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possible career change-back up income producing plan
Old 01-11-2013, 10:31 PM   #1
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possible career change-back up income producing plan

Hi, I came across this site as I was looking for the avg net worth of people like me. Also, how did they achieve early retirement and specifically,how is their income produced. Congratulations to all of you. I hope you can guide me...

*50yrs old, married 22 yrs
*son 16 UGMA acct for college 70,000
*daughter 10 UGMA acct for college 25,000.

I started investing in mutual funds (around 1991)after listening to an AM radio show late at night. I opened up a Janus/Janus IRA and Gabelli acct and began dollar cost averaging. The store where I work began offering a 401K in 1995 so I signed up for that also. In the early days of AOL about 1991/92, I came across a investment board. Individual stocks were discussed so I started buying them. One in particular was very successful leading to my overall portfolio value of about 1.7m excluding assets like home/cars..ets. I've never earned more than 50,000 per year in the retail environment that I chose to work in. I wish I had done a better job with a tax plan but you can't win them all. The only funds that are protected from the tax man are the IRA's.

*cash: 30,000
*taxable stock mutual funds: 437,000
*individual stocks : 830,000
*my IRA: 163,000
*her IRA:118,000
*my 401K:157,000

Now a change may be coming in a year or two where I work so I'm beginning to research some options. I don't mean early retirement but just something I can fall back on in case I can't find work. What I've been unable to find is what do retirees do with their portfolios to produce income? I've been so focused on growth that producing income is a blur. Everything I read talks about drawing down the funds. I don't want to draw from them, I want them to produce income and keep the principle. I'm very use to risk, so do you sell everything and buy 5 or 6 high quality dividend stocks? I would really like to see a specific example of someone with say 1.2m , what would you buy and how much would it produce per month/qtr or year?

Thanks,
Tom
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Old 01-12-2013, 08:46 AM   #2
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Everything I read talks about drawing down the funds. I don't want to draw from them, I want them to produce income and keep the principle. I'm very use to risk, so do you sell everything and buy 5 or 6 high quality dividend stocks? I would really like to see a specific example of someone with say 1.2m , what would you buy and how much would it produce per month/qtr or year?
Tom, one option would be to purchase income-producing mutual funds, Vanguard Wellesley for example. A $1.2M investment in that fund last year would have generated approximately $40,000 in dividend income plus $16,000 in capital gains distributions.

The above is only and example and not a suggestion to put all your eggs in one basket...
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Old 01-12-2013, 09:22 AM   #3
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Look up "total return". Income in terms of dividends and interest is one way to generate income, but it limits your investing style. In a sense, it is someone else deciding how much to give you each year. It is OK to sell some of your portfolio, so long as your total withdrawal, dividends, distributions, and sales, stays within your allowable withdrawal rate. Selling shares does not mean the value of your portfolio is decreasing.
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Old 01-12-2013, 09:42 AM   #4
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Tom, congratulations!! You have done extremely well!!

From what I have read over the years, the typical early retiree on these boards has an asset allocation of somewhere between 40-70% in equities and 60-30% in fixed income (bonds), typically in low cost index funds. It could be as simple as just the Vanguard Total Stock Market Index Fund and the Vanguard Total Bond Fund, but is usually a bit more complex. For tax efficiency, fixed income is typically kept in tax-deferred accounts (IRAs, 401k, 457b, etc) and equities in taxable accounts.

For someone retiring at your age, a common withdrawal rate would be 3.0-3.5% of the initial investment balance and subsequent withdrawals would be adjusted for inflation. Withdrawal rates might be higher when retiring at later ages. In many years you might not touch principal at all but in a bad year your withdrawals might include some principal. For example, 2012 was my first full year of retirement and the markets were quite good, so even after 3.5% withdrawals for my living expenses my investments increased almost 10% from the beginning of the year. But if we had a bad year and investment returns were negative then I would need to dip into principal. Over a long period of time it would be expected that the good years would outnumber the bad years and it would all work out. If the bad years start at retirement, this can cause a problem and some adjustments might be needed.

One thing you can do is look at what your total portfolio income was last year (dividends, interest and capital gains distributions from all taxable and taxable accounts). BTW, I wouldn't be so keen to have so much in UMGA accounts since your kids will have full, unfettered access to those funds when they turn 18 and most 18 year olds are not ready to handle such large amounts of money responsibly. I kept college funds in my taxable accounts and just paid the bills as they came in. I think it would also be better for you from a college financial aid perspective given your income, so you may want to give that some study.

Also see How complex is your portfolio? or google AA (asset allocation) and/or WR (withdrawal rate) at the top of the screen.
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Old 01-12-2013, 09:44 AM   #5
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Welcome to the boards, Tom. You have really done a great job growing your nest egg!
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Old 01-12-2013, 10:00 AM   #6
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Tom, this subject has been the topic of several discussions in the recent past. I suggest you search on "drawdown" in the Google search box above and read some of the threads you'll find. Here's one example:

Retirement drawdown
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Old 01-12-2013, 09:34 PM   #7
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Tom, this subject has been the topic of several discussions in the recent past. I suggest you search on "drawdown" in the Google search box above and read some of the threads you'll find. Here's one example:

Retirement drawdown
Good selection, REW. That thread includes several options with pros and cons stated very clearly.
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Old 01-12-2013, 09:44 PM   #8
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Thanks for the advice everyone, I really appreciate it.

pb4uski, I hear you loud and clear regarding the UMGA accts. I will check into my options there.
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Old 01-12-2013, 10:37 PM   #9
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Everything I read talks about drawing down the funds. I don't want to draw from them, I want them to produce income and keep the principle. I'm very use to risk, so do you sell everything and buy 5 or 6 high quality dividend stocks? I would really like to see a specific example of someone with say 1.2m , what would you buy and how much would it produce per month/qtr or year?

Thanks,
Tom
Tom, that is a very controversial topic, here and and at most forums of right thinking people, who more or less follow the Bogle approach. When you need money, you sell some shares of an index fund.

These people are kown as Bogleheads, since they forge their own paths.


There are those, including me, who follow an income and controlled speculation path, but it would be hard to explain, and I am not sure it is better anyway, oe even as good. You keep ending up with income, and your stocks go up which makes them tax expensive to sell, and everything seems to cost a lot. OTOH, those who follow the Bogle approach seem to always have plenty of money, but hardly ever need to pay any taxes.

I'd look at that method first.

Ha
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Old 01-13-2013, 09:52 AM   #10
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..... What I've been unable to find is what do retirees do with their portfolios to produce income? ....
Tom,
As you research this, I'd suggest you read Wade Pfau's blog. He's a "retirement researcher". Here's a link where he compares and contrasts two schools of thought on how to provide income during retirement.

Retirement Researcher Blog: Two Schools of Thought on Retirement Income
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