CD Ladder Opinions Please

[Puppy Belly]

CFB,
Nice curveball, had not seen one like that since Juan Marichal.

Those funds look very interesting. It would fit very well because I could easily set up the "switch" request in my Trust document with instructions to the executor.

As you noted you have TR funds which is something that crossed my mind last evening after some of the cautions to this plan. Are your holding those rather than the new "managed payouts" for the reason you mentioned, maybe the new funds being "too new"

Also, reading up a bit for the last few minutes, it appears that rate is only a target. Am I interpreting that correctly?

I have started a Word document of the suggestions and the cautions in these posts and it's an amazing read. A real eye opener as to how many ways things can be viewed and the proverbial "more than one way to skin a xxxxx).

Especially interesting is the experiences posters have encountered using various CD holdings in the portfolio.

Thanks for the new idea. Really like having that option.

Well see, and I wasnt naming any names

PB - You have a reasonable chance of any of those things happening. Which is why its advisable to have more than one leg on your investing chair.

Here's a curveball.

Vanguard is launching a new set of funds called "managed payout". They're diversified funds intended to pay a percentage of principal out while maintaining or growing the principal to fight off inflation. The funds pay out a percentage based on the past 3 years results/performance and try their best to meet the specified payouts.

There is a 3%, 5% and 7% fund expected to be launched on 1/24. The 3% fund is invested very aggressively and should produce the highest long term capital gains. The 7% fund is very conservative and will probably consume some principal to make the big payment, but still should have enough diversity to hold off at least part of inflation.

They're sort of a self-annuity, except you keep your principal and lose the benefit of spreading the lifespan and volatility risk among a large insurance company's customer base. Thats a bad trade if you live a very long time and/or we suffer through a severe and prolonged bear market. Its a very good trade if you live an average life span and market conditions over the next 30 years arent much worse than they've been for the last 30.

You could lump your taxable assets into the 5% fund, which would pay you 50,000 a year out of the gate, and one of you apply for early social security to fill in the remainder of your immediate income needs. See one of the many social security threads for all the cool ways to game the system with spousal benefits, early/delay and payback schemes.

Put the IRA account into the same 5% managed payout fund, but with the dividend being reinvested.

When the first bucket runs out, or you reach RMD status, the only change that needs to be made is to have the IRA fund pay out its dividend and any other principal needed to meet RMD requirements. Your vanguard flagship rep can do all this for you or your wife over the phone and set up any RMD schedule needed.

If the new funds are just too new and/or concerning, I'd do the same strategy with a target retirement income fund paying out ~45,000 a year starting today, and a TR 2015 fund in the IRA, same as above...dividends reinvested in the IRA until you need the money, then flip one switch and you're done.

You get the benefit of some diversification, still a large portion in fixed income, enough equities and/or other asset classes to fight inflation, full access to your principal if you need it, and a fighting chance for a long term retirement.

I'm thinking that some combination of a strong dividend paying balanced fund and a flagship advisor at vanguard would be simple enough, get the job done, and not require much input, if any, from you or your spouse.

 

[jIMOh]

jIMOh,
I appreciate the comments very much. For a young guy you have put a lot of thought into the retirement income situation. I appreciate the well thought out suggestions.

I do think some spouses, men or women, have no interest in money matters. My neighbor is married to a financial industry wife and she can't get him to take an interest in the money matters at all. He flies his plane and fishes, and is content.


Just FYI, I am also trying, as you suggest, to spreadsheet a scenario for the taxable account of all dividend stocks and/or all dividend funds and/or mixed.

How do you feel about buying the stocks of BAC, BBT, WB, USB, etc, while they are hammered down but still paying good dividend share. The yields would be very high right now and maybe even better later this week?


I like T Rowe Price and RPSIX and PRFDX are funds that make sense if individual stocks churn my stomach too much. Thanks for the Alpine tip, never considered that one before.

Roth conversion is something I had not considered and I love the tax advantage. I need to look at the conversion process. RMDs are something I considered in my spreadsheet and it does complicate the process a bit.

Yes, she would be sold an annuity by the first salesman. She really enjoys her freedom to be creative and contribute to the community. So I respect that.

In one of my earlier posts, I mentioned capping out tax bracket to convert the Traditional IRA (with RMDs and taxable withdraws) to a Roth IRA (no RMDs and tax free withdraws). You mentioned researching this. You can probably get rid of RMDs in about 15 years or so, I think.

if income need is 65k
and tax bracket is capped at 100k (for example)
you have 35k you can convert to a Roth each year

the 35 extra does three things
1) you pay tax on the 35k when you convert (because you are only capping tax bracket, you are using up your current "tax allowance" at a given rate. If the 35001 dollar is taxed at a higher rate, don't convert the last dollar-leave it in traditional IRA).

2) you will lower your RMD the next year (less money is in Traditional IRA, so RMD is lower).

3) The Roth withdraws do not have to happen, if they do, they are tax free for rest of your life.

example:

If dividends are used for income in taxable account, your only earned income will be the RMD. The RMD might be 50k on $1 M (I have never calculated an RMD, I have 35 years before that rule applies to me). The importance to me is I'd rather pay 15% federal tax later than 25% or 28% taxes now. The same technique can be used to lower taxes paid of someone in your position over your lifetime.

