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In retirement, what pays the bills: total return, market value, or income?

My take is that the goal is to have all expenses paid by income of some kind... the more the better. Typically, it's a combination of SS, Pension, and the income that comes from investment portfolios. If there is minimal income production, assets have to be sold to help pay the bills. This dips into invested capital, so that even less income is being produced going forward.

Ideally, portfolios need to be designed to produce more than enough income to pay all the bills so that principal is never invaded. Most investors naively expect market value increase to always be more than enough to take care of expenses. In extended corrections, many people are dipping into principal every month. In income focused portfolios... this never happens. In fact, both productive capital and the income it produces just keeps on growing.

During rallies in market value focused portfolios, the higher market value smiles are rarely converted into income production, so the boom-and-bust cycle continues. Every investor's goal should be to stop this kind of spiral.

How do you make your investments produce the 4% you need to pay retirement living expenses?

4% has always been accepted as a good estimate of what retirees will need to take from portfolios in retirement, but the implementation strategy has always been terrible. In up markets, more money is taken and in down markets (when it is probably needed more), less money is available. The withdrawals are funded by selling securities.

This is because most investment programs focus on growing market value and producing total returns instead of being driven by efforts to produce more than 4% in realized income through distribution payments and capital gains. "Retirement Money Secrets", expected late this month at Amazon, will show you how easy it is to generate much more than 4% in realized income from your portfolio.

What’s your reaction to this statement? “Market value fuels the ego; income fuels the yacht.”

As a professional advisor and now as an income coach, I've dealt with hundreds of "top heavy" portfolios with virtually no income production. If people started earlier developing the income "bucket" of their portfolios, they would learn that having a growing income stream will ease them into retirement. One of the key forces in becoming "Income Independent" is to develop a disciplined, targeted, profit-taking mentality. 

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