by Archie M. Richards, Jr.
December 17, 2007

In the investment world, nothing's perfect. But the contrasting asset classes in my suggested portfolio (see archierichards.com) offers promising long-term returns with reasonable fluctuations and risk. The income from the dividends and interest is approximately 2.5 percent a year.

But what if you need more income than this - say, 6 percent a year?

Here's the best way to satisfy that need: At your annual rebalancing, while returning each asset class to its proper percentage, withdraw an additional 3.5 percent, making 6 percent in all. The extra 3.5 percent represents a modest withdrawal of principal.

Over the long term, such withdrawals will not deplete the portfolio (provided you don't exceed 6 percent total). Since 1926, the market has returned 10.6 percent a year. Even after annual withdrawals as much as 6 percent, the account is likely to appreciate.

If it does so, you can in future years withdraw a lesser percentage of the then-current (larger) value and still remove the same dollar amount as before.

But what if you just can't stomach withdrawing principal? You want the portfolio to earn more income, and you're willing to sacrifice growth to obtain it.

Several solutions are presented here. Don't adopt them all. I prefer the first two or three. Continue using my suggested portfolio as the basic structure to retain some growth potential, because you'll probably live longer than you expect:

1. Acquire iShares Dow Jones Select Dividend Index Fund (DVY). This ETF is described in my 9/3/07 column. The current income yield is 3.6 percent. In bigcharts.com, select 5 years to see the fund's reasonably good long-term growth.

2. Acquire Flaherty & Crumrine Preferred Income Fund (PFD): Listed on the New York Stock Exchange, the price generally hangs out around 16. After the 9-11 attack, it fell below 12. The price is again below 12. The current dividend yield is 8.7 percent. My 5/3/04 column contains more details about this fund. Go to www.bigcharts.com to see the price history back to the 1991 introduction. Enter the symbol PFD. For the time period, select "All Data."

3. Long-term bonds and real estate investment trusts pay relatively high income. In my suggested portfolio, increase these segments from 20 percent to 25 percent each. Foreign and domestic stocks pay relatively low income. Reduce those segments from 30 percent to 25 percent each.

4. From Ameritas or Vanguard, acquire an immediate annuity, guaranteeing an income flow for the rest of your life (and your spouse's life as well, if appropriate). The annuity income should cover necessities, such as utilities and basic foods. Invest the rest according to my suggested portfolio, with extra emphasis on stocks.

5. NFJ Dividend Interest & Premium Strategy (NFJ): The current income yield of this closed end mutual fund is 8.9 percent. The following illustrates how the fund works:

Let's say you own a stock priced at 18. You offer (sell) an option that enables the option owner to acquire (or "call") your stock at 20 any time in the next 6 months. The person who buys the option pays you for it. You can retain that income; it's called the "premium."

If the stock falls to 16, the loss in value is at least partially offset by the premium. After the option expires in 6 months, you sell another call on the same stock (probably with different numbers) and collect another premium.

If the stock rises to 22 before the option's expiration, you're required to sell it at only 20. When the stock, before the option's expiration, rises to any price above 20, you forfeit the extra profit but receive the premium income in return.

NFJ continually buys stocks and sells call options against them. Except perhaps for a modest recovery from the current doldrums, don't expect much long-term growth. You receive substantial income instead.

Strive for the maximum total return with reasonable risk. But if spending principal is unacceptable to you, the above alternatives increase the income while reducing your potential for profit.