Constructing a balanced portfolio of index funds yielding 3 1/2%-4%

[chinaco]

Some helpful summaries/illustrations of popular withdrawal strategies complements of Bob.

Withdrawal Strategies Links Page

IMO - you need to construct a portfolio that will beat inflation and hopefully yield the 4%. Mutliple paths to do so. I prefer VG Index funds because of low costs. Some prefer actively managed funds... Some also prefer to split out the stocks and bonds so you do not Reverse DCA during the draw-down.

Reverse Dollar Cost Averaging

http://bobsfiles.home.att.net/CashFlowInRetirement.html

[REWahoo]

Quote:

Originally Posted by Dawg54 Got to hope and pray I get some of it back one day.

Dawg, you need to look on the positive side. The DOW is up 18% from it's 7,392 low so you've already achieved your goal - you got some of it back, right?

[Dawg52]

Quote:

Originally Posted by REWahoo Dawg, you need to look on the positive side. The DOW is up 18% from it's 7,392 low so you've already achieved your goal - you got some of it back, right?

I should have said, a lot of it back. Sorry Ha. --->

[canadianteddy]

Chinaco - thanks for the links - they seem to crystalize what I'm beginning to learn from this website and other sources

Much appreciated

[cashflo2u2]

dawg, sorry for the timing on your retirement. I was wondering about folks who began retirement in early 2007. Anyway, again, the theory of some is that if your portfolio is generating enough divvies and interest for what you need, you can ignore that decrease in the value your portfolio and go happily on your journey into the sunset.

[samclem]

Quote:

Originally Posted by cashflo2u2 Ha, SamClem. I thought with a 4%+- dividend income return on the 50%-55% plus the interest income I could possible count on the 4% cash flow for living and the capital growth in the equity portion would take care of protecting the purchasing power of the principal. I am not concerned with passing it on- just consumption for the reminder of our time before the ultimate malfunction. I could live with volatility up to say 20%, but several people have made the point- if you are getting the 4% forget the volitility. But I find as many other people say that is a flawed concept and total return is what you need to look at.

Just a back-of-the-envelope appraisal of your approach:
-- If you get 4% dividends on 50% of your portfolio, then that equates to 2% of your portfolio to be withdrawn. The interest income on the other 50% of your portfolio, if history is any guide, will be approx 1-3% above inflation (depending on the source of this interest--safer, more stable sources will produce less yield above inflation). Together, then, you'd be able to withdraw only 3% each year while keeping up with inflation. And, you still are taking risk: Companies sometimes cut dividends, there's no gaurantee that the share price of the equities wil go up in lock-step with inflation, and the value of the assets producing the interest income could go down a lot (e.g. if you choose LT Treasuries to provide this income and interest rates go up, the value of your bonds will plummet).

While I see where you are coming from, I don't think this segmentaton approach ("this portion of my portfolio gives me dividends from which I get my living money, this portion I don't touch-it's job is to keep up with inflation" etc) is particularly valuable. Instead, I'd build a well diversified portfolio that has performed well over the last 50+ years and use one of the withdrawal strategies that you are comfortable with. There's no getting around the fact that asset classes with higher returns (over many years) tend to have higher volatility. Getting 4% above inflation for many years cannot be done without a considerable chunk of volatile assets in the portfolio mix. The holy grail of asset allocation is to mix assets with relatively high volatility but low correlation to each other so that when some classes are down, others are up (or at least not as far down). This allows the investor to gain the benefits (higher overall return) of holding these riskier assets while the overall portfolio volatility is reduced.
Now, a market like the one we are having now surely shows the problems with this approach, since nearly every type stock is down right now. But, they will come back (at least they always have inthe past). Having a chunk of cash (money market funds, or even a CD ladder that you can cash in rather than rol into more CDs) can allow the investor to avoid/reduce selling of stocks when the market is down, which provides some degree of comfort.

[haha]

Quote:

Originally Posted by cashflo2u2 Anyway, again, the theory of some is that if your portfolio is generating enough divvies and interest for what you need, you can ignore that decrease in the value your portfolio and go happily on your journey into the sunset.

The best comment I have seen on this is here:

YouTube - PORGY & BESS - It Ain't Necessarily So

IMO, the business of funding long retirement from portfolio has guidelines, but no guarantees. The best thing is to be twice as rich as you think you need to be. Second best is get out right now and find a government job.

Ha

[Eagle43]

Quote:

Originally Posted by haha IMO, the business of funding long retirement from portfolio has guidelines, but no guarantees. The best thing is to be twice as rich as you think you need to be. Second best is get out right now and find a government job. Ha

Third best, have a pension or two in addition to your portfolio. Even with the pensions I did the 100 minus your age thing when I moved my 401k to Vanguard. I never did reallocate, but I will next time. Even as slow as I am, I do learn.