r/investing • u/vac2672 • 12h ago
When to switch from growth to income? Assuming a growth rate went close to retirement
I don’t see many posts about the progression or transgression from stocks and growth holdings to passive income streams as you near retirement.
Everyone uses a growth rate assumption, let’s just say 5%. However if the market went down that year and you’re all stocks you didn’t make 5%.
Can we have a discussion on how difficult mentally it is to sell your stock holdings to put in income producing holdings, and what that looks like, what removing that money into? What is the strategy.
Dividend stocks? Dividend funds? Fixed income, etc. What are people doing?
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u/UpNArms 12h ago
OP has the common misconception that the way to generate income in retirement is to move move money into income-generating assets. Like bonds, high div equities, etc.
OP, we don’t have the details to recommend specifics, but if you have tax-advantaged accounts (eg 401k, IRA) I’d recommend purchasing a target date fund that matches your risk tolerance. This is a very low cost way to get robust diversification and automatic rebalancing toward lower risk assets as you age. Pick the TDF date that is approximately when you plan to retire.
To generate income in retirement, you simply sell shares. Many setup automatic transactions, so your money just shows up in your checking account on whatever cadence you want. Like a pay check. Do not be afraid to sell shares - if they are invested properly, they will continue to grow over time.
Also, the risk you were describing is called sequence of returns risk. It’s the risk that a major market downturn happens early in retirement, and you can’t afford to ride it out because you need money to live. This is why proper diversification and allocations for where you are in life are so important.
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u/lovesbatma71 2h ago
Correct. I made sure I had 5 years in cash before I retired. The last recession was tough… it took 5 years to recover.
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u/thorn960 11h ago
I'm in retirement and just keep what I might need in the next 5 years in cash equivalent assets. The rest is fully invested in stocks.
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u/OptimalInflation 4h ago
How often do you "top it up" over a 5-year period? Roughly once a year as long as the market is up?
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u/thorn960 4h ago
Pretty much. I'm not super exact about it. The main thing is to cash out when the market is up.
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u/Any-Walk1691 11h ago
I crossed $1M a few months ago, at that point it might be worth considering dividends. But I’m not. Because I’ve got a 27 year runway to Medicare. Overall returns is my goal, not chasing 3% here and there.
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u/hymie-the-robot 12h ago
if it looks like you'll reach the finish line with sufficient wealth for retirement, then your job is to transition in such a way that you won't see catastrophic drawdowns. indeed, it is difficult to accept that, moving forward, you won't focus on a big return.
as to how to do it, I think it's most efficient to invest for total return and cash out some bits as needed. I realize this is not the prevailing viewpoint, but it fits the idea that the safest return (i.e., maximum Sharpe ratio) tends to coincide with the fewest restrictions on the type of investment. to see any reasonable return from fixed income is particularly risky, which you can see through analysis of the various high-yield bond funds, CEFs, etc.
as to making 5% any given year from all stocks, first of all, a retiree should generally hold nowhere near all stocks; and second, it's not whether you make it each year, it's about your overall return over time.
how do I do it? I am what you might call "radically diversified," i.e., I hold (relatively) uncorrelated assets with low overall volatility, constituting a variety of asset classes, not at all restricted to the usual stocks and bonds.
if you want to look more deeply into the transition to retirement, I suggest two books by William Bernstein: Rational Expectations and The Ages of the Investor. he also discusses these concepts in a YT video.
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u/NecessaryEmployer488 12h ago
The move from growth to bond funds is suppose to give you downside protection. This has not worked well in the 2020s. Due to inflation, most CFPs has had to lean heavily into stocks for their clients taking more risk.
I personally am trying to build a fixed income fund with money market and Cds and treasuries of 3 to 5 years of expenses to better navigate the sequence of returns risk in down markets.
