It Generates Income…Keeps Up with Inflation…Makes Your Money Last

Picking the best mix of mutual funds for your investment portfolio gets even trickier when you are near or in retirement. Biggest challenge: You will stop having income (or much income) from a job. That means you need investments that will help generate income and withstand periods of sharp market losses. But you may also need to invest in a way that makes sure your assets keep growing enough to help see you through your entire retirement and offset the effects of inflation.

Retirement expert Robert Carlson says that what works is combining three mutual fund portfolios that he has designed and adjusting them over the course of your retirement. Here’s how his approach works…


The biggest mistake that I see retirees make is that they invest backwards. They start by choosing funds that have delivered high yields and/or strong performance in the past, rather than starting by figuring out what their needs are now and for the future. Smarter approach: Use my three-step process, described in detail below. You will start by assessing the major risks that you will face in retirement…then you will select a variety of funds that you can rely on to address those risks…and then you will decide how to allocate your assets among the different funds depending on your individual circumstances.


I have advised thousands of retirees, and most face the same three major financial risks—and you probably do, too…

Income risk: Your fund portfolio may not generate enough spending money. To estimate your retirement living expenses, use the cash-flow calculators at, a site recommended by the American Association of Individual Investors.

Inflation risk: Your investment returns may not keep pace with the cost of living. Over time, the cash that you pull from your portfolio needs to increase if you are to maintain the same standard of living.

Longevity risk: You may outlive your assets. The average 65-year-old man can expect to live to more than 84 years old…the average 65-year-old woman to nearly 87 years old. That means that many of us will live even longer.

Solution: Don’t think of your retirement assets as one overall portfolio, as most people do. Instead, think of your assets as divided into three separate portfolios, with each designed to address one of the three risks. Here are the three portfolios of no-load mutual funds that let you do this…


This portfolio typically generates a 5%-to-6% annual yield without much risk of large drops in value (principal). The funds have different approaches to generating income, which include investing in dividend-paying stocks…preferred securities, which are stocks with some bondlike qualities including high fixed dividends…and master limited partnerships (MLPs), which trade like ordinary stocks but distribute most of their taxable income to shareholders annually in a form similar to dividends. Current allocations…

40% DoubleLine Total Return Bond (DLTNX) is an intermediate-term fixed-income fund that focuses on mortgage-related bonds.

20% DNP Select Income (DNP) is a closed-end fund that invests in utility stocks and master limited partnerships.

10% Cohen & Steers Global Income Builder (INB) is a closed-end fund with five types of investments, including large-cap stocks and other closed-end funds.

10% Cohen & Steers Infrastructure (UTF) is a closed-end fund that invests in dividend-paying stocks of airports, railroads and telecom firms.

10% Cohen & Steers Preferred ­Securities & Income (CPRRX) invests in preferred securities.

10% Eaton Vance Municipal Bond II (EIV) is a closed-end fund that owns long-term tax-exempt bonds.

Important: Most of the funds in this portfolio will be able to weather expected mild increases in short-term interest rates by the Federal Reserve starting later this year. But some of these investments, such as the DNP and Eaton Vance funds, are more interest rate–sensitive. I plan to hold these for at least the next few months, but when it seems that the Fed is close to raising rates, I will drop those funds and shift to other investments less likely to be hurt by rising rates, perhaps MLPs and short-term bond funds.


This portfolio provides less income—it yields about 3% annually—but more growth. About 40% of the portfolio is in stocks, but there also is exposure to investments that can do well in inflationary periods, including ­commodities and real estate ­investment trusts ­(REITS). Current allocations…

29% DoubleLine Total Return Bond ­(DLTNX).

25% Nicholas Fund (NICSX) focuses on about 40 US growth stocks.

21% Cohen & Steers Realty Shares (CSRSX) focuses on ­REITs.

10% Bridgeway Managed Volatility (BRBPX) aims to match the returns of the Standard & Poor’s 500 stock index with just 40% of its volatility.

10% Pimco All Asset (PASDX) invests in about 40 different Pimco funds and can include US and foreign stocks and bonds, commodities, futures and options.

5% Tweedy, Browne Global Value (TBGVX) is a large-cap value fund.


This portfolio stresses asset growth and diversification. It is designed to match the returns of the S&P 500 over the long run, but without its steep periodic declines. It uses funds that can perform well in a variety of stock- and bond-market environments. For example, some of the funds can short (bet against) stocks. Others invest in dividend-paying stocks that are less volatile than the overall stock market. Permanent allocations… 

23% MainStay Marketfield Investor (MFNDX) is a global fund that can buy or short stocks of any size.

22% FPA Crescent (FPACX) ­mixes stocks, bonds and cash to minimize losses.

16% Pimco All Asset All Authority (PAUDX) can use borrowed money to invest and can short stocks.

13% Berwyn Income (BERIX) is a bond fund that can invest up to 30% of assets in dividend-paying stocks.

11% Harbor High-Yield Bond (HYFIX).

5% Cohen & Steers Realty Shares (CSRSX).

5% Pimco Real Return (PRRDX) mostly buys Treasury Inflation-­Protected Securities (TIPS), which are bonds whose principal increases when inflation rises.

5% Oakmark Fund (OAKMX) buys stocks that are selling at least 40% below the manager’s estimate of their actual worth.


Here is how any retiree (or near retiree) can decide how to use the retirement portfolios described above…

Most retirees will need a combination of the portfolios. While there is significant overlap in the kinds of funds held in my three portfolios, that’s OK because each separate portfolio works to address a particular risk that retirees face. The percentage of overall assets that you allocate to each will depend on several factors—the size of your nest egg…when and how much you will need to withdraw annually to meet living expenses…your risk tolerance…and how much income you receive from such sources as Social Security and pensions. As a broad starting point, a 65-year-old who plans to start drawing down the standard 4% of his portfolio annually for living expenses may want to begin with a one-third allocation to each portfolio. If you need more income, then shift toward the Paycheck Portfolio, and if you need more growth, shift toward the Longevity Portfolio.

Some of the investments, such as bond funds, are best kept in tax-­deferred accounts and some in ­taxable accounts. Try to steer taxable money into the Longevity Portfolio or any of the stock funds. Reason: These generate the least taxes on income and capital gains.

Convert from your existing investments gradually. If you decide that one or more of my portfolios make sense for you, in order to shift existing assets over, begin by drawing on cash that you can spare and by selling any investments that have had poor long-term performance.

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