30k income from dividends in taxable account
50k is taxable at ordinary income tax levels (16050 at 10%, 65100 at 15%)

The 65100 is the highest taxable amount in 15% tax bracket
The 65101 dollar is taxed at 25%

You need 35 of the 50k (RMD) to live on, excess of 15k.

The 50k income is less than the 15% tax bracket max of 65100. Another excess of 15100.

So from the RMD: 35k goes to your bank account, 30100 goes into a Roth IRA (Roth conversion). The dividends get taxed at 5% because you are in 15% income bracket.
End of year IRA balance is 950k, for example.

year 2 example
The next year the IRA will have close to $1 M in it (assume 5% appreciation on 950k).
Income need is 65k+4%=68k
30k from dividends
38k needed from IRA
RMD is 60k
tax bracket max for 15% increases to 70000
60k RMD-38k need=22k convert to roth
70k tax bracket max-60k RMD-10k more to convert to Roth.
32k more converted to a Roth at 15% tax bracket level.

Roth now has 62k in it, that money will never be taxed again... Traditional IRA is down to 930000 or so. Within 15 years or so all the money is in a Roth.

Then you can decrease taxes paid in budget.

You still have 30k coming from dividends (maybe this increases some)
You can withdraw the next 40k-80k needed from Roth (tax free)

The only taxes due will be on the dividends. This should keep them at 5% tax rate.

I would not load up on bank stocks for a dividend portfolio. I also would not search based on yield. I would look at companies like MSFT, PG, BAX, GE, and others which are consumer durables and health care companies.

If I had to build dividend portfolio with individual stocks, it would have 304 components.

25% if income comes from big companies like the ones I mentioned. Maybe own close to 10 positions in big blue chip stocks. Might make this 50% of income. Might yield 2% or slightly higher.

25% of income from around 5 utilities and bank stocks. These companies are much smaller, but yield should be around 3-4%.

25% of income from real estate (REITs) and bonds. Maybe own close to 5-10 stocks here. Yield around 3-6%.

25% of income from small and mid cap companies. I would make this position be 10 stocks, maybe even 20. The yield here may vary from 1%-6%. This is the growth portion of dividend portfolio. It will grow both principal and payout.

The yield should be $30,000. Which is 3%. I would not run a screen for companies paying out 3% yields, though. I would first build it up with good companies (MSFT), plan on buying x shares with $y. Then pick another (PG) and buy z shares with $y. The dividend will be PG dvd*z shares or MSFT dvd*x shares. And so on until you get close to the 30k income you desire.

PRFDX will do this for you (it owns close to 100 stocks and pays out close to 2%) The other 1% return would come from capital gains.


If doing the dividend approach, check out some threads on dividend payers on the board. Do not invest in only one industry (financials for example) to get high yield. Steady dividend payments which increase a penny per share each year are better than ones paying high now.

The goal (IMO) of a dividend portfolio is to give you income without touching principal. Even if 20k is used as the "income" from dividiends, the 20k will increase as the companies increase their dividend, and the 1 M principal will also increase between 3-5% per year, so if you do have to sell stocks (for income), you have a higher value to start selling than you did when you started.

 

[cute fuzzy bunny]

The payout rates are a target, but they're allegedly going to try hard to meet them.

I would expect that over a long term period...10-15 years...the actual dollar payout of the 3% fund should exceed the 7% fund...more capital appreciation potential and with the diversification and that time period its likely your 'egg' would be a lot bigger. On the flip side, I'd be concerned about the payout demands of the 7% fund would eat into the principal and long term result in a smaller 'egg'.

I'm interested in these and may put some or a fair bit of money into them. I'd like to see the actual product and see its asset allocation layouts for each fund before I'd commit money to one, but its intriguing as an all-in-one-bucket asset allocation that goes well beyond the current TR and Lifestrategy options. I have some misgivings about the future of US stocks and bonds being as superior as they have been and the LS and TR funds are pretty fat with those and not much else.

The one thing I'm not fond of with the new MP funds is the "market neutral" piece. It raises the fund costs a good bit by requiring that the fund holders pay the dividends of the stocks the fund holds in short positions. I could do without that part. I'm sure the 3% fund will hold a lot of this, the 5% fund may or may not have as much.

While they might not meet the exact payout, the LS and TR funds have a varied dividend yield that can change significantly in just a few years. Seems like variability is something you're looking to avoid.

 

[FinanceDude]

I have yet to see CD ladders work over longer periods of time.

Where is your inflation hedge?

Fact is, the Fed WILL cut rates this year and possibly next, and that ladder's not going to look good on a blended rate basis.

Inflation was 4.1 or 6.3, depending on whose numbers you believe. Unless you made those numbers AFTER-tax, you lose purchasing power, plain and simple............

 

[cute fuzzy bunny]

One other thing: dont count on social security adjustments to keep that payment up with inflation either. According to my dad he gets nice adjustments every year that are then eaten by medicare fee increases.

