Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Income for Early Retirement, Another Take...
Old 01-19-2015, 01:31 PM   #1
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 367
Income for Early Retirement, Another Take...

So, I was just daydreaming a bit and noticed something. This is an approach similar to what Scrabbler says he does, so probably not much new, just would like the boards take on it.

Let's assume a portfolio of about $1,250,000. Assume $400,000 in a 401k and the rest in taxable. Expenses in retirement are about $43K.

Portfolio: $1,250,000 ($400k in 401k, $850K in taxable)
mortgage on current residence: $100k 28 years remaining @ 3%
Rental house mortgage free generating $5,000 a year in profit including maintenance and vacancies
another rental house with a 15 year mortgage covering all it's own expenses
Expenses are $43K in retirement with about $3K discretionary
Assume another non-income producing property worth about $100k if sold.
Assume 45 Years Old

Take $800k from taxable in put in high yield vanguard bond fund @ 5% SEC yield ($40K)
This added to the $5k from rent is $45K or enough to cover expenses and then some
For simplicities sake, put everything in the 401k in Wellington

If inlation doesn't kill you in the first 15 years, you have enough income to meet all of your needs. If inflation kicks up, the rent on the paid off house can be increased to compensate. If that is not enough, the $100k property could be sold and either added to the portfolio or used to pay off the primary residence.

After about 10 years, move half of 401k account to Wellesely (again, for simplification, this could be a roll your own portfolio as well)
After 5 years (15 year mark) roll another 50% wellington to wellesely (25 % wellington)
Another 5 years (20 year mark) roll everything to wellesely)

Also at 15 year mark, as rental #2 is paid off either use the rent for income or sell the property (about $100k in todays dollars) and add this to the portfolio or pay off the primary residence.

Also at 15 year mark, start pulling divys and interest from the wellesley/wellington in the 401k.

around 65 or so start collecting social security.

Again, I don't plan on doing this right now, and these arent even my numbers, though the situation with the properties mirrors pretty close what i'm dealing with now.

Currently I hold a pretty typical tilted boglehead style portfolio poised more for growth than income.

I guess my question here is, would this work? It seems to cover almost all the basis including inflation protection. The biggest risk is the High Yield aspect, but what is really the risk here? Default risk resulting in permanently reduced principle and thus less yield? As long as the income holds pretty stable, the principle could fluctuate as much as it needed to.

Also, I didn't account for the other $50K. Some of this would likely be needed to pay capital gains when liquidating the portfolio, the rest would be held in cash as an emergency fund (say $25k or so).

Is this crazy or does it make pretty good sense? How much does the income from a fund like the vanguard high yield fluctuate over time?

Also, the current house could be downsized around 65-70 and probably get $100k in todays dollars out of it before buying a retirement home, so there's that possibility as well.

Comments? I know many would say just pull 3-4% out of a diversified portfolio and don't do this, but doesn't this (admittedly not conventional) plan solve the problem with sequence of return risk? Granted, I understand this would limit the upside growth potential, but assuming $40K more or less adjusted for inflation is more than adequate every year, who cares? Also, no need to leave an inheritance..

So if you made it through my long-winded rambling post, what do you think?
__________________

__________________
When you walk in the shadow of insanity, the presence of another mind that thinks and acts as yours does is something close to a blessed event. -Robert Pirsig, Zen and the Art of Motorcycle Maintenance
panhead is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-19-2015, 01:48 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
 
Join Date: Apr 2004
Location: South Texas~29N/98W
Posts: 5,884
Quote:
Originally Posted by panhead View Post
So, I was just daydreaming a bit and noticed something. This is an approach similar to what Scrabbler says he does, so probably not much new, just would like the boards take on it.

Let's assume a portfolio of about $1,250,000. Assume $400,000 in a 401k and the rest in taxable. Expenses in retirement are about $43K.

Portfolio: $1,250,000
I can't disagree with any of this.
__________________

__________________
Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Old 01-19-2015, 01:58 PM   #3
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 367
Quote:
Originally Posted by mickeyd View Post
I can't disagree with any of this.

HehHeh! I hit <tab> and my post went up before I was done! Check it now!
__________________
When you walk in the shadow of insanity, the presence of another mind that thinks and acts as yours does is something close to a blessed event. -Robert Pirsig, Zen and the Art of Motorcycle Maintenance
panhead is offline   Reply With Quote
Old 01-19-2015, 02:26 PM   #4
Full time employment: Posting here.
 
Join Date: Aug 2014
Posts: 555
I have several rentals and I view them as 1) diversification and 2) slightly higher return than stocks. The downsides are 1) not a very liquid investment if you need cash fast and the biggie! 2) ITS WORK!

