Why total return matters more than portfolio income in retirement

One of the most common requests we hear from prospective retirees is, "Can you build me a portfolio that generates enough income so I never have to sell investments?"

It is an understandable question. Many investors feel more comfortable living off dividends and interest while leaving the principal untouched. On the surface, it sounds like an ideal retirement strategy.

In reality, however, focusing solely on the income generated by a portfolio often causes investors to overlook a much more important concept: total return.

Income Is Only One Part of Total Return

A portfolio's total return consists of two components: the income it generates through interest and dividends and the appreciation in the value of the investments themselves.

From a financial planning perspective, a dollar received from a dividend is no different than a dollar received from selling a small portion of an appreciated investment. Both increase the cash available to fund retirement spending.

The source of the cash is often less important than the overall performance and structure of the portfolio.

We Rarely Build Portfolios That Generate All of the Required Income

One misconception is that a retirement portfolio should generate enough dividends and interest to fully fund annual living expenses.

In our practice, that is rarely our objective.

Instead, we focus on building portfolios that seek to maximize total return while maintaining an appropriate level of risk. That often means allowing part of the retirement income to come from portfolio appreciation rather than relying entirely on dividends and interest.

This approach provides considerably more flexibility when constructing a diversified portfolio.

Rather than chasing higher-yielding investments simply because they can produce more income, we can own high-quality businesses, broad market index funds, international equities and other investments based on their long-term investment characteristics rather than their dividend yield alone.

The Importance of a Fixed Income Reserve

One question naturally follows: If a portfolio is not generating enough income to meet spending needs, where does the cash come from?

Our answer is surprisingly simple.

For clients taking regular distributions, we generally maintain approximately five to seven years of anticipated withdrawals in high-quality, low- to intermediate-duration, fixed-income investments.

These investments serve as the portfolio's spending reserve.

When a distribution is needed, the cash typically comes from this portion of the portfolio rather than requiring the sale of stocks.

This approach provides an important benefit during periods of market volatility.

If equity markets experience a significant decline, there is generally no need to sell stocks at depressed prices simply to generate retirement income. Instead, withdrawals continue to come from the fixed income allocation while the equity portion of the portfolio has time to recover.

Rebalancing Becomes the Distribution Strategy

As markets move over time, portfolios naturally drift away from their target allocations.

Rather than viewing withdrawals as separate transactions, we often view them as opportunities to rebalance.

During periods when stocks have appreciated, a portion of those gains may be sold to replenish the fixed income allocation that has been used to fund retirement spending.

In other words, the portfolio is systematically selling investments that have performed well while maintaining the desired asset allocation.

This disciplined process removes much of the emotion from investment decisions and helps avoid reacting to short-term market movements.

Avoid Chasing Yield

Another advantage of emphasizing total return is that it reduces the temptation to chase high-yielding investments.

Investments offering unusually high dividend yields often come with additional risks. Some investors unknowingly concentrate their portfolios in sectors such as utilities, energy, real estate or high-yield bonds simply because they produce more current income.

While these investments may have a place within a diversified portfolio, they should not be selected solely because of their yield.

A well-diversified portfolio should be built around long-term investment objectives rather than maximizing current income.

The Bigger Picture

Retirement planning is not simply about generating cash flow. It is about creating a sustainable strategy that allows assets to support spending throughout retirement while managing investment risk and taxes.

For many retirees, that means accepting that some withdrawals will come from dividends and interest while others will come from periodically selling appreciated investments.

There is nothing inherently wrong with selling investments to fund retirement. In fact, when done strategically through disciplined rebalancing, it is often one of the most efficient ways to manage a portfolio.

Final Thoughts

Successful retirement investing is not about preserving every share of stock or living exclusively off dividends. It is about building a portfolio designed to maximize after-tax, risk-adjusted total return while providing reliable cash flow throughout retirement.

By maintaining several years of anticipated withdrawals in high-quality fixed income investments, retirees can continue taking distributions without feeling pressured to sell stocks during difficult markets. At the same time, the equity portion of the portfolio remains positioned for long-term growth potential and inflation protection.

Ultimately, the goal is not to maximize income. The goal is to maximize the probability that your portfolio will successfully support your retirement for decades to come.

Reid Schwartz is a columnist for The Item and co-founder of Creech Schwartz Wealth Management in Sumter, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.

*Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners, LLC.

This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.

Securities and investment advisory services offered through &Partners, LLC, a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission and member FINRA, SIPC.