Fixed income question

[pompanobeach]

Hello Everyone.
I’d like to pick your brains on what kind of strategy I should use. I will retire soon with a pension that will provide me with $5000 per month. However, I need $7,000 per month to live as I do now. Thus, I am short $2,000 per month. I will be 62 years old in 7 years and my SS will provide me with the $2,000 I need. However for the next 7 years, I can either withdrawal the $2,000 shortfall every month from my savings of $350k at which point my nest egg will decrease by $140k or so, or I can lock my $350k for 7 years in some sort of a financial product that would provide me with the $2000 every month for the next 7 years so that at the end of the 7 years, I would still have my principal.

My $350k is in stocks now and does make about 8% per year taxable. I guess i can continue doing so and just sell stock every year. But isn’t there an easier way to do what I want to do?

Any suggestions on what I should do?

Thank you in advance.
Pompano Beach

[COcheesehead]

You need a 7% return. Equities will get you there, but with return sequence risk. I think you need to cut expenses. Just my 2 cents.

[joeea]

So you want some sort of vehicle that can reliably throw off about 6.8% and still keep the principal intact? Seems like you'll need to take on some risk to do that, just like you are doing now with your 8% return.

Is your pension inflation-protected? If not you may wish to consider delaying your social security benefits until 70.

Is this $350k all the savings you have? You may wish to consider delaying your retirement a few years.

[pompanobeach]

Quote:

Originally Posted by COcheesehead You need a 7% return. Equities will get you there, but with return sequence risk. I think you need to cut expenses. Just my 2 cents.

That’s what I thought. Thanks

[pompanobeach]

Quote:

Originally Posted by joeea So you want some sort of vehicle that can reliably throw off about 6.8% and still keep the principal intact? Seems like you'll need to take on some risk to do that, just like you are doing now with your 8% return. Is your pension inflation-protected? If not you may wish to consider delaying your social security benefits until 70. Is this $350k all the savings you have? You may wish to consider delaying your retirement a few years.

Yes. My pension has a 2% COLA.
Delaying retirement isn’t an option. If I don’t go, I loose big time with contract changes. But I guess I can always get part time job or cut expenses.

[38Chevy454]

I don't think you will get a fixed income that will return the amount you need to keep your $2000/mo and not deplete the principle. As others suggested, you need higher returns and this brings risk. It also means going from fixed income into equities.



Second the question if you have any other savings besides the $350K. Good for the nice pension, and able to get SS once you have more years age. The problem is getting the $24K/year income off your savings as you have identified.



The other options are to work a bit longer, or reduce expenses some.

[joeea]

Quote:

Originally Posted by pompanobeach But I guess I can always get part time job or cut expenses.

Yes, those are certainly options.

[pompanobeach]

Quote:

Originally Posted by 38Chevy454 I don't think you will get a fixed income that will return the amount you need to keep your $2000/mo and not deplete the principle. As others suggested, you need higher returns and this brings risk. It also means going from fixed income into equities. Second the question if you have any other savings besides the $350K. Good for the nice pension, and able to get SS once you have more years age. The problem is getting the $24K/year income off your savings as you have identified. The other options are to work a bit longer, or reduce expenses some.

Thank you for your advice. I will probably need to cut a little more expenses and try to live on the pension alone since it has a 2% COLA anyway. I may just dip into savings for taxes and vacations, etc..

[38Chevy454]

Quote:

Originally Posted by pompanobeach Thank you for your advice. I will probably need to cut a little more expenses and try to live on the pension alone since it has a 2% COLA anyway. I may just dip into savings for taxes and vacations, etc..

If you use the 4% rule as a guideline, you could get $14K/year and not have much concern for the depleting savings issue. Let's call it $1000/mo with a little cushion, so you would only need to cut $1000 from your planned $7000/mo budget. Unless you have a high COL area, most can live pretty well on $6000/mo as long as you keep eye on the discretionary spending.

[pompanobeach]

Quote:

Originally Posted by 38Chevy454 If you use the 4% rule as a guideline, you could get $14K/year and not have much concern for the depleting savings issue. Let's call it $1000/mo with a little cushion, so you would only need to cut $1000 from your planned $7000/mo budget. Unless you have a high COL area, most can live pretty well on $6000/mo as long as you keep eye on the discretionary spending.

Nice! I like that idea. So, you are saying, try to get a good safe yield and only withdraw $1000 a month for the 7 years and I will still have most of my principal left.... correct?

[38Chevy454]

Quote:

Originally Posted by pompanobeach Nice! I like that idea. So, you are saying, try to get a good safe yield and only withdraw $1000 a month for the 7 years and I will still have most of my principal left.... correct?

That's correct. Since you would like to cover both near term income and longer term inflation protection, you might investigate a fund like Vanguard Wellington (VWELX), or Fidelity Balanced(FBALX) for examples. Both of which are approx 60/40 equities to fixed income asset allocation. Both are low fees, and having the AA mix will offer less risk and better stability.