 

[Puppy Belly]

jIMOh, just want to say how much I appreciate that post. It is a stunning well written description and example of the Roth conversion. The wife was especially impressed because she usually can't abide my crude explanations.

I like the Roth approach and since you have much longer to contribute wonder what you think the chances of the Roth rules being changed at some point by Congress? Seems some articles I read don't really allude to that but have words of caution.

And likewise on the dividend stocks, some great points for me to work on. I read one post that suggested as few as 12 dividend stocks and I was not thinking that low but was wondering of if a portfolio of 4-5 banks, 4-5 utils, 4-5 bluechips, 4-5 REITs, 4-5 pharma, 4-5 healtcare, 4-5 consumer, 4-5 small, 4-5 mid and 4-5 comm, possibly 4-5 energy.

That would be about 44 or 55 stocks. It would be fairly diversified and if well screened, fairly proven track records. Is there a particular reason for 300 stocks or is that to provide risk reduction.

Another thing that I do not understand is for instance. BAC is nearly half its Nov 07 price and still pays $2.40 div per share. That equates to 7.1% today but would BAC likely slash the div per share next year to provide a lower percentage yield? Guess what I'm asking is whether dividend growth is seen as growth in percentage or growth in per share value?

BTW, I just started reading Josh Peter's Dividend Playbook so hopefully my knowledge will increase to the point of understanding the dividend game before I need to consider a portfolio selection.

Again, thanks a lot for the time and education you provided.

In one of my earlier posts, I mentioned capping out tax bracket to convert the Traditional IRA (with RMDs and taxable withdraws) to a Roth IRA (no RMDs and tax free withdraws). You mentioned researching this. You can probably get rid of RMDs in about 15 years or so, I think.

if income need is 65k
and tax bracket is capped at 100k (for example)
you have 35k you can convert to a Roth each year

the 35 extra does three things
1) you pay tax on the 35k when you convert (because you are only capping tax bracket, you are using up your current "tax allowance" at a given rate. If the 35001 dollar is taxed at a higher rate, don't convert the last dollar-leave it in traditional IRA).

2) you will lower your RMD the next year (less money is in Traditional IRA, so RMD is lower).

3) The Roth withdraws do not have to happen, if they do, they are tax free for rest of your life.

example:

If dividends are used for income in taxable account, your only earned income will be the RMD. The RMD might be 50k on $1 M (I have never calculated an RMD, I have 35 years before that rule applies to me). The importance to me is I'd rather pay 15% federal tax later than 25% or 28% taxes now. The same technique can be used to lower taxes paid of someone in your position over your lifetime.

30k income from dividends in taxable account
50k is taxable at ordinary income tax levels (16050 at 10%, 65100 at 15%)

The 65100 is the highest taxable amount in 15% tax bracket
The 65101 dollar is taxed at 25%

You need 35 of the 50k (RMD) to live on, excess of 15k.

The 50k income is less than the 15% tax bracket max of 65100. Another excess of 15100.

So from the RMD: 35k goes to your bank account, 30100 goes into a Roth IRA (Roth conversion). The dividends get taxed at 5% because you are in 15% income bracket.
End of year IRA balance is 950k, for example.

year 2 example
The next year the IRA will have close to $1 M in it (assume 5% appreciation on 950k).
Income need is 65k+4%=68k
30k from dividends
38k needed from IRA
RMD is 60k
tax bracket max for 15% increases to 70000
60k RMD-38k need=22k convert to roth
70k tax bracket max-60k RMD-10k more to convert to Roth.
32k more converted to a Roth at 15% tax bracket level.

Roth now has 62k in it, that money will never be taxed again... Traditional IRA is down to 930000 or so. Within 15 years or so all the money is in a Roth.

Then you can decrease taxes paid in budget.

You still have 30k coming from dividends (maybe this increases some)
You can withdraw the next 40k-80k needed from Roth (tax free)

The only taxes due will be on the dividends. This should keep them at 5% tax rate.

I would not load up on bank stocks for a dividend portfolio. I also would not search based on yield. I would look at companies like MSFT, PG, BAX, GE, and others which are consumer durables and health care companies.

If I had to build dividend portfolio with individual stocks, it would have 304 components.

25% if income comes from big companies like the ones I mentioned. Maybe own close to 10 positions in big blue chip stocks. Might make this 50% of income. Might yield 2% or slightly higher.

25% of income from around 5 utilities and bank stocks. These companies are much smaller, but yield should be around 3-4%.

25% of income from real estate (REITs) and bonds. Maybe own close to 5-10 stocks here. Yield around 3-6%.

25% of income from small and mid cap companies. I would make this position be 10 stocks, maybe even 20. The yield here may vary from 1%-6%. This is the growth portion of dividend portfolio. It will grow both principal and payout.

The yield should be $30,000. Which is 3%. I would not run a screen for companies paying out 3% yields, though. I would first build it up with good companies (MSFT), plan on buying x shares with $y. Then pick another (PG) and buy z shares with $y. The dividend will be PG dvd*z shares or MSFT dvd*x shares. And so on until you get close to the 30k income you desire.

PRFDX will do this for you (it owns close to 100 stocks and pays out close to 2%) The other 1% return would come from capital gains.


