portfolio that should be able to generate 5% income. With 5% income, a one-million-dollar portfolio would generate $50,000 on an annual basis. That leaves a gap of roughly $30,000 in annual funding for the first two years of retirement. They have two options. First, one of them works for another two years, either full-time or part-time, to fill up the gap. The second option would be to reserve $60,000 in fixed-income securities and withdraw $30,000 each year to fill the gap. They could also just raise $30,000 for two years by selling some shares, as it is only for the first two years.

In our example below, we will work with the second option, assuming they do not want to work part-time. We will work with the assumption that their investments would generate an average of 9% return annually.

Here is the table that shows how their investments grow and their cash flow for the next 15 years.

Table-1:

How to Structure Your $1 Million Retirement Portfolio?

Our goals for designing this portfolio would be:

• To generate 5% consistent income.
• To grow the portfolio value by at least 4% after the 5% income. That means the total rate of growth should be 9% (or better) if all income was to be reinvested back. Assuming the long-term rate of inflation of 3%, we should be able to meaningfully grow the portfolio irrespective of whether the income was withdrawn or not.

With these two goals, we will design a 50:30:20 portfolio, which will essentially have three elements:

• 50% Allocation – Safety/Core
• 30% Allocation – High-Income
• 20% Allocation – High-Growth

With the above in mind, we will select three types of securities/stocks.

• Bucket-1: 50% Allocation to DGI (Dividend Growth Investing)

These will be stocks of large-cap blue-chip companies, averaging 4% income. This is our long-term buy-and-hold core bucket, and that’s why we are allocating 50% of the capital. In our estimate, this bucket should likely provide 10% growth (including the income) over a long time frame.

• Bucket-2: 30% Allocation to High-Income Funds or Securities

This bucket will yield very high income, so by definition, it will have more risk than bucket 1. Our target income will be 9% but no less than 8%. The purpose is to compensate and balance out 4% of the income from bucket-1 and almost no income from bucket-3.

• Bucket-3: 20% Allocation to High-Growth Stocks or Funds

This bucket will invest in very high-growth stocks. We will try to earn some income as well, but the expectation should be low. This bucket will compensate for the lack of growth in bucket-2 and provide the necessary growth for the overall portfolio.

• Bucket-3A (ALTERNATE to Bucket-3): 20% Allocation to an Asset-Based Rotation Portfolio

This bucket is an alternative bucket in place of the original bucket-3. This will be appropriate for investors who want to reduce the volatility in their portfolio but would be okay with a bit less growth. We think this alternate bucket will reduce the volatility by about 15-20% overall but also may reduce the growth rate by 1% to 1.5% points.

Bucket-1: DGI (Dividend Growth, Blue-chip, Large-cap) stocks

Stocks selected: (ABBV), (ADP), (BMY), (CCI), (CNI), (ENB), (MDT), (O), (PEP), (TXN), (VZ), and (SCHD).

Table-2:

By adding the ETF, SCHD, it may appear that we may be duplicating some stocks (present both in our bucket and a holding of SCHD). It is true, but the impact is insignificant. For example, TXN is one of the largest holdings of SCHD at 4%. We also have TXN in our bucket, which accounts for 3.75% of the total portfolio. The presence of TXN inside SCHD would only add 0.34% to our holding.

Bucket-2 High-YIELD Funds/Stocks – 30% of Total Capital

In this bucket, most of our securities are CEFs (Closed-End Funds), an MLP (Master Limited Partnership), and a couple of ETFs (Exchange-Traded Funds).

(UTG), (UTF), (MCI), (RFI), (BST), (USA), (XFLT), (MPLX), (JEPI), and (JEPQ).

Table-2B:

Note: MPLX is an MLP, which issues a K-1 form for partnership income instead of a 1099-DIV.

Bucket-3: High-growth (Blue-chip, Large-cap) stocks – 20% of Total Capital

Stocks selected: (MSFT), (V), (NXPI), (CI), (FIX), (IMO), (CSL), (INTU), (NRG), and (PH).

This is the bucket that should be monitored at least on a yearly basis (if not more) to see if any of the stocks no longer fulfill the goals and need to be replaced.

Table-2C:

Alternate Bucket-3: The Asset-Based Rotation Strategy

We will refer you to our previous article here for details on the Rotation Strategy. Please look/search for the “Rotation” Strategy.

When we combine these three buckets into one portfolio, we will have a total of 32 securities. To some, it may sound a lot, but it is a complete portfolio that will require very little maintenance or trading going forward (once established). To manage such a portfolio, it will be best to keep individual buckets in separate brokerage accounts. The overall portfolio will include:

Table-2D:

Type of Security	Allocation %
9 Individual Blue-chip dividend stocks	33.75% (3.75% each)
10 Individual high-growth stocks	20% (2% each)
2 REITs	7.5% (3.75% each)
1 ETF (dividend ETF)	8.75%
2 ETFs (Income ETF, using options)	6% (3% each)
1 MLP-Energy	3%
7 CEFs (with different asset classes)	21.0% (3% each)

Click to enlarge

Here is the combined portfolio income and expected growth:

Table-3:

	Investment Amount	Growth Rate Targets (inc. Income)	Income Yield %	Income generated (annually)
Bucket-1	$500,000	10%	4.16%	$20,791
Bucket-2	$300,000	9%	8.92%	$26,754
Bucket-3	$200,000	12% – 15%	1.2%	$2,390
TOTAL	$1,000,000	10.1% – 10.7%	5.0% (approx.)	$49,935

Click to enlarge

Backtesting of the combined portfolio over the last 16-plus years:

Here are some backtesting results and comparisons with the S&P500 if we had invested in such a portfolio 16 years ago, starting Jan. 2008. Sure, 16 years ago, our selections would have been moderately different but of similar types. Some securities like JEPI and JEPIQ had to be replaced with their benchmarks as they are fairly new products. What makes this portfolio powerful is when you have to withdraw the income (please see the second chart).

Chart-1: Without Income Withdrawal

Chart-1B: With 5% Income Withdrawal (inflation-adjusted)

Note: Some securities had to be replaced appropriately (for backtesting) for the years 2008-2012, as they did not have histories before 2012. Also, JEPI and JEPQ had very short histories and were replaced with their benchmarks. So, the backtesting results represent a rough estimation only. Additionally, backtesting results cannot predict future results.

Concluding Thoughts:

We have presented a relatively simple portfolio with a 50:30:20 theme, representing Safety, Income, and Growth. It contains 32 positions in three buckets, and it would be best to keep them separate for easy maintenance. It provides ample diversification, with nearly 70% of the portfolio geared towards growth and just 30% towards income. The backtesting results provide some evidence of the portfolio’s durability and income sustainability. The future will never be the same, but as they say, it often rhymes with the past.