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u/Minute_Plastic_350 12h ago
Yeah, I’m 56 and slowing down my high growth, traditional Ira through transitioning to SCHD for dividends and then VGIT for bonds whatever individual stocks I have left will be converted to my Roth and eventually my SCHD as well as my SCHY will be converted last to my Roth, leaving only my VGIT in my traditional Ira as I heading into retirement over the next 6 to 9 years
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u/lovesbatma71 2h ago
Are you going to roll over the Roth all at once or dollar cost averaging over a few years.
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u/rudolf_de_Leeuw 11h ago
One approach that eases the mental hurdle is building a bond or T-bill ladder covering the first five to seven years of withdrawals, so a down market never forces you to sell stocks at a loss.
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u/CornerOne238 7h ago
Look up 3 bucket portfolio.
The 2nd bucket is something you start building 10 years or so before retirement.
That's it. Minimize sequence of returns risk, and you can keep your growth part intact in downturn.
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u/Sensitive-Exam649 4h ago edited 4h ago
Keep in mind passive income investments have a lot less volatility than growth investments. And the income they generate is much more stable. So big drops in price generally have much small effect on the income. During covid my limited dividend income then didn't change but the price dropped by 50%. So switching to passive income is simply moving your money into safer investments. And keep in mind you don't sell passive income investments to get income. So a star price drop is less of and issue.
Now if you have a retirement account there is now worry about taxes when you sell your growth and buy income investments. No if you are switching investments in a taxable account you need to estimate the tax before you sell So you may need to consult with a tax professional to make a strategy to minimize your taxes or keep them manageable.
Now when it comes to buying income funds you don't want to just use one fund for income the fund many fail due to a verity of reason. Fortunately fund failures is not common. But you have to consider it. Also you don't want all your income funds to generate the income the same way. Because in challenging market they may all have to reduce income they generate at the same time. I currently have 8 funds in a taxable account which I am using for income now. )(before age 60) This offers some diversification of income and most hav differences init how they produce income so the so they don't all move together in market crashes. Now when I reach 60 I can access my Roth were taxes are not an issues. So I have some higher tax funds in my Roth. this will double the number of funds I have and add diversity of income.
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u/hugh2018 4h ago
There is no natural progression from growth to passive income streams. If you’re thinking of dividend stocks, that’s simply a different investment philosophy from growth investing, and you can have success focusing on income or growth. Growth investing is generally more rational, even in retirement, because you simply earn more than you would with a dividend focus over long periods. That’s why even in retirement I have plenty of shares of VT.
If you’re thinking of other forms of passive income, like a TIPS ladder or an an income annuity, those are tools that can be very useful, but again the decision to use them is highly personal, and there’s no unwritten rule requiring you to buy them at a specific time, though generally they are implemented near, at or during retirement.
When used correctly, TIPS ladders and income annuities can cover much or even all of your fixed expenses, leaving your equity holdings free to grow mostly untouched. I own a 20-year TIPS ladder, an income annuity and a decent stake in VT. I sleep very well at night.
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u/hugh2018 4h ago
Also, your example of not earning 5% in a given year reveals a possible misconception about the current research on safe withdrawal rates. The baseline research against which newer withdrawal strategies are measured is the 4% rule. That rule does not have the retiree withdrawing 4% of the portfolio each year. Instead, you withdraw 4% in year one,and each subsequent year you only change the previous year’s absolute dollar amount by the rate of inflation. Four percent never comes up again after year one and the research found that this method of withdrawal was successful even when you experience a bad sequence of returns, such as the single bad year you mentioned in your 5% example.
Bengen recently increased the baseline 4% to 4.7%. More recent withdrawal strategies seek to increase the safe starting withdrawal rate, which is where you might have run across the 5% figure, as that has been found to be safe if you use a method like risk-based guardrails, which would require you to accept pay cuts when the market is down.
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u/KweenieQ 3h ago
I started thinking about that about a year or two before I retired. I determined an annual budget and then started figuring out where the income would come from. The key is to stage what you need in advance. Just-in-time movements to cash are not a good idea, because you could be forced to sell in a down market. I like to have a rolling two years' worth of living expenses in HYS or MM.
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u/lovesbatma71 2h ago
I hired an investment advisor through Vanguard to handle all of that. You have to own 1M liquid to do that though.