The rest of your details are a plan but they center on the #1 advantage I listed--diversification. It is just another way to spread your risk around.
__________________
ArkTinkerer is offline   Reply With Quote
Old 01-19-2015, 02:41 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Feb 2014
Posts: 1,050
I would be careful of any high yield bond funds. A lot have junk oil paper that can default if oil stays low.
__________________
jim584672 is offline   Reply With Quote
Old 01-19-2015, 03:06 PM   #6
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 409
Quote:
Originally Posted by jim584672 View Post
I would be careful of any high yield bond funds. A lot have junk oil paper that can default if oil stays low.
+1, Agree. This is the weak link.
__________________
wolf is offline   Reply With Quote
Old 01-19-2015, 06:35 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,386
Quote:
Originally Posted by panhead View Post

The biggest risk is the High Yield aspect, but what is really the risk here? Default risk resulting in permanently reduced principle and thus less yield? As long as the income holds pretty stable, the principle could fluctuate as much as it needed to.
This is absolutely true. And as long as it doesn't rain, you will never need an umbrella.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 01-20-2015, 02:10 PM   #8
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 367
I haven't tried to determine how much the 08/09 crisis affected the payout for this fund, that would probably be worth looking at. I was just kind of spitballing here to get a take on what people think. I know Scrabbler appears to be doing well with a similar strategy, but to be fair he did buy his fund at the bottom during the crisis which I'm sure gives him a huge advantage.

The only thing I *might* do at some point is add the High Yield fund into my portfolio at 10% of total portfolio value (about 20% of bond value). I know many here who follow Bogleheads aren't big fans of High Yield, but as my portfolio gets larger I think I would feel more comfortable with a slice of it.

I was having one of those "I don't want to work today" days when I was looking at yields and what might be possible. Sure looks good on paper, lol!
__________________
When you walk in the shadow of insanity, the presence of another mind that thinks and acts as yours does is something close to a blessed event. -Robert Pirsig, Zen and the Art of Motorcycle Maintenance
panhead is offline   Reply With Quote
Old 01-20-2015, 07:49 PM   #9
Recycles dryer sheets
 
Join Date: Jun 2010
Location: Southwest Florida
Posts: 326
Quote:
Originally Posted by panhead View Post
Default risk resulting in permanently reduced principle and thus less yield? As long as the income holds pretty stable, the principle could fluctuate as much as it needed to.
I always feel a bit uncomfortable with investment advice from someone spelling principal with an "le".
Bruce
__________________
Gill is offline   Reply With Quote
Old 01-21-2015, 05:32 AM   #10
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 367
Quote:
Originally Posted by MBMiner View Post
I always feel a bit uncomfortable with investment advice from someone spelling principal with an "le".
Bruce
Good thing I wasn't giving advice then huh?

"I have nothing but contempt for anyone who can spell a word only one way." Thomas Jefferson

I always screw this one up. I remember the 'pal' at the end of principal and always think of a school principal and figure the one I want must be the other one.
__________________
When you walk in the shadow of insanity, the presence of another mind that thinks and acts as yours does is something close to a blessed event. -Robert Pirsig, Zen and the Art of Motorcycle Maintenance
panhead is offline   Reply With Quote
Old 01-21-2015, 07:40 AM   #11
Full time employment: Posting here.
 
Join Date: Aug 2014
Posts: 555
Quote:
Originally Posted by panhead View Post

I always screw this one up. I remember the 'pal' at the end of principal and always think of a school principal and figure the one I want must be the other one.
"It's not the school I hate ... it's the principal of the thing!"
__________________
ArkTinkerer is offline   Reply With Quote
Old 01-21-2015, 05:41 PM   #12
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 10,147
Quote:
Originally Posted by panhead View Post
Good thing I wasn't giving advice then huh?

"I have nothing but contempt for anyone who can spell a word only one way." Thomas Jefferson

I always screw this one up. I remember the 'pal' at the end of principal and always think of a school principal and figure the one I want must be the other one.
According to the Jefferson Library Spell a word only one way (Quotation) « Thomas Jefferson’s Monticello

Quote:
We currently have no evidence to confirm that Thomas Jefferson ever said or wrote, "I have nothing but contempt for anyone who can spell a word only one way," or any variation thereof.
As Abraham Lincoln famously said "At least half of the quotes on the internet are totally made up."
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 01-21-2015, 07:34 PM   #13
Recycles dryer sheets
 
Join Date: Feb 2009
Location: Cville
Posts: 399
Back to OP, any plan you must ask what do I do if...
What if your high yield fund doesn't keep paying same dividend?
What do you do if you find you need some cash for [roof|medical|new car]?
What if inflation goes to 6%?

"Just some things to consider" Sam spade
__________________
RetireBy90 is offline   Reply With Quote
Old 01-22-2015, 07:46 AM   #14
Full time employment: Posting here.
 
