Asset Allocation for Retirement Income: A Framework for Income-Oriented Investors

Abstract

Certain investor types, particularly those approaching or in retirement, care about the income properties of investment portfolios. This article addresses the income characteristics of equities and bonds and provides a framework for building multi-asset portfolios with varying degrees of income orientation, both ex-post, investigating the historical income behavior of equities and bonds, as well as through a forward-looking lens, based on today’s much lower dividend and bond yields. Because bond yields and prices are inversely related, bonds imbed a natural time-diversification property across the two dimensions that income-oriented investors care most about: portfolio income and expected wealth. Despite the long-term growth potential of equity income and the prospect for higher bond yields over the next several years, we still find that a meaningful allocation to bonds is likely optimal for investors with an orientation toward organic portfolio income.