If doing the dividend approach, check out some threads on dividend payers on the board. Do not invest in only one industry (financials for example) to get high yield. Steady dividend payments which increase a penny per share each year are better than ones paying high now.

The goal (IMO) of a dividend portfolio is to give you income without touching principal. Even if 20k is used as the "income" from dividiends, the 20k will increase as the companies increase their dividend, and the 1 M principal will also increase between 3-5% per year, so if you do have to sell stocks (for income), you have a higher value to start selling than you did when you started.

 

[Dave J]

There are some extremely interesting posts here today.However, I think many did not get the OP original request of

"want to set something very straight forward and safe so that the wife doesn't have to ever understand Mr. Market or have to flog herself on the streets."

With the assets you have and the request you made, I would explore an immediate annuity with an inflation factor built in.Some of your posts allude to the fact she would probably buy one if you were gone and she is artsy and just wants to live and not worry about money.

Go to Vanguard and see what you can buy.You might be able to set up the 65k guaranteed factoring in your Social Security with a good amount left over to grow and have the best of all worlds and a hands off retirement.

I myself own no annuity's, but I'm not in your shoes with your request.I'm currently using CD's and I-Bonds along with 401k's and IRA's to fund myself.I would rather go with the 100% guarantee now than risk in the stock market.I, like you said originally, could easily LBYM if required

You also said "Upcoming “Bucket List” events are my reason for urgency in getting this done"

Hard question.Are you not going to around for much longer to help your lady?

 

[Puppy Belly]

CFB, thanks I suspect that them being Vanguard funds that every effort will be made to support the funds goals, so it seems reasonable to expect they will perform to the advertised level.

Your comments on the 3% vs 7% wrt growth and the intrigue of a different approach than LS and TR are exactly why I will give them strong consideration. But like you say, it will be good to see the details and with some concerns of my own about the longer term US performance (both economy and market), I'm definitely looking for an approach that mitigates risk. And in my case, added risk of manipulation of the portfolio after my wife is on her own.

Lest I paint that in a bad light, I would no more expect her to learn to work on her own car, than would she expect me to learn to design my own clothes, there are, thankfully, two very different outlooks on life at work. She gives freely of her time, money and is very responsible in spending.

And you point exactly to my goals, variability is something that concerns me because I won't to ensure a demonstrated, livable income for her. She is very comfortable with the idea of maintaining a $65k lifestyle.

Both of us came from low income families and know how to cook dried beans and rice. So not looking for luxury, looking for stability and peace of mind.

Thanks for those ideas, like I said really nice to see how much knowledge is freely shared on this forum.

The payout rates are a target, but they're allegedly going to try hard to meet them.

I would expect that over a long term period...10-15 years...the actual dollar payout of the 3% fund should exceed the 7% fund...more capital appreciation potential and with the diversification and that time period its likely your 'egg' would be a lot bigger. On the flip side, I'd be concerned about the payout demands of the 7% fund would eat into the principal and long term result in a smaller 'egg'.

I'm interested in these and may put some or a fair bit of money into them. I'd like to see the actual product and see its asset allocation layouts for each fund before I'd commit money to one, but its intriguing as an all-in-one-bucket asset allocation that goes well beyond the current TR and Lifestrategy options. I have some misgivings about the future of US stocks and bonds being as superior as they have been and the LS and TR funds are pretty fat with those and not much else.

The one thing I'm not fond of with the new MP funds is the "market neutral" piece. It raises the fund costs a good bit by requiring that the fund holders pay the dividends of the stocks the fund holds in short positions. I could do without that part. I'm sure the 3% fund will hold a lot of this, the 5% fund may or may not have as much.

While they might not meet the exact payout, the LS and TR funds have a varied dividend yield that can change significantly in just a few years. Seems like variability is something you're looking to avoid.

 

[FinanceDude]

I like the Roth approach and since you have much longer to contribute wonder what you think the chances of the Roth rules being changed at some point by Congress? Seems some articles I read don't really allude to that but have words of caution.

Given the fact that Congress pushed Roths on us, and wanted folks to convert their IRAs to Roths over a 4-year period (only 25% did), I think they are here to stay.

Every one that qualifies for a Roth IRA should set one up if you have not done so. In the unlikely event they "get rid" of Roth IRA's, they will no doubt "grandfather" in those that have them..............

 

[Puppy Belly]

Dave, the quote you print is precisely what I would love to achieve for her and yes, the Bucket List involves some extremely high risks but doing those is purely motivated by life goals. Just would leave with a certain piece of mind knowing income was guaranteed. If that is possible.

Thanks for the annuity with inflation idea. I had ruled out annuities as to fixed and potentially eroded by inflation. But that's an interesting approach. But to be honest, I like the approach of CDs if it could work.

Trading market risk for inflation and "unforseen event" risk.

Yet I am convinced that the market will be a better performer over long periods (pretty much irrefutable) but which long period and is she in that period when she needs income. Or is she forced to seek CFA assistance to restructure any portfolio I would set up other than a fixed income one.

This is tougher than I thought.

There are some extremely interesting posts here today.However, I think many did not get the OP original request of

"want to set something very straight forward and safe so that the wife doesn't have to ever understand Mr. Market or have to flog herself on the streets."

