How Much Income Can a $5 Million Portfolio Generate?

If you have a $5 million portfolio and need $120,000 a year from your investments, that's a 2.4% annual cash flow need. So how do you actually build a portfolio around that? Before we get into the numbers, why does the entire portfolio not suddenly become an income portfolio when somebody retires? That's a good question, and I think that's a

common misconception. Hey, I've got $5 million. I'm going to take all of it and put it into something that generates income to replace my paycheck. And in reality, we need 2 components. We do need an income component. We need something to replace the income we were earning from work. But the other thing we need, Brian, is a growth component. Absolutely. Inflation, as we see now with gas prices, home prices, pretty much all prices are up. We need something in our portfolio that's also growing.

Absolutely agree with that, Nolan. And we're going to start today by talking about that growth and income split. So for today, the assumptions that we've been using is 60% growth and 40% income in a portfolio. Not every retiree is going to be set up exactly that way, but it's kind of a baseline where we can start from in terms of how we discuss this. How do you actually determine though, Nolan, how much of someone's portfolio should be growth and how much should be income?

That depends on the persons, and I've never met 2 people who have been, who are identical. But a big thing that we look at, Brian, is spending. You know, it's not our portfolio value that determines how successful our retirement is. It's the income that our net worth can generate.

Right.

And so you can have 2 different investors, same net worth, different spending amounts, different lifestyle that will drive you to 2 different portfolio decisions.

Let's dig into that a little more deeply. So what would make you use more or less than 40% for income, uh, for a given client when you're trying to work with somebody?

In some cases, Brian, clients don't need income. Okay. I was in with a, uh, with a client just this week actually. She's done a really good job, she has, saving for retirement, but she worked at an employer that had a pension, or has a pension, and she has a pretty modest lifestyle. So between Social Security, her pension, um, that provides most of her income. So in essence, her net worth really is for her kids and grandkids. So she's not taking distributions beyond her required minimum distributions. She doesn't really need an income portfolio, not to support her lifestyle. Okay. And other investors are exactly the opposite. We've seen some investors that even they don't have a pension, and after Social Security, there's a gap. That gap needs to be funded with income. And one of the ways to do it is to have a portion of the portfolio generating income. that will give a distribution that they need to live on. So each person, it's situation specific.

Okay, well, let's talk through that in a little bit more detail, Nolan. So the conventional wisdom out there for retirees, people always say, okay, well, now I'm retired. Let's get a lot more conservative, be more income focused on the portfolio. And as I get older, there's kind of these rules of thumb out there, you know, 120% minus your age or what have you. Those things are out there. And it's almost conventional wisdom by now. So from your point of view, when someone retires, you know, let's Let's just say we're baselining it from 60/40, a 60% stock growth portfolio, 40% income/bond portfolio. When someone retires, should that allocation stay fixed or does that change with time? How do you feel about those kind of rules of thumb that are out there?

Yeah, I think mathematically, even if you don't do anything, the allocation's going to change over time.

Right.

You know, you said 60/40, but for the purpose of the viewers and simplicity, let's just say 50/50, because the math is easy, easier. So if I have 50% of my portfolio dedicated to generating income, there's probably not much price movement.

Sure.

Pretty predictable, which is why people like it. But if I have the other half dedicated to growth, there is going to be some movement there. So if I don't do any changes and I start this allocation January 1st, when I get to December 31st, no matter what happens, I'm no longer at 50/50.

Right.

Then we just need to decide kind of what makes sense at that point. And so you need to look at this constantly. It's not static. This could change also with lifestyle spending, big distributions that happen, or I should just call them a change in circumstance. Mm-hmm. So I think this is something that needs to be constantly adjusted. But if you think about, like, think about your clients and think about retirement, retirement spending. You know, this number changes constantly. So I think this is something that we have to look at all the time. And unfortunately, what's all too common nowadays, Brian, is the spending numbers are actually going up.

Right. So

it's another challenge.

