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58 yo retired, glad to be here, I want to start with a financial question
Old 08-27-2019, 02:28 PM   #1
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58 yo retired, glad to be here, I want to start with a financial question

Hi!

My wife and I retired about 2 1/2 years ago at 55. We have 2 kids in college, grad school and we live in Tampa. We love traveling the world and scuba diving, food, craft beer and lots of other stuff!

I'm looking forward to meeting others in the group.

We've met with many advisors and feel that we are financially secure, however, they all have different methods for getting us through retirement. We have been fortunate to accumulate a nice nest egg and we are very grateful!

My first question is financial. We have our money at Vanguard, 60/40 diversification stocks, bonds, US and Intl. I'm wondering if those that are retired build a portfolio to produce enough income to live on each year or do you dip into the principal? I like the idea of producing enough income. We have 9 million in the account and are looking to draw 300,000 per year taking into account taxes.

Thanks!
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Old 08-27-2019, 02:35 PM   #2
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Us lean FIREs are definitely planning on dipping into the principal. Especially with lower interest rates filling the horizon these days.
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Old 08-27-2019, 02:49 PM   #3
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300K on 9M assets is 3.33% WR. Since many advisors are now advocating 3% as the safe WR, you might be a little high.

To your question: My taxable portfolio can produce enough income to live on, including paying all my taxes (which include doing Roth conversions in ER, up to the top of the 12% bracket so that MRD's don't overwhelm me too badly when they start in 15 years).

Actually in the first few years of ER, I will continue to reinvest all my dividends and sell off some things that I want to get rid of (a big company stock position and some old mutual funds that pay unpredictable distributions), holding back enough each year to live on and cover my taxes, and invest any excess. The exact mechanics of how I'll do this are TBD.
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Old 08-27-2019, 02:56 PM   #4
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I can easily get it to 3%. I agree that 4% is no longer reasonable. Starting next year I'm going to be doing the Roth conversions. I'm leaning towards restructuring my portfolio to produce my yearly required income and leaving the principle. Do you have any resources for good strategies to make that happen?

I like the low fee structure at Vanguard but they advocate eating into the principal. An advisor at JP Morgan had a good strategy for not touching the principal but fees were high!

It's really hard to know who is right and are they working in your best interest.

Thanks

Marc
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Old 08-27-2019, 02:59 PM   #5
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61, 13 years into retirement, everything in dividend growth stocks since 1993, which is how I got here. I live on less than the dividends generated, and reinvest what is left over.
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Old 08-27-2019, 03:01 PM   #6
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My husband isn't retired yet, but I foresee it happening within the next 5 years or so. I'm with you on producing enough income to not have to be concerned about what assets to sell for spending money. To that end, I've been investing primarily for income as opposed to growth. I have a mix of individual corporate and muni bonds, though I'm transitioning to ETFs now. Our investments are generating about 3.5% to 6.5% in dividends/interest. I don't automatically reinvest. I direct the income into more investments regularly.

I reserve the right to change my investment strategy as time passes. However, with your $9M, using my current strategy, I'd be generating $315,000 to $585,000 easy, using corporate bond and high yield stock/preferred stock ETFs.

At your level, I might look to ease the tax bite, if a lot of the $9M is in taxable. More qualified dividends and possibly some tax exempt interest.
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Old 08-27-2019, 03:05 PM   #7
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Thanks. I'm looking at qualified dividends and Muni's. I'm glad to see that several of you are making off of the dividends! Thanks for the info, very helpful!
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Old 08-27-2019, 03:06 PM   #8
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I'm leaning towards restructuring my portfolio to produce my yearly required income and leaving the principle. Do you have any resources for good strategies to make that happen?