With the assets you have and the request you made, I would explore an immediate annuity with an inflation factor built in.Some of your posts allude to the fact she would probably buy one if you were gone and she is artsy and just wants to live and not worry about money.

Go to Vanguard and see what you can buy.You might be able to set up the 65k guaranteed factoring in your Social Security with a good amount left over to grow and have the best of all worlds and a hands off retirement.

I myself own no annuity's, but I'm not in your shoes with your request.I'm currently using CD's and I-Bonds along with 401k's and IRA's to fund myself.I would rather go with the 100% guarantee now than risk in the stock market.I, like you said originally, could easily LBYM if required

You also said "Upcoming “Bucket List” events are my reason for urgency in getting this done"

Hard question.Are you not going to around for much longer to help your lady?

 

[FinanceDude]

Dave, the quote you print is precisely what I would love to achieve for her and yes, the Bucket List involves some extremely high risks but doing those is purely motivated by life goals. Just would leave with a certain piece of mind knowing income was guaranteed. If that is possible.

Thanks for the annuity with inflation idea. I had ruled out annuities as to fixed and potentially eroded by inflation. But that's an interesting approach. But to be honest, I like the approach of CDs if it could work.

Trading market risk for inflation and "unforseen event" risk.

Yet I am convinced that the market will be a better performer over long periods (pretty much irrefutable) but which long period and is she in that period when she needs income. Or is she forced to seek CFA assistance to restructure any portfolio I would set up other than a fixed income one.

This is tougher than I thought.

I think you are making it way to hard:

1) 3-5 years expenses in a good MM account
2) 25% of your portfolio in a single premium immediate annuity
3)Remainder in a good conservative balanced fund

CD's are in effect fixed and potentially eroded by inflation too.........

So, if you die, your wife can:

1)Use the money market accounts for any unforeseen expenses in the short-term

2)Receive a guaranteed monthly check from SS, and the annuity company.

3)Have the ability to draw more money out in the future if needed from the balanced fund.

I know there are trillions of CD's out there, but I have never held the opinion that CD's are a way of leveraging your money...........

 

[jIMOh]

jIMOh, just want to say how much I appreciate that post. It is a stunning well written description and example of the Roth conversion. The wife was especially impressed because she usually can't abide my crude explanations.

I like the Roth approach and since you have much longer to contribute wonder what you think the chances of the Roth rules being changed at some point by Congress? Seems some articles I read don't really allude to that but have words of caution.

And likewise on the dividend stocks, some great points for me to work on. I read one post that suggested as few as 12 dividend stocks and I was not thinking that low but was wondering of if a portfolio of 4-5 banks, 4-5 utils, 4-5 bluechips, 4-5 REITs, 4-5 pharma, 4-5 healtcare, 4-5 consumer, 4-5 small, 4-5 mid and 4-5 comm, possibly 4-5 energy.

That would be about 44 or 55 stocks. It would be fairly diversified and if well screened, fairly proven track records. Is there a particular reason for 300 stocks or is that to provide risk reduction.

Another thing that I do not understand is for instance. BAC is nearly half its Nov 07 price and still pays $2.40 div per share. That equates to 7.1% today but would BAC likely slash the div per share next year to provide a lower percentage yield? Guess what I'm asking is whether dividend growth is seen as growth in percentage or growth in per share value?

BTW, I just started reading Josh Peter's Dividend Playbook so hopefully my knowledge will increase to the point of understanding the dividend game before I need to consider a portfolio selection.

Again, thanks a lot for the time and education you provided.

12 stocks will work, 20 would spread the risk out. 44 would spread risk out, and might have high transaction costs to maintain. You will need to draw the line somewhere. I have a "plan" to build a dividend stream like I describe to you, but am nowhere near that situation now (I need to payoff my mortgage first).

I do not think you need 4-5 stocks in a given sector, 2 should be enough, maybe even one. Have a blue chip position, a REIT position and a mid cap/small cap position.

8 Blue chips. If you picked MSFT, PG, GE, XOM, MRK, IP, MMM, PO (that's Phillip Morris, correct?) that would be 8 strong blue chips spread among software, consumer durables, oil, financial and government and a few other sectors. Might add an insurance company and investment company to this mix for financial exposure.

Then for stock #2 in each sector of interest:
If you added a financial stock, maybe add one like ALD which is smaller.
If you added another health care stock, add one which is smaller.
etc... meaning add the second one as the smaller company in another portion of portfolio. Maybe 8 smaller stocks which compliment the big ones.

REITs I would get 3-4, because you are depending on that bucket for 25% of the dividend income, spread that risk around. There is commercial real estate, foreign real estate, domestic real estate and similar. I would get one of each for sure.

If considering a company with a 2.40 dividend, the 2.40 is the only thing I look at (not the yield). You need to examine payout ratio (% of profits paid out in dividends). I believe this should be under 25% for a good company-but check that metric (payout ratio). I am guessing that ratio might be higher than one for some financial stocks right now, might shy away from there, for now.

