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Kitces: Four Pillars for retirement income portfolios
Old 03-22-2017, 10:36 PM   #1
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Kitces: Four Pillars for retirement income portfolios

Another good post from Kitces.

https://www.kitces.com/blog/four-pil...ins-principal/

This is old hat to a lot of you here, but he makes a good case for what is often referred to here as the "total return" approach to financing ER. That is, get your cash flow from Interest, Cap gains, Principal and Dividends, emphasizing one or the other as conditions dictate.
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Old 03-23-2017, 02:44 AM   #2
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Interesting read. Thanks for the tip.
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Old 03-23-2017, 10:04 AM   #3
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Thanks for a good read and a reminder.

I especially liked this quote:

Quote:
Diversification across all four pillars of retirement income can protect a retirement plan!
Diversification is, IMHO, the most important aspect of a retirement financial plan. I have said often on this site that it is best to have three legs of the stool - personal savings, pension/401K/403B, and Social Security. Ideally, one could survive comfortably on two of the three legs (just skip the flight to Paris once a month for dinner at Le Meurice.

Further diversifying the invested money provides that additional layer of protection. IOW - prevention is worth a pound of cure.

Diversification - don't leave work without it.
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Old 03-23-2017, 10:11 AM   #4
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For the newbies:

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But again, that’s actually the whole point of relying on (all) four pillars of retirement income. You don’t necessarily know which one will produce the desired results from year to year, but diversification gives you the best shot to get it from somewhere, without taking on excessive risk or portfolio concentration in stretching for yield along the way.
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Old 03-23-2017, 02:08 PM   #5
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kinda missed the defined benefit and social security pillars - had to ding him for that one

he also needs to change that photo - i feel like i'm being flipped off every time i go to his page
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Old 03-23-2017, 02:49 PM   #6
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kinda missed the defined benefit and social security pillars - had to ding him for that one

he also needs to change that photo - i feel like i'm being flipped off every time i go to his page
30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.
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Old 03-23-2017, 03:02 PM   #7
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30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.
that's a pretty solid stool!

I have those but for the UK SS. My rental income is very modest too.
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Old 03-23-2017, 03:39 PM   #8
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Quote:
Originally Posted by Chuckanut View Post
Thanks for a good read and a reminder.

I especially liked this quote:
Quote:
Diversification across all four pillars of retirement income can protect a retirement plan!
Diversification is, IMHO, the most important aspect of a retirement financial plan. I have said often on this site that it is best to have three legs of the stool - personal savings, pension/401K/403B, and Social Security. Ideally, one could survive comfortably on two of the three legs (just skip the flight to Paris once a month for dinner at Le Meurice.

Further diversifying the invested money provides that additional layer of protection. IOW - prevention is worth a pound of cure.

Diversification - don't leave work without it.
The article is talking about diversification over:
Quote:
Ultimately, these components of interest, dividends, capital gains, and principal form the four pillars of retirement income planning.
Not about having pension, SS, and personal savings /IRA/401K a.k.a. the three legged stool.

I see it more as a warning not to take an "income only" approach, ignoring total return.

Seems like retiring solely on investments meets Kitces criteria just fine.
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Old 03-23-2017, 08:49 PM   #9
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that's a pretty solid stool!

I have those but for the UK SS. My rental income is very modest too.


A 5 legged stool is PRETTY solid? Heck I am retired on a leg and a half stool. I am surprised the thing doesnt fall over, lol.
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Old 03-23-2017, 09:01 PM   #10
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that's a pretty solid stool!
In one context that would be bad.....but in this one it's good.
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Old 03-23-2017, 09:04 PM   #11
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The article is talking about diversification over:

Not about having pension, SS, and personal savings /IRA/401K a.k.a. the three legged stool.

I see it more as a warning not to take an "income only" approach, ignoring total return.

Seems like retiring solely on investments meets Kitces criteria just fine.
Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.
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Old 03-23-2017, 09:06 PM   #12
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Originally Posted by nun View Post
30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.
That's not a stool: it's a 10 foot bench!

My four legs are:
Canadian CPP and OAS (will try to avoid clawback)
Rent
RRSPs/TFSAs/taxable investments
Holding company

There were rumours that yesterday's Federal Budget would come down hard on professional corporations (which my holding company originated as). There were also rumours about increased taxes on capital gains. Neither of those things happened, but they may yet come to pass. I will stay diversified.
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Old 03-23-2017, 10:00 PM   #13
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Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.
Yet that is not what the article discusses. It's definitely not talking about three-legged stools.
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Old 03-23-2017, 10:04 PM   #14
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Frankly I read the article and it doesn't apply to me. I'm in the same 5 legged or maybe 6 legged stool as nun. I'm only invest in stocks for my IRA and non IRA. My bond is my rental. That's where I clip my coupons.
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Old 03-23-2017, 10:14 PM   #15
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Our social security income will be quite low and will probably only cover taxes incurred by the extra income plus Medicare premiums with almost nothing left over. So - at least it will cover something, but it's barely a leg.

So - we are pretty much dependent on our investments. We take a total return approach. We are widely diversified across major asset classes. When CDs are a good deal relative to bonds we take advantage. So interest, dividends, cap gains and principal all play a part. And I'm just fine with this, it doesn't concern me at all.

Overall we hope over the long run our nest egg grows enough after withdrawals to keep up with inflation, so at this point we don't feel like we are dipping into "principal". Still, if we ended up with say half of where we started, inflation adjusted, I would feel like we did great. So I'm not against dipping into principal, in principle, over a lifetime.
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Old 03-23-2017, 10:22 PM   #16
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I think it's much harder and it takes skills to live off investments. I admire people who can do that. If it were me, I might be tempted to buy an immediate annnuity.
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Old 03-23-2017, 11:49 PM   #17
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I think it's much harder and it takes skills to live off investments. I admire people who can do that. If it were me, I might be tempted to buy an immediate annnuity.
Skill? Not so much. Discipline maybe. You just set up a simple asset allocation. Rebalance rarely, and try to ignore the news/noise. I don't see that as requiring skill. Lots of people here are doing this - some with just one or two funds!

Immediate annuity - well I might decide to purchase such a thing when I'm considerably older and the payout is much greater. But at this time I'm not ready to make the such a long-term bet on the insurance companies, nor take the current payout rates.
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Old 03-24-2017, 12:33 AM   #18
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Skill? Not so much. Discipline maybe. You just set up a simple asset allocation. Rebalance rarely, and try to ignore the news/noise. I don't see that as requiring skill. Lots of people here are doing this - some with just one it two funds!

Immediate annuity - well I might decide to purchase such a thing when I'm considerably older and the payout is much greater. But at this time I'm not ready to make the such a long-term bet on the insurance companies, nor take the current payout rates.
+1

What Audrey1 said.
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Old 03-24-2017, 07:44 AM   #19
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Yet that is not what the article discusses. It's definitely not talking about three-legged stools.
Agreed, it's about diversification and income from your investments ie just one "leg". I think we got to the "3 legged stool" via a criticism that the article should have considered the other two legs as those will influence your income strategy from IRAs etc.
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Old 03-24-2017, 09:57 AM   #20
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Right, the article is about income from portfolios to spend and not about income from other sources It's right there in the title.
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