That gives us a bit of heartburn as advisors, no doubt about it. But we also understand kind of what's going on out there with prices sort of out of control over the last few years. So it's all part of something that we have to manage as advisors here with our clients. as well. So what we're really saying is, Nolan, that different parts of the portfolio have to have different jobs. And that's the end of the day. One part is helping you to replace that paycheck that you formerly used to get. And then, as you said before as well, growth is a huge, important part of what you're doing as well. You can't just give up the growth component as you're in retirement.

Yeah, because nobody likes to see their account be static. I mean, we need to, we like to see some growth, even though we're taking distributions. You know, if we start out with $5 million and you go 2, 3 years, even though you've been taking distribution, you'd like to see that number trend up somewhat.

Yes.

Even though you're taking distributions. And so that's the trick.

So that's what we're trying to calibrate here as we build portfolios that are set up for both growth and income as well. Now let's get into a little bit of the nitty-gritty of how we produce income for portfolios. So we all pretty much know out here as investors, there are companies that pay dividends. And so one of the things that I've heard are kind of the fallacies that I've heard from kind of do-it-yourself investors is just going in and trying to find out what companies pay the highest dividends. And then you're gonna need less money to generate, you know, what you're looking for from an income perspective. Let's talk about what we call the yield trap, Nolan. So once people decide they want income, the natural instinct is to go out there and find the highest yield possible. I can open a screener. There's stocks out there that pay 8%, 10%, 12%. Obviously, that doesn't mean we've discovered free money. Talk about the yield trap and sort of the fallacy that belies that one.

Yeah, you have to be really careful chasing yield. There's a lot of ways you can get hurt doing that. And what Brian's talking about is, you know, what a lot of people will do. Again, if you have $5 million, one of the ways that people try to solve for income is let me find a bunch of stocks that pay dividends and let me just load up my portfolio with those. And that is a trap. You have to be really careful. First off, most investors, especially when they retire, will need some income from their portfolio, but it doesn't necessarily have to mean it's stocks that they get the income from. Right. There's a whole range of income securities. As you know, we just put out our quarterly model income portfolio, and I think less than 10% of the holdings are actually dividend stocks. So there's a lot of securities that pay dividends. And some of them have attractive tax characteristics. So it just doesn't have to be dividends. But back to your point, if a company, if an investor's looking at companies that are paying dividends, you have to be careful. One is you still have stock exposure. Typically what I find, Brian, what we know about clients is when they are seeking income, they're also seeking stability and predictability. Right. Often you don't get that with stocks, which is why it can be part of the mix. I'd be careful relying on it solely, just dividend stocks. So that would be one of the problems. The other problem is too, the trap part is often it's the companies with the highest yield have the biggest risk. And so that's another problem that you run into. As you know, we've seen a lot of investors lose a lot of money chasing a 6 or 7% yield. You can lose a lot more than that in principal.

You know, in reality, what's going on here when we see high yields in stocks, and this is not 100%, But a lot of the times when you see a stock yielding 6%, 8%, 10%, it's because they have a fixed dividend, but the stock price has fallen.

That's the wrong way to get there.

And then the denominator, the denominator becomes much smaller and then you have a higher yield. So a couple of examples. You mentioned Walgreens was one of these when it was a publicly traded company. We've got Whirlpool now that yields about 10%, UPS, which yields about 6%. We're going to throw those stock price charts up there and just show you the flip side of taking those high yields is a pretty bad stock price situation there as well. So sometimes it's a high yielder for an accident because the price has come down. And so it's just a change in mathematics there and not a change in the business. Talk to me a little bit about how a true income portfolio stock or income portfolio security comes into our portfolios and how we make that decision.