You need to look at expenses to build this up. $9 per stock to buy, $9 per stock to sell. If a company cancels its dividend you will need to sell (as it is not providing it's function to you anymore). You will need a watch list as well so you have ideas for what to buy in place of a stock which stops paying you a dividend. Small and mid caps which pay dividends also tend to get bought out a lot (from my research), so you will need to come up with a way to replace these stocks as well.

I also second the other posters idea of considering an annuity for a portion of the portfolio. That would simplify things for wife. Might cost you more now for the peace of mind going forward. Keep it simple for wife.

You need to remember (realize?) 2 things, IMO

1) realize you have more saved than needed (meaning your SWR is lower)
2) do not let the high amount saved force you into an ultra conservative philosophy from this point forward. Shift to be more conservative, but not ultra conservative.

I would build portfolio with dividend stock mutual funds because if wife wants hands off, she could not manage a 44 stock portfolio. 1 or 2 mutual funds would be much simpler. I like dividend investing, right now I do all mone through a mutual fund (PRFDX) and hopefully you can see that fund does an excellent job of preserving principal (and increasing principal). That is the basic premise of dividend investing, IMO.

My wife will learn what she has to (she administers 401ks for a living, so she knows things, just nothing about our current holdings). I have more money invested in my name (I have been investing for 11 years, she only has been for about 5-6 years). I also put in 10% plus IRAs, she is only 6% plus a partial IRA contribution each year. So in my case keeping it simple is a word document with all holdings listed, and what to do if I die before her (rolling over, asset allocation, funds to pick).

You case needs to be simpler. If you use two dividend stock funds (PRFDX and ADVDX) then remind her this provides 25k of the 64k needed.

The other 39k is withdrawn from the IRA each year.
Another $X k is converted from the IRA to a Roth each year.

$Y is paid in taxes each year.
If you withdraw from the Roth, the tax bill goes down to $Z each year.

More than likely if you open an account with $1 M at a place like Fidelity, they will provide you with a financial advisor. Get one now, verify what I am suggesting is a good choice for your situation, then have the advisor file it with your account info.

Provide your wife with the advisors name, and if you pass, as her to call the advisor and ask him questions

1) has the plan worked as designed in the past?
2) what is outlook for plan for next 5 years (will IRA be completely comverted to a Roth?
3) when Roth withdraws are needed, how should they be done?

 

[Puppy Belly]

FD,
wow, I was off reading the doom and gloom threads. Ugh.

I forget whether it is Ferry or Swedroe but one likes annuities as I recall and the other doesn't so they seem to disagree to disagree. And I don't recall why. Do you recall that from the Boglehead forum.

I did look at annuities once and now I can't recall what they base their payout on. What factors influence the rate, T-Bonds or the like?

If this were the method I choose are you talking a fund like Wellesley that pays divs?

PB

I think you are making it way to hard:

1) 3-5 years expenses in a good MM account
2) 25% of your portfolio in a single premium immediate annuity
3)Remainder in a good conservative balanced fund

CD's are in effect fixed and potentially eroded by inflation too.........

So, if you die, your wife can:

1)Use the money market accounts for any unforeseen expenses in the short-term

2)Receive a guaranteed monthly check from SS, and the annuity company.

3)Have the ability to draw more money out in the future if needed from the balanced fund.

I know there are trillions of CD's out there, but I have never held the opinion that CD's are a way of leveraging your money...........

 

[clifp]

So many different ways to solve the problem. It is is nice to see the OP actively participating in the thread.

Stepping back a bit; a couple of observations. Pappy Bear you are obviously sophisticated enough investor that you could construct and manage any of these choices.

The real question is what type of investment would your wife be most comfortable managing? This is something none of us is in a position to know. I think spending some time with her going over the pro and cons of each alternative would time well spent.

Example
CD Ladder: Pros very safe investment almost certain to be able to meet retirement needs of $65K
Cons: Total income likely lowest, some inflation risk. Somewhat of hassle/ area for worry when rolling over the CDs. (Before taking over my 82 yearl old mom's finances a few years ago, I always had monthly phones calls
that started with I have a CD maturing what do I do? Even now after handling her finances I find maintaining a CD ladder some what of pain. You either but a lot of 10-20K CD or search very hard to find the best CD for a $100K investment.

Target Retirement or Managed Payout
Pro's: Likely to have best total return. Fairly hassle free.
Cons: Market risk, and some interest rate risk. Limited history means we have no way of knowing how they handle bear or extended turbulent
markets.

Annuities: Almost as safe as CD, very predictable income stream. Zero hassle unless you want to get out of the contract than big hassle and expense.
Cons: Money is gone for use in an emergency, or leaving to heirs or charity. Some risk that the insurance company will fail.

....

 

[FinanceDude]

FD,
wow, I was off reading the doom and gloom threads. Ugh.

I forget whether it is Ferry or Swedroe but one likes annuities as I recall and the other doesn't so they seem to disagree to disagree. And I don't recall why. Do you recall that from the Boglehead forum.

I'm not allowed in the Boglehead forum.........

I did look at annuities once and now I can't recall what they base their payout on. What factors influence the rate, T-Bonds or the like?

