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Income stream without thinking
Old 12-28-2010, 08:07 AM   #1
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Income stream without thinking

I am getting ready to start winding down my work life and getting into more of a retirement mindset. I have quite a bit saved and it's currently in a sort of generic mix of stocks and funds.

I would like to live off income my investments can generate. I do not want to withdraw from the balance but instead just live off dividends, interest, etc.

My problem is that I don't want to think about it. I want to just invest the money then have the income it generates transferred to my checking account almost like a salary. I know this probably sounds awful to the very active investors I have seen while browsing this forum but I'm just not the type to care or want to care about markets, strategies, etc. I get that that's probably not in my best interest but I am just being realistic with myself as I know I just won't do it.

I have looked at places like Vanguard that have the managed payout funds but have seen mixed reviews about such things.

So, I guess I have two options:
  • Go to a place like Vanguard, pick a managed payout fund and/or various income-focused funds. Invest the money then kick back.
  • Hire a financial planner to actively manage the portfolio and give him or her free reign to do as they please.

If you put yourself in my place as someone who just doesn't want to think about it: which approach would you take?
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Old 12-28-2010, 08:16 AM   #2
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I would have my spouse figure it out.
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Old 12-28-2010, 08:20 AM   #3
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Quote:
Originally Posted by snoopydo View Post
So, I guess I have two options:
  • Go to a place like Vanguard, pick a managed payout fund and/or various income-focused funds. Invest the money then kick back.
  • Hire a financial planner to actively manage the portfolio and give him or her free reign to do as they please.

If you put yourself in my place as someone who just doesn't want to think about it: which approach would you take?
Since giving 'free reign' not only isn't free but is often very costly, that wouldn't be my choice.
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Old 12-28-2010, 08:23 AM   #4
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Based on your 2 options listed, I would select Vanguard managed payout, but have not looked at it myself much.

Some additional details might help:

"quite a bit saved" means? The higher the number, CDs could be appropriate

Generic mix - what % are you looking at for your asset allocation, thus the risk you are willing to take.

What income number are you trying to collect from you investments?

Consider a ladder approach to SPIA?

Sorry more questions than answers.



Quote:
Originally Posted by snoopydo View Post
I am getting ready to start winding down my work life and getting into more of a retirement mindset. I have quite a bit saved and it's currently in a sort of generic mix of stocks and funds.

I would like to live off income my investments can generate. I do not want to withdraw from the balance but instead just live off dividends, interest, etc.

My problem is that I don't want to think about it. I want to just invest the money then have the income it generates transferred to my checking account almost like a salary. I know this probably sounds awful to the very active investors I have seen while browsing this forum but I'm just not the type to care or want to care about markets, strategies, etc. I get that that's probably not in my best interest but I am just being realistic with myself as I know I just won't do it.

I have looked at places like Vanguard that have the managed payout funds but have seen mixed reviews about such things.

So, I guess I have two options:
  • Go to a place like Vanguard, pick a managed payout fund and/or various income-focused funds. Invest the money then kick back.
  • Hire a financial planner to actively manage the portfolio and give him or her free reign to do as they please.
If you put yourself in my place as someone who just doesn't want to think about it: which approach would you take?
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Old 12-28-2010, 09:57 AM   #5
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It it were me, I would definitely NOT hire an FP to do the job.

I don't know your $ amount of investable assets, but you could (just as one example) invest in Vanguard's Wellesley income fund (~40/60 stocks/bonds). Putting $1 million in Admiral shares of this fund will cost you $2,100 yr., or $175 per mo. (0.21% ER). IMO, that's dirt cheap, sound financial management. If you go with the FP who will "actively manage the portfolio and give him or her free reign to do as they please" it will likely cost you 1-2% in fees, plus the potential for higher ERs and load charges in MFs they might choose to invest your funds with. This could potentially cost you $30-40,000 per year in ERs and other fees. And what if he/she chooses poorly performing funds, or takes on too much risk and loses some of your money?

