Need to start generating income from cash

[marko]

actually you are a very classic case when you don't have the pucker factor for equities or are overly invested.

folks get burned all the time trying to buy low and sell high. typically it ends up being buy low and sell lower.


this is a little secreat the public just just not know . the saying the trend is your friend is a very true one.

I'm always reminded of my dear brother who doesn't know a mutual fund from a postage stamp. Really; no clue.

About 30 years ago I suggested he throw some extra cash (less than $100K) into the Fidelity Magellan. He forgot about the money (probably still doesn't know it's there). No withdrawals, no adjustments, no reallocation.

I monitor his money for him because he's completely asleep at the wheel, but ... let's just say that he's outperformed all my amateurish efforts for improving performance.

 

[jkern]

Rental properties would avoid market volatility and provide 6% or greater return. If you don't like to manage property you can always hire a property management company.

 

[elisap]

oops, spoke too soon, I'm down but got lots to do today so I'm good.

 

[hnzw_rui]

Then you have a real problem, which is the first thing you need to address. The problem is that you are emotionally not able to handle the volatility which is an integral part of investing.

Umm, very good words of wisdom but I don't know if the OP is still following this thread. His last post was in 2014...

 

[REWahoo]

Umm, very good words of wisdom but I don't know if the OP is still following this thread. His last post was in 2014...

I missed it!

 

[O2Bfree]

Great thread, in spite of the OP MIA.

Now that my fiscal farsightedness and stoicism have improved, I sometimes feel like flaunting my indifference about "losing" $xx,xxx during market downturns. But most folks would think me a fool.

And of course, the foot can really come down at any time!

 

[nun]

I'd suggest that the OP adjust their withdrawal goal to 3% and read the wiki over at

www.bogleheads.org

 

[RobLJ]

I'd suggest that the OP adjust their withdrawal goal to 3% and read the wiki over at

www.bogleheads.org

It took me 3-4 years to get used to 5 digit daily swings in the portfolio (they started happening in 2008, but my old strategy of ignoring the portfolio until an upswing or up correction helped, psychologically, because at least I would see the day or week increase).
Now it seems more routine, just 4 digits plus an extra tacked on the end.
I will say the rapidity of the big drops and moves back up this year is interesting.

 

[pb4uski]

Umm, very good words of wisdom but I don't know if the OP is still following this thread. His last post was in 2014...

+1 I was wondering why people were piling into a thread over 18 months old.

 

[braumeister]

+1 I was wondering why people were piling into a thread over 18 months old.

I've always been impressed by how much thought people here put into their responses.

 

[statsman]

So here's one idea:

Become a "I'll never touch my principal" investor.

Put all you money into Vanguard Wellington. It's a well managed, well respected balanced fund. It yields about 2.5% right now, so it'll generate about $25K per year for you.

Swear to yourself that in up or down markets, you will not bail out. Just ignore the market, collect your dividends and construct your budget to live on that amount.

I realize this post is from 18 months ago, but this is a concept my wife and I need to embrace. We are very risk averse, having bailed completely on equities in early 2008. While it worked for us to be in bond and TIPs funds through 2012, the last three years haven't been as kind in these markets.

With retirement coming some time next year (me: 57; my wife: 63), we need to prepare our tax deferred and taxable accounts. Despite having a decent amount invested and saved, being solely in bond funds, TIPs funds, and money market is risky for the long term.

While we are/were working, we have been concentrating on our bottom line net worth. Daily/weekly/monthly fluctuations in the mutual fund prices raise havoc with this bottom line and our nerves. But if they are not sold, we still have "x" amount of shares in each fund; actually more with the re-investment of paid dividends in our tax deferred accounts.

Doing this with our taxable assets is a different story. We have a sizable amount to invest now as we head into retirement. 0.75% earned in a money market account is not going to cut it. We need to get over this hurdle now and not wait until we are retired when I think it would be even more difficult to commit.

 

[daylatedollarshort]

I realize this post is from 18 months ago, but this is a concept my wife and I need to embrace. We are very risk averse, having bailed completely on equities in early 2008. While it worked for us to be in bond and TIPs funds through 2012, the last three years haven't been as kind in these markets.

With retirement coming some time next year (me: 57; my wife: 63), we need to prepare our tax deferred and taxable accounts. Despite having a decent amount invested and saved, being solely in bond funds, TIPs funds, and money market is risky for the long term.

While we are/were working, we have been concentrating on our bottom line net worth. Daily/weekly/monthly fluctuations in the mutual fund prices raise havoc with this bottom line and our nerves. But if they are not sold, we still have "x" amount of shares in each fund; actually more with the re-investment of paid dividends in our tax deferred accounts.

Doing this with our taxable assets is a different story. We have a sizable amount to invest now as we head into retirement. 0.75% earned in a money market account is not going to cut it. We need to get over this hurdle now and not wait until we are retired when I think it would be even more difficult to commit.