Marc
See my post above, and CyclingInvestor's post. Use a mutual fund/ETF screener and sort by SEC yield and distribution yield, high to low. Don't just buy anything just because it's high yielding. You have to look under the hood.
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Old 08-27-2019, 03:09 PM   #9
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Thanks. I'm looking at qualified dividends and Muni's. I'm glad to see that several of you are making off of the dividends! Thanks for the info, very helpful!
For qualified dividends, I'm using FDVV at Fidelity and SPYD at Charles Schwab, both commission-free ETFs, respectively. PFF generated some qualified dividends for me last year, though not 100%.
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Old 08-27-2019, 03:17 PM   #10
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Great Information, thanks!
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Old 08-27-2019, 03:32 PM   #11
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We are FIRE, use VG and have 60/40 diversification. We will not use our portfolio for 3 more years, so we re invest all dividends and capital gains. Our outside accounts will get us through to 65, pension kicks in there. Then FRA of 66.5 SS kicks in. We'll probably use 1.5-2% of portfolio to get $90-$100K income. We have outside accounts of that VG portfolio to hold us over.
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Old 08-27-2019, 04:23 PM   #12
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I'm leaning towards restructuring my portfolio to produce my yearly required income and leaving the principle. Do you have any resources for good strategies to make that happen?
I'll explain how my dividend portfolio came to be.

I was a mutual fund investor for over 20 years. After paying off my house in 2009, and getting a higher paying job, a sizable cash pile began to build. I decided to build a ladder of 60 5-year $5000 CD's (buying one each month for 60 months), which were paying over 3% at the time. I'd roll them over 2 or 3 times and then start peeling them off for living expenses sometime in my late 50's or early 60's. That was my ER plan.

30 months into this project, new CD's were paying 1.7% and dropping, so I abandoned the plan. I discovered dividend growth stocks (stocks which increase their annual dividends over amazingly long time frames). Since late 2013, all new cash (and the CD's when they matured) went into these kinds of stocks (and a few conservative preferred stocks, which is another story for another day).

From 0 dividend income in 2013, I now have more than enough to live on. I realize I didn't really "restructure" anything, that this was done entirely with available cash. (I will have some restructuring to do when I start selling off my company stock and mutual funds that I mentioned in my previous comment. There will be tax planning and capital gains to deal with.)

It took me several years to learn my comfort level, etc. I use the "U.S. Companies with 25+ Straight Years Higher Dividends" list (it also lists companies with 10-25 straight years, as well as 5-10 straight years) from https://www.dripinvesting.org/Tools/Tools.asp as a main resource. And a lot of reading. The common stocks in my taxable portfolio currently yield an overall 3.7%, and average dividend growth is about 8% in 2019.
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Old 08-27-2019, 05:10 PM   #13
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I retired this year at 55, and DW retired a few months later at 61. Covering the majority of expenses through dividends (and CD interest) is a key part of our plan for ER, as we also do not want to "dip into principal" - especially in a down market.

I'm learning the hard way that it's not quite as easy as it sounded a few years back when I bought my first 3+% CD. I did manage to acquire enough income producing assets for dividends to pay most of the bills, but then a number of those high yielding assets started to undergo negative yield changes - for instance, I had some CDs this year come due - and several more are coming due later this year. Unfortunately, even the best rates any of us can find are now a full 1-1.5% lower than they were, which becomes significant and hits the best of plans quite hard.

I also counted on Dividend income from funds (more below on that) and individual stocks, only to watch one of the ones I banked on the most (CenturyLink - ticker CTL) cut it's previous $2.14/sh dividend earlier this year by 54% to $1/sh. That one hurt, as I had a good number of CTL shares that I picked up when they acquired LVLT. I was pretty happy when I learned CTL had a dividend as LVLT did not - but a key mistake I made was trusting their exec management when they said (as recently as last December) that they were "comfortable with the dividend" - only to cut it literally a month later. Go figure.

FWIW, I also invested in a number of high yielding mutual funds including FNMIX and VWEHX. Problem is, their total return in some years is often less than the yield (like FNMIX last year) - so your net worth is going in reverse, even when you're getting those great dividends - much like CTL did going from $28/sh when they acquired LVLT down to under $10 at the low. I did look at some of the funds mentioned by others, and while there is indeed often good yield to be had, I'd caution to look at total return also as sometimes funds go in reverse in terms of net value even if all dividends were reinvested..