Based on Wellesley's latest quarterly distribution on 12/15/10, it paid-out in dividends and capital gains just a little north of 4%, annualized. If you only wanted to live on the divs and cap gains, you could have the quarterly distribution automatically sent to your MM acct., or checking acct. at your local bank. This seems to represent the simplicity that you are looking for.

OTOH, if you don't want to place all of your money in a single, actively managed fund (Wellesley), you could place it in Vanguard Target Retirement Income fund (0.18% ER), or as a compromise, place half in Wellesley and half in Target Retirement Income.

I would not use the VG Managed Pay-Out funds, as they are new and have fairly high allocations to stocks, IMO.

As stated above, this is just one possible, low-cost solution. There are others available. Hope this helps in your decision!
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Old 12-28-2010, 10:18 AM   #6
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Quote:
Originally Posted by snoopydo View Post
I am getting ready to start winding down my work life and getting into more of a retirement mindset. I have quite a bit saved and it's currently in a sort of generic mix of stocks and funds.

I would like to live off income my investments can generate. I do not want to withdraw from the balance but instead just live off dividends, interest, etc.

My problem is that I don't want to think about it. I want to just invest the money then have the income it generates transferred to my checking account almost like a salary. I know this probably sounds awful to the very active investors I have seen while browsing this forum but I'm just not the type to care or want to care about markets, strategies, etc. I get that that's probably not in my best interest but I am just being realistic with myself as I know I just won't do it.

I have looked at places like Vanguard that have the managed payout funds but have seen mixed reviews about such things.

So, I guess I have two options:
  • Go to a place like Vanguard, pick a managed payout fund and/or various income-focused funds. Invest the money then kick back.
  • Hire a financial planner to actively manage the portfolio and give him or her free reign to do as they please.
If you put yourself in my place as someone who just doesn't want to think about it: which approach would you take?
I think you have a lot more options than these two unappetizing changes in your investment portfolio.

For example a third option might be to have your dividends funneled to a money market account. Each January, set up an automatic monthly withdrawal from that account of 1/12th of the previous year's dividends, to your checking account. Surely adding up your dividends once a year (or getting the total from your Vanguard tax statement) and dividing by 12 can't be too overwhelming.

Or, for a fourth option that presents an even simpler approach, each January just withdraw the previous year's dividend totals to your savings account, and then "pay" yourself 1/12th of it each month by moving that much into checking.

The reason for basing your checks on an average of the previous year's monthly dividends, is that funds may provide dividends monthly, quarterly, or yearly, and this would smooth out your monthly paychecks so that you aren't getting a huge amount one month, and very little the next.
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Old 12-28-2010, 10:33 AM   #7
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I would definitely not hire a FP and let him/her have free reign over your finances. With this approach, down the road you'd probably wished you had managed your finances yourself.

Otherwise, a set it and forget it fund depends on your risk tolerance and how much generated income you plan/need. I think with any of the Vanguard funds, you can choose to have the dividends placed in a checking account or money market fund.

As for me, I try to keep it simple, but not too simple by following the indexes (total bond, total US stock, total international stock) and then rebalance each year. It isn't totally set it and forget it, but balance it and not worry about it -- at least not worry about it too much
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Old 12-28-2010, 11:58 AM   #8
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Most of my investments that are directly with the fund companies are set up to transfer all distributions in cash to my checking account. Oddly enough I can't really do that with Fidelity that easily. So it is easy enough to do this without special fund types. Of course you might want to select funds that pay large monthly dividends.
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Old 12-28-2010, 12:25 PM   #9
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+1 to everyone who has nixed giving a planner free rein. The only way I would even consider involving a financial planner in such a decision would be to pay a fee-only planner to help you set up your portfolio and withdrawal rate to fit your income needs, amount of assets, risk tolerance and desire for simplicity. If you take that route, I'd suggest you also ask the planner to make the plan as simple as possible from a tax standpoint, (assuming you are going to file your own income tax return).