If you are risk adverse, check out the liability matching strategy at Bogleheads wiki:

https://www.bogleheads.org/wiki/Matching_strategy

 

[audreyh1]

The pullback finally materialized - it only took another year and 4 months........

And it didn't pull back as far as the brief 10/2014 drop did.

 

[pb4uski]

If you are risk adverse, check out the liability matching strategy at Bogleheads wiki:

https://www.bogleheads.org/wiki/Matching_strategy

I notice you keep mentioning matching. The Achilles heel of matching is that given that the rate of return on matching assets is low (low risk = low reward) it only really works if you are overfunded (have a really low WR... probably 2.5% or lower). It is not a viable option for most retirees.

 

[daylatedollarshort]

I notice you keep mentioning matching. The Achilles heel of matching is that given that the rate of return on matching assets is low (low risk = low reward) it only really works if you are overfunded (have a really low WR... probably 2.5% or lower). It is not a viable option for most retirees.

At least some financial talking heads are advocating 2.5% or less SWR even with a mutual fund type portfolio. John Bogle interview on his return predictions over the next 10 years:

“When you factor in the costs associated with index funds, inflation, and taxes, you are actually looking at real returns of nominal to zero,” Bogle explained."

http://finance.yahoo.com/news/exclusive-vanguard-founder-john-bogle-163124461.html

Liability matching is the approach some financial writers like Zvi Bodie and the post 2008-Bill Bernstein recommend and are discussed frequently on Bogleheads these days. Bernstein interview here:

Bernstein Says Stop When You Win The Game | The White Coat Investor - Investing And Personal Finance Information For Physicians, Dentists, Residents, Students, And Other Highly-Educated Busy Professionals

Boglehead discussion here:
https://www.bogleheads.org/forum/viewtopic.php?t=136613

If you want to rely on stocks and have the risk tolerance for it I am not trying to talk you out of it. But there are ways to retire without stocks. Not everyone is comfortable seeing 30 - 50% of their life savings at age 60+ possibly disappear in a given year, especially when they are no longer working and can't make up the money. Sequence of returns risk in retirement article here:

http://www.marketwatch.com/story/how-to-avoid-sequence-of-return-risk-2013-09-28

Most 65+ households actually have very little investment income in either stocks or bonds:
http://www.bls.gov/cex/2014/combined/sage.pdf

 

[statsman]

If you are risk adverse, check out the liability matching strategy at Bogleheads wiki:

https://www.bogleheads.org/wiki/Matching_strategy

No investment in mutual funds at all? Are you saying a matching strategy is a better bet than being in bond/income/TIPs funds without any equities exposure? Current tax deferred assets are roughly 31% total bond fund, 29% Dodge & Cox Income fund, 21% TIPs fund. and 19% GMNA fund.

 

[FANOFJESUS]

Great topic even if the thread is old. I have the same problem as the OP. I have thought about Wellington and bringing the capital gains/dividends home every year. It makes taxes simple and I feel better with the extra money.

 

[daylatedollarshort]

No investment in mutual funds at all? Are you saying a matching strategy is a better bet than being in bond/income/TIPs funds without any equities exposure? Current tax deferred assets are roughly 31% total bond fund, 29% Dodge & Cox Income fund, 21% TIPs fund. and 19% GMNA fund.

I am not saying one is better than the other. Better is in the eye of the beholder. If you are risk adverse it might be a topic to read up on. We wish we had heard about this years ago, like way before 2008 and the dot.com crash, so I bring it up as an option for other conservative investors to consider.

The general idea is your essential inflation adjusted expenses are covered by insurance or inflation adjusted investments with fixed maturity dates and no loss of principal. Fixed expenses, like a fixed 30 year mortgage, can be matched with non-inflation adjusted investments, but also with maturity dates. You can invest your mad money in anything you want, but this way your essential expenses are covered.

 

[pb4uski]

Very few retirees have enough saved to use liability matching without inflation eating them alive.

If you buy into Bernstein’s theory, you’d better plan on working a little longer, saving more, or spending less in retirement.

Besides a few short years ago he was advocating a more conventional approach... should we believe him now or then?

If someone has a 2.5% WR and is very risk averse then liability matching might be a good approach, but very few retirees will be able to do it... I'm guessing perhaps 1 in 20 at best.

 

[MichaelB]

The general idea is your essential inflation adjusted expenses are covered by insurance or inflation adjusted investments with fixed maturity dates and no loss of principal. Fixed expenses, like a fixed 30 year mortgage, can be matched with non-inflation adjusted investments, but also with maturity dates. You can invest your mad money in anything you want, but this way your essential expenses are covered.

Only if the rate of inflation is the same for your expenses as it is for the index. If CPI runs lower than your expense rate, you will still fall behind.

