Retirees Face a Familiar Trap: Chase Yield or Chase Growth?

The early years of retirement can be a tricky time. No matter how much money you have saved, you wonder if it's enough. No matter which investment strategy you choose, it's easy to wonder if there's something else you should have done. After decades of saving, it's surprisingly difficult for many retirees to begin spending down their savings.

According to a survey by the Employee Benefit Research Institute (EBRI), roughly 78% of retirees believe they can afford to spend. Still, nearly half admit they underspend out of fear they'll run out of money, which explains why many continue to invest throughout retirement.

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Retirement investing

For years, you've had two major investment options: Invest in assets that provide a high yield and regular payments, or keep chasing investments with the potential for impressive growth. Each option can be tempting. After all, who wants to miss out on gains when the market is red hot?

Yet, you may believe that you must pick a lane -- either focus on regular dividend-paying investments, or attempt to capture the growth associated with specific sectors of the market. It makes sense because each option offers something important.

The yield temptation

It's natural to gravitate toward high-yield funds like high-yield dividend stocks, covered-call exchange-traded funds (ETFs), real estate investment trusts (REITs), and bond-heavy portfolios because they promise attractive monthly checks. Current payouts look even more compelling given how far long-term Treasury yields have climbed.

However, maximizing portfolio yield can create a unique trap. High-yield bonds and preferred stocks may generate income today, but experience limited payout growth. In other words, chasing high current income could come at the expense of future raises.

Desire for growth

On the other side of the trap is chasing growth by loading up on broad-market or tech-heavy equity funds with low yields but strong appreciation potential. You may not be concerned that these funds don't pay much in dividends. Instead, you're betting the investments will increase in value over time.

However, going "all-in" on growth can be a trap. You may find that your income isn't enough in the short term, forcing you to withdraw more from savings to cover expenses. If the stock market dips early in your retirement and you keep withdrawing money, it can seriously affect how long your savings last.

Navigating the trap

Avoiding the yield-or-growth trap means not looking for a single "answer." Instead, design a plan that allows you to make the most of what's available to you. One effective approach is the three-bucket model. One bucket contains roughly two years of expenses in cash or short-term securities. Another is your "growth bucket," holding broad equities, and the last bucket covers dividend-paying investments.

The exact percentage of your investments that should fall into the last two buckets is a matter of opinion, with suggestions ranging from 40% to 80% allocated to equities. How much to allocate to your buckets largely depends on your age and risk tolerance.

Like most things in life, the most effective retirement investments depend on balance.

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