Need 3% of $700K Annually. What AA is best?

[Cheesehead]

We have a pension and social security, but need an additional $18K (after taxes, 25% bracket) a year for living expenses. We are retiring and now need for $700000 to get 3% annually for income and I’d like some advice as to how to do this. We plan to have them send us a monthly check. Additionally, we have four years of living expenses in cash in laddered CDs.

I was thinking of splitting 50/50 into Wellington & Wellesley, adding some international stocks, but I am cautious as to their average bond duration of 6.5 years, with interest rates about to rise. This I figure pushes me into making my own index AA using short bond funds, correct? We are conservative investors. Or can someone recommend a fund where I can determine the stock to bond ratio and have shorter durations in the bonds?

I subscribe to a Vanguard newsletter and for an Income portfolio but they are 66% stock. I also subscribe to Bob Brinker and his AA for Income is 50/50.

I would prefer to not have to rebalance, I'd like a fund which will do it for me. I considered Vanguard Conservative Life Strategy but their bonds average duration is 6 years. I appreciate your ideas and as to how you produce regular income in retirement. Thanks!

 

[TreeHugger]

Yield of VYM or SCHD is almost 3%. Attractive especially in light of low tax rate ,high ratings and ability to keep up with inflation.

 

[ejman]

The Vanguard High Dividend Yld Idx Inv yields about 3% a year. Of course, being all stock it can have very large swings in value but the dividend yield would probably remain fairly constant https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0623

 

[TreeHugger]

The Vanguard High Dividend Yld Idx Inv yields about 3% a year. Of course, being all stock it can have very large swings in value but the dividend yield would probably remain fairly constant https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0623

It would more likely grow at a rate that beats inflation.

 

[Cheesehead]

I presently have 5% in Vanguard Dividend Appreciation Index:

https://personal.vanguard.com/us/funds/snapshot?FundId=0602&FundIntExt=INT

Is that comparable?

 

[TreeHugger]

I presently have 5% in Vanguard Dividend Appreciation Index:

https://personal.vanguard.com/us/funds/snapshot?FundId=0602&FundIntExt=INT

Is that comparable?

That fund is more comparable to SCHD then to VYM. It is collection of wide moat companies just like SCHD.

VYM has more of the a Value tilt.

Out of 3 of them I find SCHD best because it has relatively high yield, high quality companies and lowest fees. That would my choice if I had to select only one of them.

 

[pb4uski]

I smell "gone traveling".

 

[pb4uski]

Pick either Wellington or Wellesley, whichever is more comfortable for you, set up a $1,750/month automatic redemption and then declare victory.

 

[Cheesehead]

PB: I'd like to do just that, but what about the longer duration of their bonds?

 

[pb4uski]

So what? The bonds will go down when interest rates go up but interest rates will go up because the economy is doing well, which means stocks will be going up. You're in it for the long haul.

If you really want to mitigate interest rate risk then you could go with Total Stock and CDs for fixed income.

 

[Koolau]

I suppose all of this depends upon how reliably you need the $18K to be. Many of us here take what we need from our portfolios, but are willing to take more or less, depending upon whether markets are up or down. After a 2008ish scenario, some folks would not have taken all of their usual withdrawal. Of late, they might have taken a bit more.

Most of us here like Wellesley/Wellington as part of a balanced portfolio, but counting on it for a reliable 3% withdrawal, year in and year out, might not always work going forward.

If $18K/year is set in stone, there's the possibility of an SPI annuity, but few around here like them. Sorry to be so much help! Oh, and YMMV.

 

[nun]

A $700k joint SPIA (both people 65 years old) will pay 5.7% or around $40k a year. So why not use around half of the $700k to buy an SPIA and generate $20k for life and then invest the rest.

 

[Cheesehead]

Thanks Nun, but we looked into that. We couldn't afford one with an inflation adjustment so over the course of a 30 year retirement the purchasing power of those dollars would drop quite a lot.

 

[nun]

Thanks Nun, but we looked into that. We couldn't afford one with an inflation adjustment so over the course of a 30 year retirement the purchasing power of those dollars would drop quite a lot.

Yes, but the $350k in something like Wellesley could cover you for inflation. Anyway if you only need 3% and you can get 5.7% from an SPIA do you really need inflation indexing? The 50/50 SPIA/Wellesley etc gives you a base guaranteed income and some flexible withdrawals to cover spending increases.

