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Ask a Fool: What's the Best Way to Invest for Income?

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Matthew Frankel, CFP, The Motley Fool
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Q: I'm a few years away from retirement and just rolled over a big 401(k) from an old employer into an IRA. My priority is income, but I also don't want to give up growth. What's the best way to invest?

If your priority is income, that doesn't mean that you need to sacrifice growth. Or liquidity, for that matter.

My favorite approach to constructing an income portfolio is an age-appropriate stock/bond mix. My rule of thumb is to subtract your age from 110 to determine your equity allocation. So, if you're 50, this implies that you should have about 60% of your IRA invested in equity (stock) investments and 40% in fixed income. And unless you want to pick individual stocks and bonds, I suggest using low-cost index funds to do it.

For the fixed-income portion, an ETF like the Vanguard Total Bond Market ETF (NASDAQ: BND) is a solid example with a rock-bottom 0.05% expense ratio and a yield of about 2.8%.

For the equity portion, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) will pay you about 3.3% based on the current share price. It invests in high-quality stocks like Johnson & Johnson, ExxonMobil, and JPMorgan Chase.

Finally, I'd suggest allocating some of your equity investments to real estate investment trusts, or REITs, which generally pay above-average yields and also have growth potential. The Schwab U.S. REIT ETF (NYSEMKT: SCHH) is a smart choice, with a 0.07% expense ratio and a yield of about 3.5%.

These are just three examples, but the bottom line is that with a few index funds, you should be able to create a properly allocated portfolio that pays you 3% or more per year, and also has excellent long-term growth potential.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of JNJ. The Motley Fool has a disclosure policy.