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How to generate own paycheck from assets during retirement
Old 02-08-2015, 01:10 AM   #1
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How to generate own paycheck from assets during retirement

I’d like to retire soon but still feeling very insecure. Here are my current numbers:
- 55y/o with one more year before fire’ing
- 600K in 401K and IRA/rollover IRA
- 1.750M in brokerage/bank accounts - 30% stocks, 30%, 40%(!) in cash
- 35K/year (estimated) social security at age 70
- estimated inflation-adjusted 60K/year expenses during retirement

If my math is correct, assuming I’ll be around until 95y/o, then my WR is 2.53% before 70y/o, and 1.05% once I start collecting ss, to an average 1.58% WR. This sounds fairly safe. Yet, knowing myself, I’m afraid once I retire, I’ll not only be constantly worrying, but also reluctant to freely spend the budgeted 60K if I don’t have income - similar to a regular paycheck - hitting my bank account periodically.

Any suggestions how I could create my own 60K/year ‘paycheck’ from my assets, especially during the pre-social security years? How do you generate income to cover expenses from assets?
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How to generate own paycheck from assets during retirement
Old 02-08-2015, 04:31 AM   #2
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How to generate own paycheck from assets during retirement

Your spending is relatively low (does it include health care) and certainly your asset allocation is (extremely) conservative. Having a 40% cash balance doesn't make much sense to me.

Withdrawal rate is 2.5% is low, and made even more conservative as the 2.5% doesn't include SS benefits.

The odds of a 55 year old male living to 95 are low.

I do see one big looming problem. In all probability you are going to die with a huge estate. Who is going to get it and are they more deserving than you enjoying the next 10-20 years living it up a little bit more and enjoying the fruits of your hard work ?


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Old 02-08-2015, 06:02 AM   #3
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Others may comment on the math and ability to RE.

However I think everyone who's had a steady job for 20, 30 years has a lot of apprehension about no longer getting that predictable, steady paycheck every week/month. It takes some time before you realize that it's going to be ok, that you're not going broke and that your plan is actually working.

If you're still working, a lot of folks on this forum have done a 'training wheels' test, where they keep working but bank their paycheck and instead try living off their withdrawals for six month or a year.

As far as creating a paycheck: A lot of people here have their dividends, interest and cap gains deposited into a savings account (vs being reinvested) and then have a fixed amount automatically deposited to their checking on a weekly/monthly/quarterly basis. Personally, I only use my dividends and reinvest my cap gains (to help build the cushion) and cap gains can be a bit unpredictable year to year.

If that doesn't cover all the expenses, then you have to look at what equities you might need to sell in order to cover the shortfall. I'm hoping that with a 30% bond mix you'd have enough bond income to not worry about that.
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Old 02-08-2015, 06:52 AM   #4
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Originally Posted by wingfooted View Post
Your spending is relatively low (does it include health care) and certainly your asset allocation is (extremely) conservative. Having a 40% cash balance doesn't make much sense to me.
Caricoa,
Have you really validated your expenses. As Wingfooted noted...this is relatively low based on some undefined standard... but I would think this would be for the american public with the $ to consider ER.
I don't see this as unrealistic, but I would urge you to really validate your current spending. When I was thinking of ER last year I pulled together all my 2013 spending sans income taxes as these would drop significantly when I ER. I came up with $40K for the year. This included everything I could pull togther (almost everything is on a credit card and through bill pay.. so it was easy to do). This included 2.5 weeks vacation in Europe, 1 week Caribbean cruise, $2.5k for furniture and my property taxes. I figured that I needed to add health insurance... so I added $20k for this (cost of health insurance + max out of pocket for an ACA plan)

Double check your spending #.