So we're looking for not only cash flows, we're looking for the directions of those cash flows. So it's one thing for a company to pay a dividend. What we're really looking for is the history. Has the dividend number been increasing over time? And then more importantly, if we're looking at an individual company, it's what's the underlying cash flows of the business, right? Because if the business isn't healthy and growing, And it's not generating more cash every year, how can it possibly pay us a higher dividend? Right. That doesn't work. So there's a lot of work beneath the surface to validate the dividend. That's at least when we're doing stocks. Now, as I mentioned, stocks in a model income portfolio is less than 10% of what we own, just traditional stocks that pay quarterly. There's these other income securities that get money other ways. Let's say, for example, business development companies. which is often involved in lending, lending money to businesses and other institutions. And for the lending, they get paid back in interest, and then they turn around and give that back to investors in the form of a dividend. And so business development companies is another area that's interesting. We want to evaluate those for the same thing. It's the durability of the dividend. Hey, under what economic situations do we expect this company to perform? Or not performed? What happens when interest rates go up? Let's stress test this business. And in an environment when interest rates changed, how did the business respond? And then you can do the same with economics. Hey, if we had a recession— last time we had a recession, or during the great financial crisis in '08, or COVID during '20, what happened with the operations of the business? So you can test the elasticity that way, uh, as well. And then I'm just thinking about An area that we really like for income securities are things like MLPs or infrastructure assets or master limited partnerships. So these are usually long duration, hard, heavy assets, pipelines, toll roads, airports. We expect them to be here for literally generations.

Yes.

And so there we're, we're looking at the durability of cash flows and they're contractually obligated to pay out 90% of that cash flow. out to investors. So we have a really high degree of confidence we're going to get cash flow. We just want to make sure it's durable and it's increasing. And so there's a— depending on the type of income securities, there's a few different lenses you can view it through.

Yeah, so the bottom line of this is, Nolan, is when you're putting together an income portfolio, and this is kind of the way we look at it, is you're not looking just exactly for what the yield is today, but you're buying a sustainable cash flow. And you got to make sure that that cash flow is going to continue to come to you because You, as a retiree, are depending on that cash flow to continue to come. That's something that we are always looking for. What's the history of the dividend? What's the history of that cash flow? Has it been steady or increased, especially, as Nolan said, in times of trouble? Even if there are times of trouble, your expenses don't change. You have to make sure that cash flow remains sustainable. The final thing we'll say on this before we move to the next topic is that a 6% A 6% stated yield and a 6%, you know, stable, sustainable cash flow are 2 different things. And that's something that we, as we make our— build our income portfolios, are taking into account.

There's one other thing before we leave that topic. And you mentioned 6%. We didn't miss— we didn't mention the most significant building block when we build income portfolios, which is corporate bonds, right? We tend to look at fixed income.

Absolutely.

And that's the first asset that we look at. Now, when we're looking at cash flows, it's the same thing. We're looking at the business. Except for, um, we're not necessarily have to look through the microscope. We can kind of look at the telescope because as lenders to the business, we don't face the exact same risk as stockholders do.

Right.

You know, you can have a bad earnings report where the stock goes down 20, 30%, and the bond price does just fine because you're guaranteed your cash flows off the top. So we just want to make sure that they survive and they have enough capital to pay us back. So all type of ways to look at income securities. There's many income securities that are out there. And as interest rates change, as they are right now, there are different income securities that are more or less attractive depending on the environment you're in.

You're right, Nolan. That is a great segue to the next topic. But before we say that, as Nolan mentioned, there are many different types of income securities. There's not just dividend-paying stocks. You've got the business development companies, you've got the master limited partnerships. You've got preferred stocks and you've got corporate bonds and a lot of number of different things in between. So lots of different options there as you put together an income portfolio. And one of the things that we specialize in is looking under all those different rocks for the different ways to generate income. So as Nolan mentioned, today's rate environment, we're putting this together in the summer of 2026. We're definitely in a raising, rising rate environment now. And so that's changed the landscape in terms of how income securities are put into a portfolio and building streams of income. So it's a lot different than it was 5 or 10 years ago. Back in those days, we had near-zero interest rates for pretty much a decade or so, and people who wanted meaningful income had to reach out and take, actually take risk to generate income. Well, that's not the way it is today. So talk to us about what we're dealing with here in the mid-2020s with a rising rate environment and how that how that computes with income securities as we build portfolios.

You brought back some memories. You said 5 or 6 years ago. One of the things that stuck out to me, it was like COVID. You're right. COVID was 6 and a half years ago.

It was.

And it went really quickly. And we were using acronyms like ZIRP and TINA.

Yeah.

You know, ZIRP, Zero Interest Rate Policy. TINA, There Is No Alternative. Crazy stuff. Europe, Uh, they had negative interest rates for a while. So if you had your money in the bank in Europe, you actually had to pay them to keep it there. Just crazy.

