My approach to retirement-What say you?

[Quantum Sufficit]

I would like to run this by the crowd here. I currently have a diversified portfolio of 65% equities/35% total bond market type bonds. I am 46 and want to pull the plug at 53. My current portfolio size is 1.2M. I will not have any pensions and healthcare will be all on us (wife and I). Home is worth 400k and is paid off. Office is worth at least 150k and is paid off. This plan below will not likely receive a warm reception here but here goes:

I hope to save at least 150k annually for the next 6 years. Most of the 1.2M is after tax money currently invested in a very tax efficient "boglehead" style portfolio of index funds as above. ok....here is the plan.

By the time I reach 53, I would like to have a 2M dollar portfolio not including any of the real estate. At retirement (or as soon as I hit 2M), I will liquidate the portfolio....and ...invest it in the Vanguard Long term corporate portfolio.

Right now, tax considerations are paramount for me and maybe I am greedy but I would like a shot at a bit more than 2M, so I am keeping the above boglehead portfolio. My annual expenses all in are about 50k including just about everything I can think of as well as 2 nice vacations a year.
I would like to see the NAV of the Long corporate fund back under 10 dollars a share. If that is the case and using 2M and a 9.50 nav we have

2M/9.5 = 210,526 shares x 0.044 dividend = 9,263 per month dividend

This dividend payout has decreased with falling interest rates but that is the current dividend and I would think it possible to fall further but not by much further.

How many of you have a 5% withdrawal rate that yields more than 2x annual expenses without touching principle. Nonspent dividends are reinvested at the end of the month into more shares of the fund. If need be, we have no heirs I would tap a reverse mortgage at age 62. This does not include any social security and does not include sale of office building near retirement.

If everyone clings to 4% as the absolute golden rule (with inflation adjustment) what is wrong with 5% dividend rate, no use of principle, with reinvestment of excess as an inflation hedge? I would never consider an annuity in these low interest rate times. I would be giving away my principle for the same payout rate of about 5% (I ran the numbers).

I considered abandoning the 65%/35% portfolio now but the NAV of the bond fund is too high at 10.50 to dump 1.2 million into the fund right now. If it was 9.50, I would do it today and just keep buying shares of this fund until retirement accumulating at a rate of 150k/9.50= 15,800 shares annual. I know this seems rather simplistic and naive to people but there are plenty of retires who live on CD income (good luck with that now) and are risk averse, avoiding stocks completely. I have seen 13 years of stocks going nowhere.

What if the sequence of returns is similar (or worse) in 2019? Would I want to take 4% of a declining portfolio-I know it would make me very nervous to wonder whether this black swan was right around the corner. There are risks everywhere I know this but this seems as good a plan as any other.


Let the flames begin!

 

[RetireBy90]

I wouldn't use this plan my self but you have to live with it not me. However, if your needs are $50K and you would have $2M you should be able to make mistakes along the way and still get your $50K. Plenty of room for error corrections.

I would think that one risk to your plan is risk that inflation outpaces your returns. If you don't have any growth in the portfolio then the returns will provide less after inflation over time, a whole lot less. Could cut your $120K in half in 10 to 15 years.

Another risk is what if the return on your portfolio doesn't stay at 5%? What if the NAV of the bonds goes down faster than rates go up? You could sell and then buy other assets to provide your needed income but remember no guarentee that you will continue to get the same dividend for 30 or 40 years.

Another risk is concentration. If something happens and bonds don't provide a reasonable return you are stuck with a non-reasonable return. Course, you would monitor this I'm sure and could shift your strategy.

An other risk is what if your retirement needs go up and your $50K doesn't meet your needs. Your plan would have you pulling in about $120K so seems you would be able to exceed your $50K and still be ok.

Just a quick look at some risks you don't seem to have covered in your post. Most important risk is the inflation risk followed closely by risk of your return not staying at 5% and the concentration risk.

Just my thoughts.

 

[MichaelB]

When you say Vanguard Long Term Corporate portfolio do you mean Vanguard Long Term Investment Grade Bonds?

100% fixed income for very long periods of time is not a good idea. Try FIREcalc. I looked and over 40 years it shows a failure rate of more than 60%.

 

[Quantum Sufficit]

I will try firecalc. What did you use for parameters?