I guess I was looking at "ease of administering" in the event you passed on and your wife was left to handle things. Statistically, of course, single premium annuities don't have a very good internal rate of return (typically 1-2%), but they do give a guaranteed check every month. As long as you use a well-known company, they can work.

If this were the method I choose are you talking a fund like Wellesley that pays divs?PB

Or VG balanced fund, or the like.

 

[jIMOh]

FD,


I forget whether it is Ferry or Swedroe but one likes annuities as I recall and the other doesn't so they seem to disagree to disagree. And I don't recall why. Do you recall that from the Boglehead forum.

I did look at annuities once and now I can't recall what they base their payout on. What factors influence the rate, T-Bonds or the like?

Annuities have their pros and cons.

First, stay away from variable annuities as an investment, you can probably do better choosing investments yourself while accumulating assets.

Second, if considering annuities, consider an immediate annuity. This means you write a check to an insurance company, they invest the money for a promise to pay you $X a month or $Y per year. You can pay more, or get less initially, to have $x or $y adjust upward for inflation.

Pros- annuities cannot be touched by lawsuit. If you become destitute, sued or other, creditors cannot get access to your money. See OJ Simpson as exhibit A.

Cons- more than likely you are going to see about a 4% return on your money from the annuity. Obviously the market will do better. The annuity basically transfers that risk to the insurance company. In addition, another con is that if you die young, your kids/heirs do not get the remaining balance- you could write the annuity check for 750k today, die in a car crash on way home, and the insurance company just made 750k. For this reason sign the paperwork at your house (LOL).

If you expect to live a long time, an annuity could work out as a real good thing for you. You might end up with a 10% type annual return when all is said and done if you outlive life expectancy tables the insurance companies use.

In your case, you have 2 M which needs to generate an income of 65k.

SS takes 15k of this off the table (because SS provides you 15k per year). So 2 M needs to generate 50k per year. 50k can be generated by 1.25 M (4% SWR), so consider using 750k to purchase the annuity in this case. I don't know what 750k would give you per year, my guess is between 21k and 30k annually. You would need to ask an insurance agent for specifics.

 

[FinanceDude]

Cons- more than likely you are going to see about a 4% return on your money from the annuity. Obviously the market will do better. The annuity basically transfers that risk to the insurance company. In addition, another con is that if you die young, your kids do not get the remaining balance.

You would be lucky to get 4%, more likely 2%. (IRR)

 

[Puppy Belly]

jIMOh, again thanks for sharing your work so freely. I suspect that any portfolio based on individual stocks would not be suitable for her but I might consider it using my Private Access rep at Fidelity to consul her. Trouble is that I seem to have a new person every 5 years, they move on to other areas or into Fund management as the progress.

Later this evening I will spreadsheet some of these div suggestions and other's suggestions and make a few runs to see what the income stream might look like. I need to re-learn those criteria and this Peter's book (Suggested on another post by clifp) is getting there soon, Next chapter.

And also a PRFDX and ADVDX portfolio option. She would be fine with that. She is degreed in liberal arts and more than capable of learning the financial stuff but she has a point, why does she have to.

If she ever agrees to take an interest, I would prefer to leave her a MM, CD/bond (paying yearly into MM), dividend, and growth port.

But meantime the Roth conversion is very interesting reading and considering.

Thanks

12 stocks will work, 20 would spread the risk out. 44 would spread risk out, and might have high transaction costs to maintain. You will need to draw the line somewhere. I have a "plan" to build a dividend stream like I describe to you, but am nowhere near that situation now (I need to payoff my mortgage first).

I do not think you need 4-5 stocks in a given sector, 2 should be enough, maybe even one. Have a blue chip position, a REIT position and a mid cap/small cap position.

8 Blue chips. If you picked MSFT, PG, GE, XOM, MRK, IP, MMM, PO (that's Phillip Morris, correct?) that would be 8 strong blue chips spread among software, consumer durables, oil, financial and government and a few other sectors. Might add an insurance company and investment company to this mix for financial exposure.

Then for stock #2 in each sector of interest:
If you added a financial stock, maybe add one like ALD which is smaller.
If you added another health care stock, add one which is smaller.
etc... meaning add the second one as the smaller company in another portion of portfolio. Maybe 8 smaller stocks which compliment the big ones.

REITs I would get 3-4, because you are depending on that bucket for 25% of the dividend income, spread that risk around. There is commercial real estate, foreign real estate, domestic real estate and similar. I would get one of each for sure.

If considering a company with a 2.40 dividend, the 2.40 is the only thing I look at (not the yield). You need to examine payout ratio (% of profits paid out in dividends). I believe this should be under 25% for a good company-but check that metric (payout ratio). I am guessing that ratio might be higher than one for some financial stocks right now, might shy away from there, for now.

You need to look at expenses to build this up. $9 per stock to buy, $9 per stock to sell. If a company cancels its dividend you will need to sell (as it is not providing it's function to you anymore). You will need a watch list as well so you have ideas for what to buy in place of a stock which stops paying you a dividend. Small and mid caps which pay dividends also tend to get bought out a lot (from my research), so you will need to come up with a way to replace these stocks as well.