Join Date: Aug 2014
Posts: 555
Quote:
Originally Posted by Gumby View Post
As Abraham Lincoln famously said "At least half of the quotes on the internet are totally made up."
You know there was no internet in Lincoln's time! Einstein said this. I have a link to it somewhere...
__________________
ArkTinkerer is offline   Reply With Quote
Old 01-22-2015, 08:06 AM   #15
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 1,670
Be careful with high yield funds. These are not treasuries and are not as liquid. When/if interest rates do rise and depending how sharply, these funds could run into a liquidity problem forcing a fire sale of their holdings. It could get messy.
__________________
Dash man is offline   Reply With Quote
Old 01-22-2015, 08:15 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,870
Quote:
Originally Posted by panhead View Post
I haven't tried to determine how much the 08/09 crisis affected the payout for this fund, that would probably be worth looking at. I was just kind of spitballing here to get a take on what people think. I know Scrabbler appears to be doing well with a similar strategy, but to be fair he did buy his fund at the bottom during the crisis which I'm sure gives him a huge advantage.
Yes, I did buy my shares of the big bond fund at the end of 2008 when its NAV was nearly at its all-time low. This gave me about 25% more shares than I expected to buy when I was planning my ER budget.

What this did was create a nice surplus every month and enabled me to not have to use my other bond mutual funds I own to supplement the big bond fund's income. Or transfer a lot of money from those other bond funds (mainly munis) into the big bond fund. I did transfer some money from the munis, though, just not a lot.

Last year, thanks to declining monthly dividends per share which were not sufficiently offset by my increasing share balance, I began supplementing the big bond fund's income by taking as cash (instead of reinvesting) the quarterly dividends from a stock fund. This quarterly dividend had been between $1,200 and $1,500 most of the time but last year exploded to just over $8,000 total for the year. This quarterly boost to my monthly dividend income from the big bond fund is actually well timed because it coincides with my "lumpier" expenses such as income taxes, dental visits, and auto insurance.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is online now   Reply With Quote
Old 01-22-2015, 09:20 AM   #17
Recycles dryer sheets
 
Join Date: Jun 2002
Posts: 367
Quote:
Originally Posted by ArkTinkerer View Post
You know there was no internet in Lincoln's time! Einstein said this. I have a link to it somewhere...
I love it!


Thanks for the comments all. Let me see if I can answer some of the questions. Inflation could be managed in several ways. Increasing rent on my rental property, selling my non-income producing property, and my thought was to hold onto my low rate mortgage and pay it with the interest from the HY fund. Also, 401k would be invested in a stock/bond allocation (Wellington in the example) and would hopefully grow in excess of inflation. After 15 years (about 60 yo) this could be tapped and would hopefully increase current income to make up for loss from inflation. Also at the 15 year mark, I will have another paid off rental property that could be sold and the proceeds added to the bond fund or used to pay off the house to further increase cash flow. Then in another 5 years Medicare kicks in (20 years from now) further reducing costs. Then the last decision is when to take SS.

The first 15 years would primarily rely on the HY fund. Also, the question was asked about lumpy expenses, I would also keep an emergency fund in cash, maybe $20k or more.

Again, I'm not planning on walking away from my current portfolio, but if I wanted to quit today, it seems like it might be a viable plan?

Realistically, the better decision is to w*rk a few more years and get to sub 3% withdrawal from my current balanced portfolio. I understand there's no free lunch, but damn, it was a fun back of the napkin exercise!

Scrabbler, thanks for sharing as always. I had forgotten that you have some stock funds in taxable as well. It was your posts that got me thinking along this path. Sigh... Time to get ready for work.
__________________
When you walk in the shadow of insanity, the presence of another mind that thinks and acts as yours does is something close to a blessed event. -Robert Pirsig, Zen and the Art of Motorcycle Maintenance
panhead is offline   Reply With Quote
Old 01-22-2015, 09:55 AM   #18
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by panhead View Post

Rental house mortgage free generating $5,000 a year in profit including maintenance and vacancies
another rental house with a 15 year mortgage covering all it's own expenses
Expenses are $43K in retirement with about $3K discretionary

What worries me is that you state the "other" rental house is paying its mortgage and covering expenses with its cash flow. What about vacancies/maintenance? Sounds like if/when you have a hiccup with the 15 year mortgage rental, it would siphon all cash flow - and then some! - from the other rental. There goes all your budget fluff, and also eats into your budget. That would make me nervous.