 

[BigE]

To me it seems that 50k total annual expenses is to low a figure to include health insurance on your own for you and spouse. Health insurance is the one expense I really worry about when and if I am ever able to retire.

 

[Quantum Sufficit]

I can cover health insurance for 600 a month for the both of us.

 

[LOL!]

You have several years to refine your strategy.


And to change your mind.

 

[jclarksnakes]

Initially seems like a pretty good plan but there problems that I see which would make me nervous. Your plan lacks diversification. It is always safest to have diversification in a portfolio. Longterm fixed income could be eaten alive by inflation. I also wonder if someone who lives in a 400K house can really live on 50K a year. Admittedly in some areas a 400K house is no big deal. In many places a 400K house is a McMansion and could be expensive to maintain.

 

[Independent]

Here's a simple calculation. $2,000,000 / $50,000 = 40.

You could cover 40 years of $50,000 spending from the principal alone. If the bonds provide 0% real return, and you die before 93, you don't run out of money.
If you get 1% real, then you can last to 103. Of course, you've already done the math, 2.5% real and you can go indefinitely.

So my thought is: What's the chances that 8 years from now you will be able to look forward at those kinds of returns? At one time you could have built a TIPS ladder at 2.5%, but today it would be 0%. I won't guess on where we'll be 8 years from now.

I'd think about the $50k. Is that before or after tax? (Remember that you pay tax on all the interest, not just the real portion.) Have you allowed for house repairs, increasing health costs with age, etc?
If you're currently living on $50k while saving $150k, then you're a pretty frugal person and probably have a good handle on your expenses, but it's worth a careful look.

 

[MichaelB]

With only fixed income, due to inflation one runs out of purchasing power long before running out of money.

I will try firecalc. What did you use for parameters?

I just plugged in the numbers you gave in the OP. $2M portfolio, $50K spending, 100% LT corporate bond (still not sure about that) and 40 years. FIEcalc says 36% survival.

 

[teejayevans]

I can cover health insurance for 600 a month for the both of us.

Today, yes, but remember HI has it's own rather large inflation rate (~10%), if you retire at 53 AND are in perfect health (you develop a health condition between now and then, all bets are off), it may be 600 today if your 46, but 7 years from today, I would assume it would be double that.
TJ

 

[Katsmeow]

Are you eligible for SS? What kind of SS can you and your wife expect?

Does the $50k in spending include all your spending or is that $50k on top of spending SS?

 

[ziggy29]

100% fixed income for very long periods of time is not a good idea. Try FIREcalc. I looked and over 40 years it shows a failure rate of more than 60%.

And that's even when considering that we've had a ridiculous 28-year bull run for bonds. And it still fails 60% of the time? That would *really* worry me.

 

[MichaelB]

And that's even when considering that we've had a ridiculous 28-year bull run for bonds. And it still fails 60% of the time? That would *really* worry me.

Exactly. Allocating 30% to stocks (S&P 500 or large value) and leaving the remaining 70% in LT corporate improves the success to 100%. While nothing is really 100% or risk free, most people would see 30% equities as a low risk portfolio.

 

[Quantum Sufficit]

I just don't see it. I can get 5% from the portfolio annually, a full percentage more than the 4% rule and not spend principal. My 400k home is a condo, and I have automatic budgeting for repairs, in the HOA fees (currently 280 per month). The 50 k expenses break down like this:

Monthly Budget
**Could be reduced/eliminated if necessary

Condominium fees
280

Property taxes
400

Cable television
75

Automobile lease
400

Automobile fuel
250

Auto Insurance
200

Cell Phones/data
150

Medical Insurance
700

**Vacation fund
350 (would provide 2 vacation/yr)
**
Groceries/misc
1000

Utilities
200

Condominium Insurance
15

Dining out
100

Clothing
150
**Entertainment
100

Sewer/water
15


Total
4385





52620 annual

Current progress As of 6/7/12--->
61,248 Annual bond dividends if monies in long bond (1.2 million divided by 10 nav x 0.044 per share)

Again I ask how many retirees have STARTED THEIR RETIREMENT TODAY (OR WHENEVER) WITH FULLY 2X their annual needs while simultaneously NOT invading principal?