I also think that with your desire for simplicity, an SPIA might be appropriate for at least part of your plan. You write a check to the insurance company, they send you a check every month for the rest of your life. You can't get much simpler than that.
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Old 12-28-2010, 01:38 PM   #10
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Originally Posted by snoopydo View Post
My problem is that I don't want to think about it. I want to just invest the money then have the income it generates transferred to my checking account almost like a salary.
If your top priority is not having to think about it, your most logical option is an annuity. However, that might not be the best financial decision in today's low interest rate environment and at your age. I agree with all those who say you should not choose your second option.

My top priority is not to run out of money. To achieve that goal, I believe it is worth my while to become informed and to monitor the performance of my investments. YMMV.
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Old 12-28-2010, 01:57 PM   #11
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Thanks for all your replies.

I think you are all right about a FP. When you subtract 1% or more from returns for their fees then the advantage to the actively managed portfolio is negated by the loss in fees. I suppose I knew that but I didn't consciously make the connection.

So it sounds like, in general, everyone is leaning toward something like Vanguard funds. Be it one all-in-one fund or a selection of fund types.

I see that support on the Managed Payout funds is sort of 50/50. I personally like that sort of approach as, to me, the idea of a set monthly payout is appealing. Are there any specific downsides you know of for those type of funds other than the fact they are so new so there is a lot of future unknown?
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Old 12-28-2010, 08:08 PM   #12
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snoopy,

I always thought that I could lose my money as well as anyone. Why should I pay someone to lose my money, then?
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Old 12-28-2010, 08:27 PM   #13
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Thanks for all your replies.

I think you are all right about a FP. When you subtract 1% or more from returns for their fees then the advantage to the actively managed portfolio is negated by the loss in fees. I suppose I knew that but I didn't consciously make the connection. (snip)
And that is assuming there actually is an advantage to the actively managed portfolio, which is by no means certain.
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Old 12-28-2010, 11:19 PM   #14
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I like the IDEA of the VG managed payout funds, my reservation is that they are too new for me to really trust them. I better understand and trust index funds and, because of their long history, I trust VG Wellesley and some of their other active, low fee funds. DWs IRA is 65% Wellesley and 35% Star, and she can carry on managing these if I amno longer around.
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Old 12-28-2010, 11:37 PM   #15
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Originally Posted by snoopydo View Post
Thanks for all your replies.

I think you are all right about a FP. When you subtract 1% or more from returns for their fees then the advantage to the actively managed portfolio is negated by the loss in fees. I suppose I knew that but I didn't consciously make the connection.

So it sounds like, in general, everyone is leaning toward something like Vanguard funds. Be it one all-in-one fund or a selection of fund types.

I see that support on the Managed Payout funds is sort of 50/50. I personally like that sort of approach as, to me, the idea of a set monthly payout is appealing. Are there any specific downsides you know of for those type of funds other than the fact they are so new so there is a lot of future unknown?

Snoopydo,

Last January, the thought of having an automatic monthly payout such as a Payout Fund was appealing to me but during year I nixed the idea and as of now, have sold all my investment in it. For me the reason wasn't performance but I track my allocations and since this is a moving target in the payout fund, I found the idea of figuring out how much was allocated to what asset class in my overall picture cumbersome. I think potential downsides are that the payout funds do carry pretty much stocks which can have pretty big swings (if I was to put all of my money in one fund, I'd prefer a balanced fund like Wesslely or Wellington). Also, the payout varies from year to year, so you'd need to do some thinking/budgeting for income each year, unless you have such a high amount that the income generated is just gravy.

I guess a question is, if you put your money in a fund, will that generate enough income you'd be satisfied with each year? As there will be good years and bad ones.
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Old 12-29-2010, 05:12 AM   #16
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Your question sets off an alarm to me.