If you stayed in 100% stocks you will have a lot more risk and more chance for a downturn in stock values to cause you concern for depleting the principle. While VWELX or FBALX can both also go down if stocks take a downturn, the 40% fixed income portion will help minimize some of the loss. A pure bond fund could be considered for your needs as well, but you would reduce the inflation protection while increasing the shorter term stability of monthly income. A 40/60 AA mix can be had with Vanguard Wellesley (VWINX) as another option to look into. Widely held funds are also going to be less volatile than individual stocks. Not sure what you are invested in right now.



Just remember there is no guarantee of returns, so having flexibility in your budget can help by changing the withdrawal to meet conditions and performance of the savings.


Actually, after all this typing, I think the Wellesley would meet all your needs, it has a good track record of meeting your minimum 4% need, with many years doing better. That better years means your savings will grow slightly, so you could take a larger withdrawal, or save it for leaner years or an unexpected large expense.

[pompanobeach]

Quote:

Originally Posted by 38Chevy454 That's correct. Since you would like to cover both near term income and longer term inflation protection, you might investigate a fund like Vanguard Wellington (VWELX), or Fidelity Balanced(FBALX) for examples. Both of which are approx 60/40 equities to fixed income asset allocation. Both are low fees, and having the AA mix will offer less risk and better stability. If you stayed in 100% stocks you will have a lot more risk and more chance for a downturn in stock values to cause you concern for depleting the principle. While VWELX or FBALX can both also go down if stocks take a downturn, the 40% fixed income portion will help minimize some of the loss. A pure bond fund could be considered for your needs as well, but you would reduce the inflation protection while increasing the shorter term stability of monthly income. A 40/60 AA mix can be had with Vanguard Wellesley (VWINX) as another option to look into. Widely held funds are also going to be less volatile than individual stocks. Not sure what you are invested in right now. Just remember there is no guarantee of returns, so having flexibility in your budget can help by changing the withdrawal to meet conditions and performance of the savings. Actually, after all this typing, I think the Wellesley would meet all your needs, it has a good track record of meeting your minimum 4% need, with many years doing better. That better years means your savings will grow slightly, so you could take a larger withdrawal, or save it for leaner years or an unexpected large expense.

Thank you so much!

[jkern]

For me personally, I would just take $140K from your stash and put it in cash investments (CD's, MM) and withdraw monthly or yearly from that for the next 7 years. All done!!

[UnrealizedPotential]

If it was me, I would take the 350K and invest it in a bond fund to provide the income I needed. One of the funds I was looking at would provide only 1691 a month approximately every month, leaving you short a little over 300 a month. You could invest it more aggressively to get the extra 300 you want, but I wouldn't do that.


If you did that I think it's too risky. I would look for ways to cut your spending down to match the 1691 a month. But that's what I would do. It's your money, you get to decide.

[pompanobeach]

Nice. Which bond fund were you looking at?

[pompanobeach]

Simple but it works! I may get less of avreturn but it is simple! Thanks.

[UnrealizedPotential]

I like RPIHX. That's T. Rowe Price global high income bond fund. I own it myself. The payments are very consistent and mostly predictable. Look it over and see if it would work for you. Look at the history of payments and what it can offer you. T. Rowe Price is not the cheapest fund company, but it's very worthy .

[pompanobeach]

Quote:

Originally Posted by UnrealizedPotential I like RPIHX. That's T. Rowe Price global high income bond fund. I own it myself. The payments are very consistent and mostly predictable. Look it over and see if it would work for you. Look at the history of payments and what it can offer you. T. Rowe Price is not the cheapest fund company, but it's very worthy .

Thank you so much!

[corn18]

Quote:

Originally Posted by UnrealizedPotential I like RPIHX. That's T. Rowe Price global high income bond fund. I own it myself. The payments are very consistent and mostly predictable. Look it over and see if it would work for you. Look at the history of payments and what it can offer you. T. Rowe Price is not the cheapest fund company, but it's very worthy .

It's a young fund (3 years old). It's a small fund ($100M). It has a high ER (1.13% gross, 0.78% net) and it invests in junk bonds:

Strategy
The fund invests primarily in global, below-investment grade corporate debt securities. The Fund normally invests at least 80% of its net assets in bonds and 50% in foreign securities. The Fund may invest up to 20% of its net assets in bank loans.

That's a lot of risk for a 3% premium.

[pompanobeach]

Quote:

Originally Posted by corn18 It's a young fund (3 years old). It's a small fund ($100M). It has a high ER (1.13% gross, 0.78% net) and it invests in junk bonds: Strategy The fund invests primarily in global, below-investment grade corporate debt securities. The Fund normally invests at least 80% of its net assets in bonds and 50% in foreign securities. The Fund may invest up to 20% of its net assets in bank loans. That's a lot of risk for a 3% premium.

Thanks for the info but no thanks! Very risky...