To that point, if you mention the word "dividend" on Bogleheads, you might get run out of town on a rail ..they are ALL about "total return" and only recently have I started to understand why and to somewhat see their point..for example - what would you rather have..YTD performance of the S&P 500 or 3% divvy from Wellesley + it's considerably smaller NAV increase? But that said, I also can't understand the Bogleheaders (or similar folk elsewhere) who want to have a very high (like, 80-100%) equity allocation and plan to pay the bills by selling shares. No thanks! That strategy seems very risky at best to me and God help them not if, but when, a bear market hits. Me? I'll take the income to pay at least most of the bills and try to not stress (although I will) about the NAV drops.

So, like you - it'd be great to cover my "core" expenses with Divvy and Interest income..but it's also getting increasingly hard to do so..fortunately, you're in pretty good shape with your acquired assets and expense level..and generating enough dividend yield to live off of should be pretty straightforward, even with the new challenges the inverted yield curve and considerably lower rates are giving us even a short 12 or so months later..

Please do keep us posted on what you wind up doing. There are a small number of us (much more than the 'total return' crowd) that are taking an 'income first' strategy..would love to see that number grow but do appreciate the opinions of those in the other camp as well..
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Old 08-27-2019, 05:45 PM   #14
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Hi!

My wife and I retired about 2 1/2 years ago at 55. We have 2 kids in college, grad school and we live in Tampa. We love traveling the world and scuba diving, food, craft beer and lots of other stuff!

I'm looking forward to meeting others in the group.

We've met with many advisors and feel that we are financially secure, however, they all have different methods for getting us through retirement. We have been fortunate to accumulate a nice nest egg and we are very grateful!

My first question is financial. We have our money at Vanguard, 60/40 diversification stocks, bonds, US and Intl. I'm wondering if those that are retired build a portfolio to produce enough income to live on each year or do you dip into the principal? I like the idea of producing enough income. We have 9 million in the account and are looking to draw 300,000 per year taking into account taxes.

Thanks!
Congratulations on your situation, it is very enviable and no doubt hard won.

I am in a similar situation, your vintage, kids in university, HCOL lifestyle, and have exactly the same approach. We built a perpetual income machine, with no intended spending of anything except returns.

If the returns vary, our spending will vary accordingly. All types of spending and risk buffers are built in to help smooth out bumps should they occur.

I'm not waging any type of argument with the total return crowd, as I understand perfectly their approach and respect it. But, like you if you choose, I don't have to deal with the concept of withdrawals and "safe rates". The safest rate possible is after-tax cash in hand every month, year and decade, forever.

So, for what it is worth, I'm a fellow high-net-worth early retiree using your thinking very happily (Canada, but same structures, issues, risks and concepts).
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Old 08-27-2019, 08:04 PM   #15
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Originally Posted by Catmandu View Post
I can easily get it to 3%. I agree that 4% is no longer reasonable. Starting next year I'm going to be doing the Roth conversions. I'm leaning towards restructuring my portfolio to produce my yearly required income and leaving the principle. Do you have any resources for good strategies to make that happen?

I like the low fee structure at Vanguard but they advocate eating into the principal. An advisor at JP Morgan had a good strategy for not touching the principal but fees were high!

It's really hard to know who is right and are they working in your best interest.

Thanks

Marc
I think you are misinterpreting Vanguard... they don't advocate eating into principal, but they acknowledge that with a total return approach (with which I agree) that there may occasionally be years that you dip into principal in rare situations.

Just interest and dividends will probably be 2.4% of the 3.3% you are withdrawing... so only 0.9% needs to come from current year appreciation to stay even for the year. Most years, even a poor year, will have more than 1.5% appreciation needed.

In a down year, you will most likely be dipping into appreciation, but not necessarily into principal.