I hope your overall retirement plan has more substance to it than your description in the OP.

You could loose a substantial amount of your money! You could run out of money early!

Here is some sound advice: Spend a little time educating yourself and create a comprehensive plan.

The Otar book is listed in a recent thread... it can be downloaded free. Read it and go to your library and check out some books on retirement financial management (during the distribution phase).

If you are unwilling to spend the time yourself, consider seeking the advice of a reputable financial planner to help you build a plan. There are plenty of posts on the forum about what to look for in a financial planner.


SPIAs produce an income that one does not have to think about. But if you decide to go that route, do your research and understand what you are buying (it is a permanent decision). IMO - Only do business with highly rated insurance companies!
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Old 12-29-2010, 07:47 AM   #17
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All good advice. I have thought about buying a small SPIA when I reach SS age. SPIA + SS = budget. Then put the rest in a conservative target or balanced fund. That's pretty much full autopilot. But, might just keep on keeping on as is. I renew a CD here and there, own a few stocks and really don't have to do much to follow it.
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Old 12-29-2010, 01:16 PM   #18
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Thanks for all your replies.

...
I see that support on the Managed Payout funds is sort of 50/50. I personally like that sort of approach as, to me, the idea of a set monthly payout is appealing. Are there any specific downsides you know of for those type of funds other than the fact they are so new so there is a lot of future unknown?
There really isn't anything wrong with them, but my concerns are mostly with their holding of the market neutral fund, overweighting of REITs, and the 10% or so in the 'other' category. Also, the expense ratio is higher than alternative Vanguard options. Look them up on the Vanguard site.

You might just as well roll your own allocation with vanguard or buy one of the target retirement funds. It isn't hard to transfer funds via their web site to your linked bank account, which you could do as necessary.
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Old 12-29-2010, 01:54 PM   #19
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It it were me, I would definitely NOT hire an FP to do the job.

I don't know your $ amount of investable assets, but you could (just as one example) invest in Vanguard's Wellesley income fund (~40/60 stocks/bonds). Putting $1 million in Admiral shares of this fund will cost you $2,100 yr., or $175 per mo. (0.21% ER). IMO, that's dirt cheap, sound financial management. If you go with the FP who will "actively manage the portfolio and give him or her free reign to do as they please" it will likely cost you 1-2% in fees, plus the potential for higher ERs and load charges in MFs they might choose to invest your funds with. This could potentially cost you $30-40,000 per year in ERs and other fees. And what if he/she chooses poorly performing funds, or takes on too much risk and loses some of your money?

Based on Wellesley's latest quarterly distribution on 12/15/10, it paid-out in dividends and capital gains just a little north of 4%, annualized. If you only wanted to live on the divs and cap gains, you could have the quarterly distribution automatically sent to your MM acct., or checking acct. at your local bank. This seems to represent the simplicity that you are looking for.

OTOH, if you don't want to place all of your money in a single, actively managed fund (Wellesley), you could place it in Vanguard Target Retirement Income fund (0.18% ER), or as a compromise, place half in Wellesley and half in Target Retirement Income.

I would not use the VG Managed Pay-Out funds, as they are new and have fairly high allocations to stocks, IMO.

As stated above, this is just one possible, low-cost solution. There are others available. Hope this helps in your decision!
+1 on this approach.

Vanguard allows you to easily pull Wellesley's quarterly dividends over to your bank account. This approach allows automatic dividend withdrawal, automatic rebalancing, and long term portfolio growth to keep up with inflation. If you want to raise your stock exposure, mix Wellesley with Wellington. You may have to occasionally rebalance between the two funds to maintain your target stock/bond mix, and the dividends will be smaller than just straight Wellesley.

Pretty much gives you what you're looking for - someone to manage/maintain your investments, steady stream of dividend income, and little to no effort required on your part.

Unlike an annuity - you've delegated control of your investments, and can change your mind at anytime....
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