So how do you generate income with all those dollars... buy annuities? the sales guy will love you... it will generate income... but is expensive way to generate income. >>> you likely need to invest the money in something better than cash.. with a higher return than 0. So do you generate dividends and cap gains? or do you do systematic withdraws (invest for total return an sell some to raise income)? You need to decide this. SWR assume some level of investment return.

to repeat... double check your spending numbers.... . or you may be this blue guy
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Old 02-08-2015, 08:15 AM   #5
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How do you generate income to cover expenses from assets?
I sell assets to buy food and fun.
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Old 02-08-2015, 08:40 AM   #6
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Personally, I'm still able to live off my non-COLAed pension, but others here just give themselves a yearly paycheck when they do their yearly asset allocation rebalance. Pay out 1/12 or 1/52 to yourself on a appropriate basis, and you have your paycheck.
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Old 02-08-2015, 08:45 AM   #7
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Originally Posted by carioca View Post
....Any suggestions how I could create my own 60K/year ‘paycheck’ from my assets, especially during the pre-social security years? How do you generate income to cover expenses from assets?
Your feelings are very natural. Change is hard.

What I did when I retired is I changed my AA from 60% stocks/40% bonds to 60% stocks/34% bonds/6% cash. The 6% cash allows me to sleep well knowing that I have 2-3 years of spending in cash.

The cash is in an online savings account and is replenished when I rebalance, usually annually. I have a monthly "paycheck" which is a transfer from the online savings account to our local credit union accounts that we use to pay our bills.

I realize it is a bit silly and non-substantive, but is is easy to manage and works well for us.

There is enough flexibility in our budget that we could tighten our belts if investment results lagged for a period of time and we do occasional minor splurges when times are good.
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Old 02-08-2015, 09:20 AM   #8
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I don't get the comments about "$60k is abnormally low". The OP has not said whether he/she is single or married.

Even if he/she is married, that's about the average spending for older married couples with no kids.
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Old 02-08-2015, 09:46 AM   #9
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Welcome to the forum. You have $2.35MM so I don't see any problem with you pulling $80k/yr from your portfolio. You are so far away from SS @ 70 that I'd personally ignore it. There are so many things that can change in the next 15 years that I'd consider it a safety stop. As you get closer (min 60s?) you can start baking it into your near term spending plan.

You may be a little on the conservative side with your asset allocation. I suggest you read Andrew Hallam's Millionaire Teacher. This will give you a little better insight into index investing and asset allocation. You do have to have an AA that your are comfortable with. As for taking a "paycheck" from your assets, most people sweep money to their bank account weekly, monthly, quarterly or annually. You would sell whatever you have too much of in your asset allocation. If stocks go up, you sell mutual fund shares as needed. If stocks go down or not up enough, you pull out of bonds, CDs or MM. I personally plan on moving money annually to a savings account and then into checking as needed.

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Originally Posted by Independent View Post
I don't get the comments about "$60k is abnormally low". The OP has not said whether he/she is single or married.

Even if he/she is married, that's about the average spending for older married couples with no kids.
+1

We have married couples on this forum happily living on around $30k/yr and we have some that are into six figures.
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Old 02-08-2015, 09:48 AM   #10
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Welcome Carioca!

I just retired in June this past year. I transfer money from my brokerage account to my checking account each month... similar to a paycheck. I still have a buffer in my savings account for those lumpy expenses (property taxes, car/home/umbrella insurance.) Any excess in my checking account gets swept to savings (just like when I was working.)

I have dividends left in cash - and can generate any additional cash needed for the year when I rebalance. Since you have such a large cash position, you don't have to do this - you can just live off the cash for a long time.

For me - doing the monthly transfer is good for giving me confidence about our budget, so early in. I've been told that confidence of 'not running out of money' will happen after a while of de-cumulating... but I'm not there yet, so the psuedo paycheck thing works for me.

As for your budget - if you're just one person $60k is plenty generous... We are living on $84k for a family of 4. We definitely don't feel deprived.
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Old 02-08-2015, 10:05 AM   #11
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Hi Carioca,

Vanguard Investment Counseling & Research has a paper on the most tax efficient method of spending from a portfolio. Maybe you'll find it helpful. Here's a quote:

"The Mechanics of the Total-Return Approach to Spending :
An investor who is withdrawing from a portfolio typically should have three primary objectives: to obtain the desired spending amount, to maintain the portfolio’s asset allocation, and to minimize taxes. As previously stated, most investors should spend from their holdings in the following order: required minimum distributions (RMDs), if applicable; taxable assets; tax-deferred assets; and, last, tax-free assets.