 

[REWahoo]

I just don't see it.

You aren't accounting for the impact of inflation.

 

[btbw2380]

I agree with the original observation that plenty of people have had a successful retirement while avoiding the stock market. How many stories were there about people forced to look for work (with a lot of looking without landing) or 401k's turning into 201k's during the recent stock market collapse and people not knowing how they would get by. Worst of it, many bailed locking in gigantic losses. Didn't hear those stories about those invested very conservatively. The only inflation that matters is each individual's personal rate. The OP has a condo paid for so no worry there for his biggest expense item. Using some assumed aggregate number for the convenience of calculations is pointless and misleading. SS, a reverse mortgage, selling the office building - all future safety nets in addition to his income stream he proposes. I'm betting on the OP being just fine, sleeping well at night and avoiding becoming a Walmart greeter like so many burned in the stock market.

 

[Independent]

I just don't see it. I can get 5% from the portfolio annually, a full percentage more than the 4% rule and not spend principal. My 400k home is a condo, and I have automatic budgeting for repairs, in the HOA fees (currently 280 per month). The 50 k expenses break down like this:


Again I ask how many retirees have STARTED THEIR RETIREMENT TODAY (OR WHENEVER) WITH FULLY 2X their annual needs while simultaneously NOT invading principal?

If you get 5% nominal from $2 million, that's $100k. If you really don't want to "invade principal", you need to stick the inflation rate back into the fund. If inflation is 3%, you need to use $60k of your interest to maintain the purchasing power of your fund. That doesn't leave you with $50k of spending money.

I'm not saying it won't work. In fact, a constant 5% nominal interest and 3% inflation will last longer than you will, you just have to get used to a shrinking real portfolio. Plus, you've got the office building, SS, and the market value of the condo to back you up.

But it's worth thinking about inflation and the uncertainty there.

 

[jclarksnakes]

I just don't see..............................................
Again I ask how many retirees have STARTED THEIR RETIREMENT TODAY (OR WHENEVER) WITH FULLY 2X their annual needs while simultaneously NOT invading principal?

You seem to think that the answer to that question is pretty important. Those of us who are FI and RE have all arrived where we are through different routes. For most of us income in retirement comes from or will come from some combination of investments, pensions and SS. For DW and I with DW still working we will not be in the position of STARTING retirement with 2X annual needs while not invading principal. However a couple years down the road after DW retires and starts drawing her pension and after we both are getting SS and a couple of our deferred annuities come on line we will have income over twice our annual needs. The important difference between our situation and yours is that most of our income (the pensions and SS) is COLA'd and so we will not have to worry too much (knock on wood) about inflation. Your numbers looks great TODAY but a couple years of high inflation or even a couple decades of low inflation like we have now will put a BIG hurt on your plan.

 

[Katsmeow]

I just don't see it. I can get 5% from the portfolio annually, a full percentage more than the 4% rule and not spend principal.

The 4% is inflation adjusted. Let's say you were retiring with a portfolio of $2 million. 4% the first year is $80,000 and coincidentally that is how much money you want to spend each year.

What the 4% rule says is that in year 2 you take $40,000 but adjusted by inflation. So, let's say there was 3% inflation, then the next year you take $82,400. Let's assume inflation was 3% that year, so the third year you take $84872.

Let's assume annual inflation of 3%. After 10 years to have the same spending power of $80,000 a year you would withdraw from your portfolio 107,513. After 40 years, you would need to withdraw $260,963 a year.

And, that is what you would be doing under the 4% rule. Remember, that under the 4% rule you are not withdrawing 4% of the portfolio each year. Rather, you are withdrawing 4% of the initial portfolio, adjusted by inflation each succeeding year.

The reason this "works" is because the portfolio is invested in both equities and bonds so it has an overall return most of the time that is greater than the 3% rate of inflation.

The problem with your plan is that you are proposing an investment that isn't likely to beat inflation for the long term. Therefore, you will either need to withdraw more to keep up with the spending you need or, if you don't, you will have to decrease your "real" spending to match what you are withdrawing.