Let's say that your $9 million portfolio has a cost basis of $7.5 million and $1.5 million of unrealized gains. If investment results for a year are totally flat and you take out $300k, the portfolio balance is now $8.7 million.... Have you dipped into principal? NO!... because you still have $1.2 million of unrealized appreciation! Only if you have withdrawals such that your value is less than your basis have you ever dipped into principal.

The reality is that many of us here have WRs in the 3-4% range and have portfolios that are much higher than when we retired. In my case 25% higher after 7 years of withdrawals... not only for spending but also for a winter condo and a new garage.... both paid in cash.
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Old 08-27-2019, 09:19 PM   #16
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FWIW, I also invested in a number of high yielding mutual funds including FNMIX and VWEHX. Problem is, their total return in some years is often less than the yield (like FNMIX last year) - so your net worth is going in reverse, even when you're getting those great dividends - much like CTL did going from $28/sh when they acquired LVLT down to under $10 at the low. I did look at some of the funds mentioned by others, and while there is indeed often good yield to be had, I'd caution to look at total return also as sometimes funds go in reverse in terms of net value even if all dividends were reinvested..
The "trick" to this is to be unconcerned about the price fluctuations while taking the dividends in cash. The alternative is to buy individual issues with the intent to hold until maturity. I spoke about that above. When buying an individual bond, you can't automatically reinvest the interest payments like you can with funds. If you don't need the interest to live on, you have to continually find new bonds to buy.

I'm investing in ETFs with a similar mindset. I realize there is no maturity date or guarantee that I'd ever be able to sell them at a profit. If the goal is to eventually live off the dividends generated, I'm not looking to sell the cash cow anyway. Right now, I'm buying more cows.
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Old 08-28-2019, 05:44 AM   #17
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The "trick" to this is to be unconcerned about the price fluctuations while taking the dividends in cash. The alternative is to buy individual issues with the intent to hold until maturity. I spoke about that above. When buying an individual bond, you can't automatically reinvest the interest payments like you can with funds. If you don't need the interest to live on, you have to continually find new bonds to buy.

I'm investing in ETFs with a similar mindset. I realize there is no maturity date or guarantee that I'd ever be able to sell them at a profit. If the goal is to eventually live off the dividends generated, I'm not looking to sell the cash cow anyway. Right now, I'm buying more cows.
Yes, that's what I always thought as well and why I also took the approach I initially did - ie: "don't worry about share price and just take the income". But unless you are buying bonds v. equities or funds, NAV can of course drop precipitously while you're collecting those dividends - and when that happens (as in CTL's case), the dividend is often cut as well. That's often because the health of the underlying business (or the market as a whole) is headed south..

CTL is a great example..$28/sh when they bought LVLT (which is how I wound up with the shares) to under $10. Paying $2.16/yr at first, cut to $1/sh. So not only was my dividend income decimated, but I took a >50% cut on the value of those shares. Will they get back to $28+ at "some" future point? Hard to say - it's been mired in the $9-12 range for quite some time and $28 looks like a very distant memory that we may never see again..

F (Ford Motor Co) is another great example. Bought many of my shares at $12 and a 5+% yield. Closed at $8.76 yesterday for a 27% PPS loss since I bought. Sure, I got 5 and 6% along the way..but all that doesn't add up to 27% and I would have been better off keeping the $$s in cash..at least I could have gotten 2-2.5% in VMMXX or similar and kept my principal intact.

Net, while I'm also in the "invest for income first" camp..I also do believe you need to not totally ignore total return as in the end you are most likely better off considering both aspects of investing your hard earned $$..
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Thanks!
Old 08-28-2019, 07:47 AM   #18
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Thanks!

I really appreciate all of the thoughtful replies. This really helps going forward.

Thnaks!
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Old 08-28-2019, 07:52 AM   #19
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How can this thread get to 18 posts and nobody mentioned FireCalc?

OP, have you run your numbers there?

And... Welcome to the Forum!
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Old 08-28-2019, 08:25 AM   #20
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I got to this site while using firecalc, there was an ad. It's an awesome tool! Highly recommended. www.firecalc.com
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