RMDs come first because these withdrawals are mandated by law. The order of the other categories is designed to maximize tax-efficient withdrawals and the tax-deferred or tax-free growth of portfolio assets."

Here's link to the entire paper: https://personal.vanguard.com/pdf/s557.pdf

Expounding a bit:
1) Have distributions from Taxable account go to your checking/spending account.
2) If distributions are not enough, then begin selling assets from the taxable account, starting with those with least or negative capital gains.
3) When taxable is gone, then direct tax-deferred distributions to your spending account.
4) If tax-deferred distributions are not sufficient, then begin selling tax-deferred assets (after 59.5 yrs old!)

Good luck!
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Old 02-08-2015, 10:12 AM   #12
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Create a paycheck by xferring into a specific checking account on a regular basis. That account is your spending money.
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Old 02-08-2015, 10:15 AM   #13
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Originally Posted by wingfooted View Post
Your spending is relatively low (does it include health care) and certainly your asset allocation is (extremely) conservative. Having a 40% cash balance doesn't make much sense to me.

Withdrawal rate is 2.5% is low, and made even more conservative as the 2.5% doesn't include SS benefits.

The odds of a 55 year old male living to 95 are low.
Perhaps we should not make assumptions about Carioca's lifestyle or gender. If the OP is a single female living frugally in a low cost of living area of the U.S., annual expenses of $60K including taxes and healthcare may be perfectly doable, and living to 95 may not be quite so improbable.

I do agree that a 40% cash allocation will lead to underperformance.

In answer to Carioca's original question, yes, the loss of a regular paycheck requires adjustment for someone who has always received one. As others have mentioned, there are several strategies that retirees use. Here are some of mine.

1. Discipline. During my working life, I had several income streams, including a paycheck and corporate income. For years I saved the corporate income and lived off the (small) salary. This facilitated documentation of my personal expenses and encouraged me to keep them within limits.
2. Diversification. While working, I invested in 3 rental properties and have now paid off one of them. The rental property portfolio is now cash flow positive. In time, as the second and third mortgages are paid off, it will generate a stable income stream that will rise with inflation.
3. Fungibility. As long as my withdrawal rate is 3% or less, I feel confident that portfolio gains will keep me solvent. I understand that some of that money will come from portfolio income, some from dividends, and some from capital gains. It's a total return approach.
4. Documentation. Since 2000, I have done an annual Net Worth calculation. NW has continued to rise since ER despite withdrawals. This is very reassuring.
In retirement I do a detailed expense calculation at the end of every month. My spreadsheet has all recurring costs (e.g. car loan, property tax) built into it. This is enormously helpful in budgeting.
5. Cash buffer. Before retirement I built a GIC (term deposit) ladder within my corporation. This started at about 10% of assets and produces a chunk of cash each year as the GICs mature. This is a buffer that I use to reduce the risk of portfolio failure in the vital early retirement years. I am quite aware of the research that says it is a drag on portfolio returns. It gives me peace of mind, which is worth a lot. And as the cash buffer is depleted, my equity allocation will rise (see Pfau's recent research on the equity glide approach).
6. Tax efficiency. Each year I evaluate the most tax efficient way to "pay myself" and how much I will need for the year. If my portfolio has done very well, I will withdraw the amount I need for 6 months from my personal portfolio, selling equities if necessary, keeping asset allocation within predetermined limits. I will also pay myself an eligible corporate dividend up to the limit of tax efficiency (your tax system may vary) as advised by my accountant.
7. Planned distribution. These funds are transferred to a HISA, and transferred periodically to my current account as required. As they are depleted, I top up as much as I need to. So usually I have three payments per year. After a couple of months, I did not "miss" a pay cheque at all.

I hope this helps.
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Old 02-08-2015, 10:27 AM   #14
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Perhaps we should not make assumptions about Carioca's lifestyle or gender. If the OP is a single female living frugally in a low cost of living area of the U.S...
From the OP's profile:

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About carioca

Gender: Male

State: California
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Old 02-08-2015, 11:55 AM   #15
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You'll find these threads interesting. Many users have provided their own plans for drawing down annual expenses
Systematic Withdrawals: how do you decide what to sell?
Systematic Withdrawals: a year at a time or monthly?
Retirement Income: fixed income, systematic withdrawals or annuities?