Wow.

My, my, how the circumstances have changed in a matter of 6 and a half years.

The rate environment today is materially different from the near-zero rate environment several years ago. That changes how investors may think about constructing the income portion of a portfolio, including the trade-offs between fixed-rate and floating-rate securities. As always, the appropriate mix depends on the individual investor's circumstances risk tolerance, and overall portfolio.

So one of the things that stuck out to me as you mentioned that is cash.

Okay.

You know, there's still trillions in cash. And when I say cash, I literally mean checking account, passbook savings accounts. Yeah, I was looking at a statement the other day a client brought in and she's receiving 0.01%.

That's 0.01%. That's 1/100th of a percent.

Correct.

Yeah.

Yeah. I mean, you almost need a, you know, you need a microscope to find it.

Right.

And so I think those are the first place I'd look because in a rising rate environment, why are rates rising? It's usually because inflation. So that means the cost of things are rising. You know, I drove to Detroit to see my dad this weekend. I don't drive very much, so I had to fill up and I really paid attention to gas prices 'cause I don't gas up that much.

Right.

And gas prices were $5.50.

Wow.

For premium, for 93. I don't ever remember paying that much. Now, I know a lot of it is because of what's going on in Iran, but it doesn't change the fact that grocery prices, home prices, the cost of living has increased, which is one of the reasons that interest rates have gone up because the Fed needs to battle inflation. So that becomes an issue. And if you have money that's not earning at least At the rate that the prices are going up, then you're losing. So it's not necessarily offensive. It's also defensive. You know, I've got $5 million and I don't do anything and I leave it in the bank. It's going to slowly erode.

Right.

I need to do something.

Absolutely. You know, you're just standing still in an inflationary environment and everything you've done up to this point is kind of fading away a little bit over time. And that's your purchasing power. If you sit there with something earning 0.01% or 1%, or whatever it is, something that's lower than the rate of inflation. So at a minimum, you have to find a way to generate the rate of inflation just to stand still. But if you need to generate money to pay bills, you gotta be beyond that.

What I find too, Brian, is there's a couple of camps of people who are sitting around with significant sums that are not active with the money, just sitting at the bank.

Right.

Some of them are just busy and they haven't had time to have a thoughtful discussion of how much do I really need liquid and how much could go to something longer term that generates money.

Right.

So we work with a lot of busy professionals. You know, our ideal client profile are mid-career, late-career executives, publicly traded companies. And for a lot of them, they're busy. You know, they're working, you know, they have lives, kids in college, etc. And so they don't have time. But that's a minority.

Mm-hmm.

I think the bigger slice of people with that significant amount of money in the bank is there for a reason. Like they're nervous about something they're not comfortable with. what's happening in the market or other investments. And I think what we'd like to— the message we'd leave them with is there is a middle way. You can do income investing exclusively, which is generally a lot more predictable and a lot less volatile than doing stocks or the stock markets. And at least you can earn enough yields to keep up with inflation and hopefully exceed it by a decent amount.

Okay. We are going to finish this topic, this discussion by talking about what a portfolio at $3, $5, and $10 million actually can generate in numbers terms. But let's, before we do that, let's talk about the 3 tax buckets, Nolan. So, you know, what investments you've got are the— is really important. Choosing the right investments is important, but it's also important as how much money you actually keep after paying taxes. So we have this concept we always, a lot of times talk about with clients and prospective clients. You've got the 3 buckets. You've got your freedom bucket, the taxable brokerage bucket. You've got your IRA/401 bucket, which is the tax-deferred bucket. And then you've got the tax-free bucket, the Roth IRA. So talk to me about how that all matters in terms of how we put income security, securities portfolios together and how we manage that in terms of the 3 buckets.

Yeah, so this is an important topic, Brian. Often clients come in and they Talk about can they, you know, can I afford to retire? When can I afford to retire? Can I afford to retire now? Can I, can I retire last year? And so it's an important question, but depending on, it's not just how much they have, but where they have it. Let me give you an example. So you mentioned the 3 buckets. Bucket number 3 is what I refer to as bucket 3 is their freedom bucket.

Yep.