 

[jclarksnakes]

No flames. I actually find this discussion interesting. You seem to not believe what we are saying about inflation. I know another way to look at it and you have 6 years before you pull the trigger on your plan. So here goes.
I am going to pick six items from your projected budget.
1. Condominium fees $280
2. Property taxes $400
3. Automobile fuel $250
4. Automobile insurance $200
5. Medical insurance $700
6. Utilities $200
I bet you a beer that before you are 53 years old at least one of those items will be 50% higher.

 

[Katsmeow]

FWIW, I think your budget doesn't mention a lot of things.

For example, you have automobile lease, fuel, and insurance but what about maintenance, repairs, registration, license renewal and other driving related costs such as tolls and parking?

I assume you have no pets or hobbies and will never have any over the next 40 years...at least none that will exceed your $100 a month entertainment budget.

I assume you spend nothing on physical activity -- no gym or Y fees, no sports, no exercise equipment, no exercise paraphernalia and you plan to never spend any money on that type of activity.

I was curious about the $15 a month for condominium insurance. What does that cover? That seems really low if it is meant to cover your condo and all your belongings and liability insurance. Do you have an umbrella policy by the way?

You budget $700 a month for medical insurance (which it is unclear if that is a guesstimate or a real number). What is striking though is that it is apparently a policy that will cover 100% of your medical, dental, vision, and hearing costs, as well as all prescription and OTC medications, since you have nothing budgeted for those things.

It is also strikes me that you do not think that you will ever have to buy any furniture, or any tools or supplies or replace appliances or linens, or replace a computer, or television, or printer. Or even, decorative items such as a new picture or a new rug, etc. While these are not expenses that will occur every year, it occurs to me to think that you will likely have some of these expenses over the years but none are budgeted for.

I also note that you budget nothing for gifts.

And, of course, you have budgeted nothing for income taxes.

 

[Quantum Sufficit]

ok, Excellent points catsmeow. The condo association fee will be likely to increase. The 1000 miscellaneous/groceries will easily cover most of what you added. Groceries are roughly 500 per month for my wife and I. Our condo insurance covers all interior replacement costs. In the 280 condo fee is all structure including all interior structure to the sheetrock, floors etc including flood. The condo fee is including money for replacement items like roofs etc. Our utilities budget is last 3 years, stable. Health insurance could be a problem. We will be in the 15% income tax bracket at 100k per year. The health insurance is actually currently 540 combines and that is all in everything. I think my personal rate of inflation will be substantially lower than 3%. If I am wrong, I have 250k coming from a reverse mortgage at 62 (will provide another 1000 per month in income), social security at 62 provides another 1500 per month in income, paid office building provides 150,000 at retirement (15,000 shares x 0.044= 660 per month in income), 7920 annual. Therefore, my backups are poised to provide an additional 38k in annual income.

If I use 60,000 as my needs in retirement and 3% rate of inflation I will need:

About 80k in 10 years, 108k in 20 years and 145k in 30 years.

May I ask how many of those who retired here in 2002 are drawing 20k more out of their portfolio than they started drawing in 2002 If you are, you better plan on going back to work soon given the last 10 years return. How many of you who retired in 1990 are drawing fully 2x the amount you did in 1990?? I really do understand inflation could be a big problem for a fixed income investor like me but....are we overstating the real effects here? I am not trolling here. Just trying to decide if I want this approach or a total return 4% inflation adjusted withdrawal approach. Something about consuming principle scares me...can't really help it.

 

[yakers]

I retired in 2008 and I have been spending similar amounts each year. But this has been a time of low inflation and I have had some expenses decrease (youngest son just finished college). If we were to hve a bought of inflation like in the 80s the numbers would look different. I have a COLAd pension so I am a bit less afraid of inflation but I still need to keep an eye on it. And if I were solely dependent on my investments I would pay a lot of attention to inflation issues.

 

[Katsmeow]

Just trying to decide if I want this approach or a total return 4% inflation adjusted withdrawal approach. Something about consuming principle scares me...can't really help it.

I think you are talking about two different things here. One is asset allocation and the other is withdrawal strategy. You seem to assume that if you have a more traditional asset allocation that includes equities that this somehow equates to consuming principle. I mean you could set up a withdrawal strategy that set a floor that you wouldn't let you plan go below. For example, on Firecalc I think you can set it so that your portfolio at the end doesn't go below a specified number.