 

[Cheesehead]

I am afraid of giving up control of the funds for an annuity. I am developing an AA idea as:

$300K Wellesley, $300K Vanguard Lifestrategy Conservative and with the remaining $100K, I'll follow the Income models, perhaps Bob Brinker's newsletter or Dan Wiener's Vanguard newsletter, and see how that does. In this way, as long as there are no severe crashes, I feel I can get the 3% annually even in a bear market or recession. $21000 less taxes = $18000 or so.

I wish I could find an online calculator to stress test it. I am wondering about how to test the allocations without messing up my online Fidelity planner. Even if I started a fresh one it will require many assumptions whereas I only want to see how these three Das will do in the future. I am familiar with many of the online retirement calculators but most want you to put in many assumptions regarding, SS, expenses, etc. but I just want to know how long my AA would last for a specific length of time.

So...does anyone know of an online calculator where I can put in an amount of money, the funds ticker symbols, the length of time I need it to last, and then it will run Monte Carlo simulations with predicted inflation, various market conditions, etc? Perhaps Morningstar with a subscription?

Thanks

 

[nun]

I am afraid of giving up control of the funds for an annuity.

You are exhibiting the classical "annuity puzzle" behaviour. If 3% retirement income is truly your goal then an SPIA is perfect. If you want to leave a legacy then an annuity would not work.

You are in a great position and can afford to buy the guarantee of an annuity, don't be afraid to annuitize if it fulfills your requirements.

 

[Koolau]

I understand your concerns with an SPIA. As I mentioned, most folks here are not to keen on annuities. So, if like most folks here, you want to use a portfolio to generate a specific income, you just have to be aware that it can not be guaranteed. If you look back at the performance of the portfolio you are considering, I'm guessing you will see that it WOULD generate ON AVERAGE more than you need. BUT, since an average means there were some ups and down, NO portfolio can "guarantee" you the income you want. An SPIA will do that (although guarantee is probably too strong a word.) Any insurance product could go defunct, though there are safeguards and backups which you would want to confirm for yourself.

I think the easy answer is that $700K should be enough to routinely supply the cash flow you need, given a reasonable portfolio of stocks/bonds, etc. BUT there is no guarantee that it will always throw off enough to avoid occasionally getting into principle. After all, if you live long enough, you are almost guaranteed to NEED to get into principle - although, with a little luck, that might be when you are 110.

As far as "stress testing" with monte carlo modeling, you might just plug everything into FIRECalc. You can figure out how much cash, bonds and stocks you have in your 700K. FIRECalc will spit back whether your AA will support a 3% WDR for 30 years (or whatever). Keep in mind that it's all based on past performance, so not guaranteed. Of course, nothing in life (except death - and probably taxes) is truly guaranteed.

That's about as far as my pea-sized brain goes on this subject. I'll just wish you luck and remind you that YMMV.

 

[pb4uski]

.....I wish I could find an online calculator to stress test it. ...

So...does anyone know of an online calculator where I can put in an amount of money, the funds ticker symbols, the length of time I need it to last, and then it will run Monte Carlo simulations with predicted inflation, various market conditions, etc? Perhaps Morningstar with a subscription?

Thanks

WADR Cheesehead, you are in analysis paralysis mode.... do you really need to stress test a 3% WR? Do your own research but I suspect that there is not a year in the last 10 or even 20 years where Wellesley has not distributed less than 3% so you should be all set.

You're overthinking it badly.

 

[copyright1997reloaded]

We have a pension and social security, but need an additional $18K (after taxes, 25% bracket) a year for living expenses. We are retiring and now need for $700000 to get 3% annually for income and I’d like some advice as to how to do this. We plan to have them send us a monthly check. Additionally, we have four years of living expenses in cash in laddered CDs.

I was thinking of splitting 50/50 into Wellington & Wellesley, adding some international stocks, but I am cautious as to their average bond duration of 6.5 years, with interest rates about to rise. This I figure pushes me into making my own index AA using short bond funds, correct? We are conservative investors. Or can someone recommend a fund where I can determine the stock to bond ratio and have shorter durations in the bonds?

I subscribe to a Vanguard newsletter and for an Income portfolio but they are 66% stock. I also subscribe to Bob Brinker and his AA for Income is 50/50.