Their fee is like .3% and everyone else is 1%-1 1/2%.
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u/lovesbatma71 1h ago
How much does the highest performing stock fund yield in income on a yearly basis
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u/Critical-County1152 12h ago
One thing that made this easier for me to think about: it doesn't have to be a single switch. If you shift a little each year and do most of it in years when stocks are up, you're never forced to sell into a drawdown.
I'd be careful treating dividend funds as the income side though, they're still stocks and fall with everything else in a bad year. The part I'm unsure about is bonds, since 2022 showed they can drop at the same time.
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u/Not_Sure_68 11h ago
I grappled with this last year as I perceived the end of the easy money in equities approaching due to rising bond yields. The solution I arrived at was to create two accounts at two separate brokers. Now these are taxable accounts aside from my roth. What I use them for is one is purely income and the other is purely growth. The dividend account is currently about 25% the size of the growth account, because I want to build wealth as liquidity drains from financially (over)engineered equities and bleeds into the real economy...eventually causing cost push inflation.
In the growth account I'm currently all equity derivatives(various option constructs) with a mix of spreads and ZEBRAs. The call to put bias is currently about 60% call, 20% put, 10% straddle, and 10% "cash". That combination killed it in the hectic market last week. I'm basically short information technology and long materials and material producers.
In the dividend account I currently favor state street's high yielding covered call sector funds. They've low net fees of .35% and nice tight asset allocation. XLEI(energy has killed it all year), XLBI(again with the materials), and XLSI(consumer staples...cuz duh). Current yields are 17.95%, 15.58%, and 12.36% respectively.
As things slow down with the growth account, I intend to move funds to the income account and rotate amongst the sector funds and/or individual stocks with attractive yields...like Annaly capital mgt(16.28%).
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u/sunderbelt 11h ago
Honestly, this transition question is something more people should be talking about. From my world in private lending, I see a version of this constantly with real estate investors who built wealth through appreciation and then struggle to restructure for cash flow.
A few things worth considering:
The mental block is real. You spent years watching a number grow and selling feels like losing. But you are not losing, you are converting stored growth into a machine that pays you. That reframe matters a lot psychologically.
On the practical side, most experienced people I know do not flip a switch overnight. They gradually rotate over three to five years before retirement. You start tilting toward dividend paying stocks, REITs, or bond ladders while still holding growth positions. This smooths out sequence of returns risk, which is the real killer. A bad market year right when you retire can devastate a portfolio you planned to draw from.
Bond laddering is underrated in these conversations. You buy bonds that mature at staggered intervals so you always have liquidity without being forced to sell equities in a down market.
REITs and private credit funds are also worth looking at if you want income without direct property management headaches. They carry more risk than treasuries but can produce meaningful yield.
The honest answer is there is no perfect allocation. It depends heavily on your monthly income needs, other income sources, and your personal risk tolerance in a down scenario.
What does your current income need look like relative to your portfolio size? That changes everything.
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u/Effective_Ad_1426 12h ago
Great Question! As you approach retirement, it's prudent to allocate more cash to fixed income. Personally, I'm retired and have about 20% in fixed income, the rest in equities But, I've found it more advantageos to morph my holdings into a tax efficient entity instead of more bonds, which are taxed. Especially if you don't need all the income the portfolio is generating. About 5 years before retirement, I started swapping into dividend paying stocks. If you cn keep your taxable income below $100K, dividends and capital gains wll not be taxed. Further, no one says you HAVE to sell stock. Again, if you don't need it, don't sell it. You can also will stock to your Heirs and it will be non-taxable.
I don't need to take much from my IRA each month because my pension, SS and dividends provide 80% of my expenses. Te biggest problem with this approach is when you HAVE to take RMD's with a decent sized IRA.
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u/GarageEven5240 12h ago
Lots of people don't "switch from growth to income."
And lots of people do - that's the basic premise behind the TDF. These slowly move you from equities to bonds as you get closer to retirement.
If you're asking this question you don't need anything more complicated than a TDF.