Retirement income products
Retirement income products
Designing a portfolio for retirement income

Frank GermackFrank Germack
CFA, Director of the Investment Department at Rehmann Financial in Troy, Mich.

Balancing income generation while mitigating risk is the main goal of a retirement portfolio of this size, says Frank Germack, director of the investment department at Rehmann Financial in Troy, Mich.

To protect against interest rate risk and inflation, he suggests diversifying fixed-income holdings.

But, "one thing that is a little bit harder to do with a portfolio of $500,000 is have adequate diversification," he says.

To that end he recommends using exchange-traded funds rather than individual securities.

Frank Germack's portfolio recommendation
Frank Germack's portfolio recommendation

53 percent fixed income / 47 percent equities through ETFs and funds

"When you're buying smaller holdings, the markups can be a bit higher than creating the portfolio with different types of securities," Germack says.

What does he mean by markups? "Bonds are typically marked up when sold, meaning if a (bond) desk buys $50,000 bonds at a price of $100, they may re-offer to clients at a price of $101.50. The $1.50 reflects a markup."

Conversely, the bid/ask spread on an ETF is extremely low, as low as a penny in price, according to Germack. The bid/ask spread represents the difference between the price at which someone will sell the security and the price the buyer is willing to pay.

"ETFs offer improved liquidity, not to mention the diversification of hundreds of underlying holdings," he says.  

He suggests even more diversification by holding international fixed-income investments.

"There was a time when international fixed income was considered opaque, difficult to value or of low quality. But we're seeing now that certain countries -- Australia, Canada, Korea -- offer attractive yields on their securities with very good quality," he says.

International holdings will provide income and can guard against the erosion of buying power from a falling dollar.


To manage interest rate risk and rising inflation, Germack recommends sticking with maturities in the middle of the yield curve for most of the bond holdings, or around five to seven years.

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