I also second the other posters idea of considering an annuity for a portion of the portfolio. That would simplify things for wife. Might cost you more now for the peace of mind going forward. Keep it simple for wife.

You need to remember (realize?) 2 things, IMO

1) realize you have more saved than needed (meaning your SWR is lower)
2) do not let the high amount saved force you into an ultra conservative philosophy from this point forward. Shift to be more conservative, but not ultra conservative.

I would build portfolio with dividend stock mutual funds because if wife wants hands off, she could not manage a 44 stock portfolio. 1 or 2 mutual funds would be much simpler. I like dividend investing, right now I do all mone through a mutual fund (PRFDX) and hopefully you can see that fund does an excellent job of preserving principal (and increasing principal). That is the basic premise of dividend investing, IMO.

My wife will learn what she has to (she administers 401ks for a living, so she knows things, just nothing about our current holdings). I have more money invested in my name (I have been investing for 11 years, she only has been for about 5-6 years). I also put in 10% plus IRAs, she is only 6% plus a partial IRA contribution each year. So in my case keeping it simple is a word document with all holdings listed, and what to do if I die before her (rolling over, asset allocation, funds to pick).

You case needs to be simpler. If you use two dividend stock funds (PRFDX and ADVDX) then remind her this provides 25k of the 64k needed.

The other 39k is withdrawn from the IRA each year.
Another $X k is converted from the IRA to a Roth each year.

$Y is paid in taxes each year.
If you withdraw from the Roth, the tax bill goes down to $Z each year.

More than likely if you open an account with $1 M at a place like Fidelity, they will provide you with a financial advisor. Get one now, verify what I am suggesting is a good choice for your situation, then have the advisor file it with your account info.

Provide your wife with the advisors name, and if you pass, as her to call the advisor and ask him questions

1) has the plan worked as designed in the past?
2) what is outlook for plan for next 5 years (will IRA be completely comverted to a Roth?
3) when Roth withdraws are needed, how should they be done?

 

[FinanceDude]

jIMOh, again thanks for sharing your work so freely. I suspect that any portfolio based on individual stocks would not be suitable for her but I might consider it using my Private Access rep at Fidelity to consul her. Trouble is that I seem to have a new person every 5 years, they move on to other areas or into Fund management as the progress.

More likely they "wash out" of the business, there is high turnover in those customer service areas of Fidelity............

 

[OAG]

IMO CD Ladders are SIMPLE to maintain. That is what Excel was invented for. I am far from any type of math wizard - my formal level of math education is about 5th grade (before algebra). Currently I have 58 CD's, in three types of accounts (Traditional IRA, Roth IRA and Regular), under two names (DW and I), at 4 Institutions, with maturities from 3 months to 7 years. All on a single page spread sheet with 16 Columns. Very easy to manage - a caveman (caverperson?) could do it.

 

[jIMOh]

Maybe find a CFP in your area which is younger than you to share your plan with. Hopefully that CFP is still in business 40 years later if your wife needs to consult with someone.

Decide on a plan, run it by a CFP (for a fee) and implement it yourself. Then file this person's info away with life insurance and other documents. If one of you needs to change the plan later, go back to same person.

 

[FinanceDude]

Maybe find a CFP in your area which is younger than you to share your plan with. Hopefully that CFP is still in business 40 years later if your wife needs to consult with someone.

Decide on a plan, run it by a CFP (for a fee) and implement it yourself. Then file this person's info away with life insurance and other documents. If one of you needs to change the plan later, go back to same person.

Tough to find a CFP that is fee-only............

 

[FinanceDude]

IMO CD Ladders are SIMPLE to maintain. That is what Excel was invented for. I am far from any type of math wizard - my formal level of math education is about 5th grade (before algebra). Currently I have 58 CD's, in three types of accounts (Traditional IRA, Roth IRA and Regular), under two names (DW and I), at 4 Institutions, with maturities from 3 months to 7 years. All on a single page spread sheet with 16 Columns. Very easy to manage - a caveman (caverperson?) could do it.

How do you shop rates??

 

[OAG]

FD: I just use PFCU, Navy Federal, VyStar CU (Formally JAX Navy), and one bank (Capital One). Needless to say currently I am in the "accumulate cash" mode as the rated are not too good with the exception of PFCU (5.25% 7 year) which I have recently actually used for the 7th rung (2015 Maturity).

I have looked at Bank Rate but that site is really a poor source as they NEVER have the best rates posted.

 

[Puppy Belly]

R Wood,
thanks for the breakdown of how you've implemented a CD ladder. I planned to do everything within Fidelity and was wondering if you have been in CDs for enough time to assess whether you are feeling any inflation erosion like most caution on this thread.

Also, how does this 3/4% cut in the FED factor in as you roll over your CD's at maturity.
thanks

IMO CD Ladders are SIMPLE to maintain. That is what Excel was invented for. I am far from any type of math wizard - my formal level of math education is about 5th grade (before algebra). Currently I have 58 CD's, in three types of accounts (Traditional IRA, Roth IRA and Regular), under two names (DW and I), at 4 Institutions, with maturities from 3 months to 7 years. All on a single page spread sheet with 16 Columns. Very easy to manage - a caveman (caverperson?) could do it.