This is not that different than the local bank account, meaning the accessibility, the fact that there's no rules around it. It's pretty tax light. There's no zero tax, but it's pretty tax light.

Sure.

And you could take money in and out without restriction. That's what we call the freedom bucket. Brokerage account is another name for it.

Yep.

Money market. But it's liquid. It's liquid. Then we have the restricted bucket, which we call bucket number 1. That's the one that's rules around it. I can't touch it till 59 and a half. Even when I get to 75 and need to start Start taking required minimum distributions. Yeah. If I take money out early, I'm taxed. So that's bucket number 1. It's good money, but there's still rules around it. And I know there's a cutoff window before I can start touching it. And then we have bucket number 3, which is Roth, which is if I do it right and there are qualified distributions, that money should be tax-free for forever. And so if I am 50, or like a lot of our clients, you know, that work in corporate America, somehow magically between the ages of early to late 50s, they often are approached about a package to leave early.

Yeah.

And so investors would like to know, can I retire now? You know, they have this package. I am 53. Can I do it now? And you're talking about these buckets. It matters. You know, if somebody has $5 million, Brian, And it's all in bucket 1, which is their 401 account and their IRA account. You tell the listeners what issues pop up.

Well, everything you take out of there is a taxable event. So the $5 million you've got in a restricted bucket is really not worth the same as $5 million in a taxable bucket or in a Roth bucket.

And actually at 53, can they even touch them?

No, can't touch it till 59 and a half as well.

Right. So I've got a gap. I've got a 7-year gap. Before I can touch my retirement money, I've got a 9-year gap before I even get the early Social Security.

Right.

And so if I don't have any money in that freedom bucket, it just makes it a lot more difficult. And that's why we say you can't just look at the number. It looks at— it matters how you have your assets.

So there's that. Definitely an important consideration. And then there's also a consideration of which type of securities you hold in each bucket. So talk to Talk to the listeners about how we think about that as well.

Yeah. So if I'm in bucket 3, so let's assume I do have a freedom bucket. So I'm 53, but I was lucky enough and I've got all of my $5 million just in a brokerage type account.

Yeah.

So now I need to pay attention to my accounts generating income, but what type of income? The example you used earlier was 6%. Yeah. So

if

I have $500,000, if I have $5 million at 6%, My income's $300,000 per year.

Exactly.

But wait, there's more. If my $300,000 is generated, just say it was all fixed income, then it's all going to be taxable to me as ordinary income. There really is no difference between my income portfolio paying me $300,000 and me working at Apple or Google or Microsoft, and I got the $300,000 through my paycheck. Absolutely no difference from a tax standpoint. So I have to pay taxes at my tax rate, which is probably going to be pretty high. Now let's change the fact pattern. Let's assume, uh, I have $300,000 and it all came from qualified income sources.

Yep.

That means that the most I'm going to pay for that is probably 15%, which in many cases is much lower than I would pay at ordinary tax rates. And so You can see how if you change the character of your income and if it's in a pretty tax-friendly account, there's some adjustments you can make to hopefully keep more of what you earn.

Right. And then if you're not drawing income yet, but you want to own some income securities, you know, owning some, some of those securities in a tax-deferred bucket as well shields you from having to pay income tax today on that income as well. So a few different considerations with the buckets. In terms of what's owned where. Let's finish up by answering the question that we posed at the beginning of this video, Nolan, which was, what can you expect to generate off a $3 million portfolio, a $5 million, and a $10 million portfolio? So for someone with a $5 million portfolio who needs $120,000 a year from their investments, that's a 2.4% annual cash flow need. How you fund that between interest, dividends, and periodic sales from the growth portfolio depends on how the portfolio is actually constructed.

Yeah, I think it's, I think it's safe to say that Generally, if somebody's not working with an investment professional, not likely they're going to have much of an income portfolio because these generally aren't DIY-type projects. Right. At least not the way that, that we think about them. You're right though, the portfolio design is really important when we think about income. And we give these examples, $3, $5, and $10 million with kind of a 60/40 split.

Yep.