Quote:
Originally Posted by scrabbler1 View Post
This quarterly dividend had been between $1,200 and $1,500 most of the time but last year exploded to just over $8,000 total for the year. This quarterly boost to my monthly dividend income from the big bond fund is actually well timed because it coincides with my "lumpier" expenses such as income taxes, dental visits, and auto insurance.
You didn't get $8,000 in dividends - you received about $6,000 in interest, with $2,000 in short-term and long-term capital gain distributions. Or, as more likely, even the previous $1,200-$1,500 quarterly distributions also may have contained capital gains (and would not recur in the future), given what rates have done over the past few years. If I were you, I'd devour the press releases from that fund to find out what the components are of the distributions regarding interest from the bonds vs short/long term capital gains that won't happen every year in the future. You should only count on the actual interest component of your distribution to happen in the future, not any return of capital or capital gain distributions.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 01-22-2015, 10:47 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,870
Quote:
Originally Posted by MooreBonds View Post
You didn't get $8,000 in dividends - you received about $6,000 in interest, with $2,000 in short-term and long-term capital gain distributions. Or, as more likely, even the previous $1,200-$1,500 quarterly distributions also may have contained capital gains (and would not recur in the future), given what rates have done over the past few years. If I were you, I'd devour the press releases from that fund to find out what the components are of the distributions regarding interest from the bonds vs short/long term capital gains that won't happen every year in the future. You should only count on the actual interest component of your distribution to happen in the future, not any return of capital or capital gain distributions.
Um, yes I did receive $8,000 in quarterly dividends from the stock fund. Until last week, the fund had not paid a cap gains distribution since early 2008, 7 years ago. That was mainly due to a capital loss carryover (a tough item to find in the fund's annual financial statement) which had finally been used up. For the bond funds, I am careful to separate the similarly lumpy cap gain distributions I always reinvest from the monthly dividends/interest.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is online now   Reply With Quote
Old 01-22-2015, 10:59 AM   #20
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,870
Quote:
Originally Posted by panhead View Post


I love it!


Thanks for the comments all. Let me see if I can answer some of the questions. Inflation could be managed in several ways. Increasing rent on my rental property, selling my non-income producing property, and my thought was to hold onto my low rate mortgage and pay it with the interest from the HY fund. Also, 401k would be invested in a stock/bond allocation (Wellington in the example) and would hopefully grow in excess of inflation. After 15 years (about 60 yo) this could be tapped and would hopefully increase current income to make up for loss from inflation. Also at the 15 year mark, I will have another paid off rental property that could be sold and the proceeds added to the bond fund or used to pay off the house to further increase cash flow. Then in another 5 years Medicare kicks in (20 years from now) further reducing costs. Then the last decision is when to take SS.

The first 15 years would primarily rely on the HY fund. Also, the question was asked about lumpy expenses, I would also keep an emergency fund in cash, maybe $20k or more.

Again, I'm not planning on walking away from my current portfolio, but if I wanted to quit today, it seems like it might be a viable plan?

Realistically, the better decision is to w*rk a few more years and get to sub 3% withdrawal from my current balanced portfolio. I understand there's no free lunch, but damn, it was a fun back of the napkin exercise!

Scrabbler, thanks for sharing as always. I had forgotten that you have some stock funds in taxable as well. It was your posts that got me thinking along this path. Sigh... Time to get ready for work.
Panhead, it looks like you are splitting your ER plan into at least 2 pieces - the first is getting to age ~60 using only some of your assets, the ones you have unfettered access to. Then, after age ~60, you can begin tapping into some (eventually more) of your other retirement assets. That is my plan. I call those second set of assets my "reinforcements" such as (1) unfettered access to my IRA, (2) my frozen company pension, and (3) Social Security. I do not expect to exhaust my taxable account's money. Maybe I tap into some principal, principal which has grown by a lot since 2008 despite using its earnings every year since 2009 to pay my expenses.

I use my taxable account's stock fund as a partial inflation guard and to provide some supplemental income for my expenses. In my IRA, I have another stock fund which comprises about 50% of the IRA's total value. The (rollover) IRA's value has doubled since I ERed in late 2008.

I use one of my old muni bond funds as an emergency fund. I hate the idea of setting aside so much money in something which has pretty much zilch return. At least the muni bond fund, a fund whose balance I have lowered since I ERed (because I am in a lower tax bracket), generates about 2-2.5% return. I am willing to take a little risk in principal to get that 2-2.5%. It is an intermediate-term muni bond fund so its NAV doesn't bounce around a lot. And it is mostly tax-exempt. And it has checkwriting privileges which makes it easier to get money out if I need it, something which averages about once a year.
__________________

__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Retirement Income: fixed income, systematic withdrawals or annuities? BBQ-Nut FIRE and Money 29 03-01-2014 12:34 PM
Poll: Do YOU have a floor income % built into your retirement income plans? Midpack FIRE and Money 45 01-02-2014 01:14 AM
DRINKERs (Dual Retirement Income No-Kids Early Retirement) Kroeran Life after FIRE 58 11-24-2009 07:11 PM
Current Income Vs. Retirement Income tgotch FIRE and Money 27 05-30-2008 05:23 PM
Does passive income = Retirement Income? Bree Young Dreamers 14 05-07-2008 09:53 AM

 

 
All times are GMT -6. The time now is 11:47 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.