Welcome! All the best.
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Old 02-08-2015, 12:37 PM   #16
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Thanks everyone for all the replies.

I guess my main concern is more a psychological one, ie. how to deal with a situation where I'd be using money while no longer earning a paycheck. The numbers seem to indicate I'm ready to fire, but I worry I'll feel insecure without a paycheck and not be able to spend money as freely as I should/could.

To add some color to my situation, I'm married, currently on a stable job. Kids are grown up and independent so no kids expenses any more - just wife and myself. We keep track of our expenses and since we'd be asset rich/income poor, the assumption is that we'd qualify for ACA/Obama care subsidies. We live in a fully paid house so no mortgage -but we do pay HOA and property taxes, which is not cheap here with California house prices. In summary, as far as we can tell, 60K/year should be sufficient to keep our simple current life style.

Now, as for my current unusually high cash allocation, it's mostly driven by the assumption the Fed will finally raise interest rates soon and how that will impact the bond and stock market. I keep thinking once rates go back to more normal levels, then I'll allocate more of the cash to intermediate bonds, but the Fed just keeps moving the dates further into the future...

As for generating the 'paycheck', I've considered:
- SPIAs but again given the current interest rates, the payouts are so low they do not seem to make sense
- rental properties is an option though I'd prefer a more passive way to generate income
- that leaves dividends from stocks and bonds as the primary option right now

I just wonder if there are other (better) options worth considering that has worked well for you folks.
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Old 02-08-2015, 12:54 PM   #17
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You will feel insecure without a paycheck - but it will pass with time.

I found two things that helped. First, I create a monthly expense report with a 12 month rolling period to show that we're within budget. Also, a YTD to see how we're doing in the current year.

Secondly, about every quarter or longer, I look at the portfolio & our annual expense to make sure we're in the range that we thought we'd be - ie. withdrawal rate.

We had a huge scare when we ER'd in May 2008, but we managed. Stay flexible with your spending & enjoy your ER!
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Old 02-08-2015, 12:56 PM   #18
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A lot of us are "total return" investors. We don't try to generate an income stream from interest and dividends to live off of. Rather, we take a portion of our portfolio each year as income. From that it's easy to generate a monthly "paycheck" you just stash it somewhere and have a chunk transferred to your checking each month.

We choose an allocation that we think has a high probability of supporting our withdrawal rate over the long term taking into account inflation. So that portion taken out may be a fixed percent each year, or it may be inflation adjusted from the first year. There are various methods people use. And we usually rebalance the portfolio to that allocation when we take out the income.

I don't know what to tell you about imminent rising interest rates. A lot of folks have been waiting for rates to "normalize" for 5 years now. But what indicates that the pre 2010 interest rate and inflation patterns will be normal in the future? So far, staying the course, not changing ones allocation in anticipation of rising interest rates, has been the winning approach. But again, past performance is no guarantee of future performance.
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Old 02-08-2015, 01:12 PM   #19
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As for generating the 'paycheck', I've considered:
- SPIAs but again given the current interest rates, the payouts are so low they do not seem to make sense
- rental properties is an option though I'd prefer a more passive way to generate income
- that leaves dividends from stocks and bonds as the primary option right now

I just wonder if there are other (better) options worth considering that has worked well for you folks.
My real estate portfolio is professionally managed, which reduces the return, but minimizes the hassle. REITs and commercial property would be more passive ways to invest in real estate. Commodities would be another sector to explore, but more volatile. I chose modest residential real estate because people will always have to live somewhere.
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Old 02-08-2015, 01:19 PM   #20
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- SPIAs but again given the current interest rates, the payouts are so low they do not seem to make sense
- rental properties is an option though I'd prefer a more passive way to generate income
- that leaves dividends from stocks and bonds as the primary option right now

I'd suggest a hedged portfolio of closed end funds. Should be able to generate 7-9% annualized distributions. No way I would do real estate.
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