Based on feedback from member postings here, this is a real risk.

 

[daylatedollarshort]

Very few retirees have enough saved to use liability matching without inflation eating them alive.....If someone has a 2.5% WR and is very risk averse then liability matching might be a good approach, but very few retirees will be able to do it... I'm guessing perhaps 1 in 20 at best.

According to the Consumer Expenditure Survey, the mean income from "rents, dividends, rental income and other property" for households over 65 is $1,244 a year, so I am not sure if a 1% or so change in portfolio withdrawal rates is going to make a huge difference to most retirees.

http://www.bls.gov/cex/2014/combined/sage.pdf

Liability matching does take into account inflation, as outlined in the Boglehead wiki article I linked to previously. The whole concept is geared towards not losing money to CPI inflation.

Here is an article on using stocks as an inflation hedge:
Investing Error: Don't Use Stocks as an Inflation Hedge - DailyFinance

Even wealthier retirees have a median of $395K in financial wealth, according to a Vanguard study, so I am not sure a 1% withdrawal rate from ~3% for liability matching to 4% for a Firecalc kind of approach would make a huge difference in annual income except for very affluent households. Of course, if you want the chance of growth, then you won't get that with liability matching. If you want less volatility, then a liability matching strategy may suit your household better. There are pros and cons to each approach.

 

[daylatedollarshort]

Only if the rate of inflation is the same for your expenses as it is for the index. If CPI runs lower than your expense rate, you will still fall behind.

Based on feedback from member postings here, this is a real risk.

True, but then again your personal inflation rate may also be less than CPI-inflation. I'm not aware of any alternative investments that would have more of a guarantee of keep up with one's personal rate of inflation. Stocks may or may not be a good inflation hedge, depending on other economic variables, per the article in the previous post.

I used the government inflation calculator to check my starting salary after college compared to what kids today make in the same major, 35 years later, and they were pretty close, so that was my reasonableness test that for me CPI inflation probably isn't wildly off the mark.

 

[pb4uski]

.....

Here is an article on using stocks as an inflation hedge:
Investing Error: Don't Use Stocks as an Inflation Hedge - DailyFinance.....

Great link.

That's why some experts have even recommended that retirees or near-retirees hold 60% or more of their assets in stocks -- terrible advice, and it destroyed many people's finances and peace of mind during the crash a couple of years ago.

And if you're worried about inflation, you should take some of that money -- and sell some of your bond holdings, too-- to buy some asset classes that have better track records as inflation hedges....

Such as? "In periods of high and increasing inflation, gold and commodities are definitely something you want in your portfolio,"

So, what should you do? I'd take some profits in your stock and bond holdings and buy small positions (maybe 5% of your portfolio each) in gold, commodities, REITs, and TIPs ETFs, preferably when they've sold off a bit, too.

Then, I'd keep 40% to 50% in stock, 20% to 30% in bonds, and another 10% in cash. That way, you'll have some protection against inflation, deflation, and just normal life.

So according to the moron who wrote this article, 60% in stocks is "terrible advice" and destroyed many people's finances and peace of mind during the great recession, but 50% in stocks is fine. Talk about a distinction without a difference.

Oh, and by the way, invest the proceeds from the stock sold in gold and commodities, REITs and TIPs.

Sounds like

to me.

 

[daylatedollarshort]

Oh, and by the way, invest the proceeds from the stock sold in gold and commodities, REITs and TIPs.

Sounds like

to me.

The Dailyfinance article had links to academic research studies on the value of stocks as an inflation hedge, such as:

"Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School have one of the world's deepest databases on the performance of stocks, bonds, bills, and currencies, as well as inflation. It covers 19 different markets and goes all the way back to 1900....In an article in the 2012 Credit Suisse Global Investment Returns Yearbook, they found that during periods of "marked" inflation, equities easily outperform bonds, probably the worst investment to own during inflationary episodes. Yet equities gave a real return of -12% during those periods, while bonds lost 23.2%. Double ouch."

That particular link was not an example of a liability matching portfolio. Liability matching portfolios do not recommend gold or REITS. The LM Boglehead wiki article explains this:
https://www.bogleheads.org/wiki/Matching_strategy

I don't really get the need for the feces picture and foul language. If you don't want to invest in a liability matching portfolio no one is suggesting that you personally need to do so. Not everyone can handle the stress of losing 30 - 50% of their life savings at retirement age in a down market, and for some the LM strategy may be a better choice. We prefer it. There are many interesting discussions on the BH site on this strategy for those retirees interested in something less volatile than a mutual fund approach.

 

[pb4uski]

....That particular link was not an example of a liability matching portfolio. Liability matching portfolios do not recommend gold or REITS. ...

Then what was the point of attaching the link if it isn't relevant to the topic?