I would prefer to not have to rebalance, I'd like a fund which will do it for me. I considered Vanguard Conservative Life Strategy but their bonds average duration is 6 years. I appreciate your ideas and as to how you produce regular income in retirement. Thanks!

One way to think about this is that your social security is like a bond that is indexed for inflation (sort of). Your pension is also like a bond (either indexed or non-indexed depending on your pension). So, a good part of your income stream is already like 'fixed' assets. If it were me, I would have the vast majority of the $700K invested in assets that had a good chance of their income stream rising with inflation, e.g. in dividend producing stocks. This is especially true since you have four YEARS of living expenses in cash. If you don't currently have the $700K invested, then perhaps start buying in pieces, and keep the rest pending investment in cash or laddered CD's.

 

[JohnnyBGoode]

One way to think about this is that your social security is like a bond that is indexed for inflation (sort of). Your pension is also like a bond (either indexed or non-indexed depending on your pension). So, a good part of your income stream is already like 'fixed' assets. If it were me, I would have the vast majority of the $700K invested in assets that had a good chance of their income stream rising with inflation, e.g. in dividend producing stocks. This is especially true since you have four YEARS of living expenses in cash. If you don't currently have the $700K invested, then perhaps start buying in pieces, and keep the rest pending investment in cash or laddered CD's.

+1 I was having the same thought - you aren't looking at your complete financial picture - trying to lock down the one part of your portfolio that has some potential. You've already got a fixed income stream - so unless the additional 3% income is absolutely needed with no flexibility at all, I think you would be fine with a moderate or conservative portfolio. The good news is that we all have (or should have) some flexibility. 3% return over mid or long term is an extremely low-risk goal even for a 50/50 mix. And if you could knock it down to 2% or less during a severe market downturn for a year or so (which you could given your cash reserves) I think you should just stay in the market a bit.

But as others have said - the most important thing is to find a solution that lets you sleep at night. If even a chance of dipping below 3% causes you anxiety and grief, then go for the annuity and sleep like a baby!

 

[Jerry1]

We have a pension and social security, but need an additional $18K (after taxes, 25% bracket) a year for living expenses. We are retiring and now need for $700000 to get 3% annually for income and I’d like some advice as to how to do this.

Do you really care? I didn't do all the calculations, but one simple calculation is $700,000/$18000=38.8 years. Do you really need guaranteed income for longer than that? Seems like even a couple percent would extend that quite a few years (that's the calculation I didn't do - sorry). So you would likely only care if your desire was to have the $700,000 there when you die. If not, put it into something ultra safe and it should last you 40 years.

 

[Sunset]

OP - how about this:

Put 150K in WFC-L , a preferred share paying 6.23% at todays price.
Put 150K in BAC-L , a preferred share paying 6.15% at todays price.
(150000×.0623)+(150000×.0615) = $18,570 / yr.
put the remaining 400K in Schwab SCHD which pays div of 2.81% = $11,240

The SCHD will grow, especially if you let the div mostly re-invest.
The preferred will stay fairly range bound for many years, but have a nice consistent payout.

 

[capjak]

OP - how about this:

Put 150K in WFC-L , a preferred share paying 6.23% at todays price.
Put 150K in BAC-L , a preferred share paying 6.15% at todays price.
(150000×.0623)+(150000×.0615) = $18,570 / yr.
put the remaining 400K in Schwab SCHD which pays div of 2.81% = $11,240

The SCHD will grow, especially if you let the div mostly re-invest.
The preferred will stay fairly range bound for many years, but have a nice consistent payout.

+1 Agree Totally.....

 

[Mulligan]

+1 Agree Totally.....

Cap, you know I am a preferred honk and have close to half my stash in 2 companies. But I would be too weak kneed to suggest that to someone else. Company concentration and sector concentration would be too much for me despite the company's current financial strength.

 

[Cheesehead]

Yes, PB, I am probably overthinking it.

And thanks everybody, good advice. My wife's pension is COLA'd at 3% a year guaranteed which is a comforting factor. I suppose balanced is the way to go, should be easy in good times to get 3%. Now thinking $300K in Wellesley, $300K in Vanguard Lifestyle Conservative Strategy and the remaining $100K perhaps following Bob Brinker's newsletter or Dan Wiener's Vanguard Newsletter in their Income Portfolios.