Retirement planning isn’t about simply having a great investment portfolio that earns enough retirement income. It’s also about building retirement income through diverse strategies to ensure lifelong financial security.
Certainly, growing your nest egg is important, but knowing how to access that money efficiently to support your retirement lifestyle is just as important.
Our goal at Armbruster Capital Management is to structure a portfolio that works for you in retirement, drawing from current research and firsthand industry expertise. That means assessing the tax implications of how portfolios are structured and drawing money in a way that minimizes the tax bite.
Understanding the Dividend Appeal
Maximizing dividend income has a strong appeal. After all, who wouldn’t want to know that their investments generate enough income to meet all their spending needs? However, I admit we aren’t huge fans of them around here. The reason is that there are better ways to access your money and pay less in taxes, but investors on balance still seem to love their dividends. Behavioral finance has helped explain their emotional appeal. Investors often treat dividends like wages (spendable income) while viewing capital as something to preserve. This creates a psychological comfort with dividends.
Recent research in The Journal of Wealth Management (Summer 2025), conducted by Meir Statman and Vanguard, shows that even if investors do not need dividends immediately, many still prefer dividend paying stocks because they believe these stocks offer higher returns and lower volatility.
This belief is partially supported by data: Over the past 50 years, dividend-paying stocks in the S&P 500 have delivered stronger and more stable returns than nonpayers.
However, we have to remember that correlation isn’t causation.
Dividend-paying companies often exhibit traits like strong cash flow, profitability, and financial discipline. In other words, the same characteristics that we find in value and quality investments which have been known to outperform over time.
The Risks of Chasing Yield
While income-producing investments, such as high-dividend stocks, REITs, and high-yield bonds, may seem appealing, they can come with significant risks, especially when chosen solely for their yield.
We’ve witnessed firsthand the consequences of income-centric investing. A firm we acquired over a decade ago was heavily concentrated in high-dividend paying stocks, particularly in the financial industry, before the 2007-2009 bear market financial crisis. Due to other considerations, like long-term growth and risk, which were largely ignored (as they often are with an income‑centric investment strategy), these holdings suffered both steep capital losses and income cuts, creating a worst-case scenario for retirees relying on their portfolios for spending.
Investors got hit with a double whammy of steep capital losses and a substantial decline in income.
A singular focus on income can blind investors to the overall risk profile and diversification needs of a portfolio. High income can also mean concentrated exposure to certain sectors or asset classes that are more vulnerable to economic cycles.
Considering Total Return for a More Flexible Framework
Instead of maximizing income, our advisors advocate for a total return approach. This means building a diversified portfolio designed to generate the best return for a given level of risk, regardless of whether that return comes from dividends, interest, or capital appreciation.
This approach allows retirees to strategically tap into portfolio gains, often in more tax-efficient ways, rather than relying on dividends or interest that can be taxed at higher ordinary income tax rates.
A ‘total return’ framework involves:
- Diversification: Spreading investments across asset classes (stocks, bonds, real estate, etc.) and geographies to manage risk.
- Risk-adjusted asset allocation: Allocations based on time horizon, risk tolerance, and income needs. A 60%/40% or 70%/30% stock/bond mix is common, but we customize it for every client.
- Rebalancing: Periodically adjusting allocations to maintain your risk profile and capture gains.
- Spending strategy: Using a combination of interest, dividends, and selective sales of appreciated assets to fund retirement.
- Withdrawal planning: Structuring withdrawals to reduce taxes, smooth cash flow, and preserve the longevity of assets.
A ‘total return’ framework is ultimately about having the flexibility to choose where and how to draw income based on tax considerations, market conditions, and individual goals rather than being tied to a fixed stream of cash flows.
Building Your Retirement Income with the Right Portfolio
Designing a portfolio that supports you in retirement requires careful attention to asset selection, risk management, income flexibility, tax efficiency, and longevity of the portfolio itself. While the total return approach provides the framework, it’s important that your retirement portfolio reflects your specific needs and time horizon.
A well-structured retirement portfolio strikes a balance between growth and stability. For many investors, a mix of 60% stocks and 40% bonds serves as a starting point, but the allocation should reflect individual goals and risk tolerance. Stocks offer long-term growth potential, which is necessary to outpace inflation, while bonds provide a more stable income and act as a buffer against market volatility.
Limiting investments to domestic markets introduces concentration risk and limits potential returns, and exposure to international stocks and bonds enhances resilience during regional downturns.
Managing the sequence of returns risk (where market losses early in retirement have an outsized impact) is another critical consideration. One solution is to maintain a cash or short-term bond buffer covering several years of expenses. This allows you to avoid selling volatile assets during downturns and supports consistent income regardless of market performance.
Dividends may be comforting, but true financial independence in retirement comes from discipline, diversification, and keeping more of what you earn with the help of smart tax planning, withdrawal flexibility, and periodic portfolio reviews.
Whether you’re approaching retirement or just want peace of mind, this guide will help you take proactive steps to protect your financial future.
For additional information about steps you can take to help protect your financial future, download our free guide, “How to Navigate Market Volatility and Protect Your Savings.”
To learn more about Armbruster Capital or to speak with one of our registered investment advisors, call # (585) 381-4180 or reach out to us via our contact form.
Disclaimer:
**Armbruster Capital Management’s views as portrayed in this post are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time, and you may gain or lose money.
Past performance is no guarantee of future results.