Um, we just really have to be careful. What I own in my portfolio is really important. So above and beyond the income, it's not just that I'm getting income, it's what do I own that's generating the income? Meaning, does it have an opportunity to appreciate? Would it appreciate at all? Would it just be fixed if my income's fixed? Or does what I earn have an opportunity to go up? And it would— it's the same thing that we said earlier in regards to the income.

Right.

The character of the income matters. If this is my taxable account and I'm getting 6% on my money and all 6% is 100% taxable at ordinary income, very different after-tax outcome than if the character is mixed. Some is qualified, some may be tax-free. Some income securities pay a return of capital. So therefore my taxes that I pay on it could be deferred for a very long time.

Right.

And so, um, all of those things that, um, we're going to be careful about. And again, we're going to pay attention to each client is going to be different in a different situation.

Yep.

Particularly if there's a case where we're going to get an income cliff in the future, which a lot of times when clients retire and they have these income portfolios, one of the things that we look at is, hey, has your income situation changed between now and retirement? Meaning, You know, hey, is your income lower today than it was at retirement? We want to make a projection. Hey, this is your income level now, but let's imagine you get to required minimum distribution age and we calculate what your required minimum distribution is. Will your income stay level once your RMDs kick in?

Right.

Or will that kick you into a higher bracket?

Right.

And if you're in a valley now on income, before your income goes up, it may make sense to do some smart things like, hey, Does it make sense at this point to do some conversions before I get an income step-up and really get pounded with taxes?

Yeah. So it always kind of comes back to, again, what you keep. It's not what you earn, but it's what you keep that really matters at the end of the day. I got one question for you, Nolan. So let's just take the $5 million example. We are talking about at 40% income, you're going to generate roughly $120,000 per year. What if a client needs $200,000 per year? How do you approach that?

This is a, a really good point because I think a common misconception is that, you know, we have to have the portfolio generating $200,000 a year. And it doesn't. We can get $120,000 just from the income sleeve.

Right.

And then we can get $80,000 even from the growth sleeve. There'll be things to do, particularly let's imagine it's a taxable account. And in our case, it was 60/40. So I have $3 million that's in growth securities.

Exactly.

And so I need another $80,000. One of the things that my mind goes to right away is let's take a look at the $3 million bucket. Do we have some securities in here that maybe we're not as high on today as we were in the past? And if it has a taxable unrealized loss in it, maybe it's an opportunity for us to kill 3 birds at one stone.

Okay.

clean up my portfolio, get the income distribution I need,

right?

And also produce a realized loss to defer my taxes a little bit, or at least cut down on my realized gain year to date, or maybe net me a loss I can use on my taxes.

Okay.

So there's a lot of ways to approach it. The bottom line is just because you need income doesn't mean it needs to necessarily be generated by an income security or the income side of the portfolio. The growth side could also be a source for incremental cash as well.

So it's an opportunity for creativity inside of the portfolio to build exactly that number that you need to get to. It doesn't have to all be in some sort of an income security to generate it, as you said. And, uh, you don't have to sacrifice growth necessarily to get to that number. So we'll close it out by saying, if you're approaching retirement with $3 million, $5 million, or $10 million or more, the question is not just, do I have enough? It is, what will my portfolio actually produce? And how much of that income is actually sustainable? And is the rest of the portfolio positioned to keep growing? Those are the questions we work through with clients every day. If you'd like to have us take a look at your situation, there's a link below to schedule 30 minutes with our team. And if you're sitting there thinking, okay, but is $5 million actually enough for me to retire? That's exactly where we're going next with the next video. So check that one out as well. We're going to be talking about, can you retire with $5 million? Nolan, any final thoughts before we close out today's video?

I don't. I'd just like to reiterate how important this income discussion is, especially in this environment with, uh, with rising rates. Also, you know, uh, we hit a sad high-water mark, uh, this month where the national debt passed $40 trillion. And in my mind goes to Congress has one playbook to pay off that debt, and it always comes back to the same thing— it's higher taxes. And so we really, this income topic I think is really important.

Absolutely agree with that. Don't forget to like and share with your friends that might find this video useful and leave a comment down below. We'd love to interact with you. If you comment, I promise I'll put a response behind it. We'll see you again on the next Left Brain Investment Committee meeting.