Now retiring, need advice for an income fund

[Cheesehead]

Hello,

I am 63, my wife is 59, and between her pension and my social security, we need our nest egg to throw off 3% to meet our needs. I'd like a more managed approach than me doing index funds in a couch potato manner, and we don't want a lot of risk. I am now retiring and would like to collect our 11 various accounts under the Fidelity and Vanguard umbrellas and invest 80% of them in one or two funds which will automatically withdraw monthly a 3% WR to our bank account. As for managed, I am thinking of Wellesely, perhaps Vanguard Target Retirement 2020, perhaps the Vanguard Lifestrategy Conservative Growth, or a combination of the three. We will also have CD ladders.

I am worried about Wellesley because their average bond duration is 6.5 years, and we are now looking at increasing interest rates, so that can't be good, right?

Our Fidelity advisor is suggesting their Blackrock Diversified Income Portfolio which is a part of their strategic services and costs 1.1%. I can't find any reviews on it besides press releases, it seems only two years old, doesn't even seem to be listed with Morningstar or have a ticker symbol, so I turned that down. Unlike most of the regulars on this forum, I am not adept at math and I do not find money management enjoyable, yet I know how important it is. So I am looking for a reliable, low cost fund such as Wellesley and/or Wellington and would like to know what others have used for auto pilot. The Vanguard Managed Payout Fund has not gotten good reviews.

Thank you for your advice.

P.S. Where can I find the FIRE calculator people refer to?

 

[exnavynuke]

If you get a fund with 1.1% fees you're throwing money away. A mix of Wellesely and Wellington funds is what many people use and are exceptionally happy with here. The mix amount is generally decided by risk tolerance and return needs.

 

[exnavynuke]

Fire calculator referred to here generally is this one FIRECalc: A different kind of retirement calculator

 

[REWahoo]

I am 63, my wife is 59, and between her pension and my social security, we need our nest egg to throw off 3% to meet our needs.
I am worried about Wellesley because their average bond duration is 6.5 years, and we are now looking at increasing interest rates, so that can't be good, right?

Even if rate increases cause bond values fall, Wellesley should still "throw off" 3% or more. And since you are likely in it for the long haul, any bond value decline will self-correct over time and improve returns.

As previously mentioned, a mix of Wellington and Wellesley has a long history of strong performance. Of course nothing is guaranteed...

Our Fidelity advisor is suggesting their Blackrock Diversified Income Portfolio which is a part of their strategic services and costs 1.1%.

Yikes! That's more than 5X the cost of Wellington and Wellesley.

 

[bingybear]

Hello,

Our Fidelity advisor is suggesting their Blackrock Diversified Income Portfolio which is a part of their strategic services and costs 1.1%. I can't find any reviews on it besides press releases, it seems only two years old, doesn't even seem to be listed with Morningstar or have a ticker symbol, so I turned that down.

The blackrock diversified income portfolio in not a single investment, but a managed account the buys a variety of ETFs. Not sure if they invest in some non-ETF things like MLPs. So you would not expect M* to have a rating of this program like they would on an ETF or mutual fund.

I'm thinking this is fido's adviser's arm running an income portfolio for people using black rock ETFs.
I can't speak to this program being good or bad. But I'd say you made the right choice. I would not buy into something that you don't understand.

 

[bingybear]

Yikes! That's more than 5X the cost of Wellington and Wellesley.

That is just the cost of the adviser. I don't think that includes the underlying products expense ratio.

 

[Cheesehead]

Yes that's true but the way the rep explains it, the returns are much greater therefore it's worth the higher fee. However, they only have two years of history and there are no impartial sources such as Morningstar to confirm this. I know they wouldn't outright lie, but I'd like some verification.

Also, I just tried FIRE calculator and when I hit submit, nothing happens. Do I have to pay for it somewhere? It is not as sophisticated as other Monte Carlo simulators we used, such as at a CFP's office and at Fidelity. For instance, I can't put in all my expense categories and differentiate the ones susceptible to inflation. So, why is it so popular here?

 

[REWahoo]

Also, I just tried FIRE calculator and when I hit submit, nothing happens. Do I have to pay for it somewhere? It is not as sophisticated as other Monte Carlo simulators we used, such as at a CFP's office and at Fidelity. For instance, I can't put in all my expense categories and differentiate the ones susceptible to inflation. So, why is it so popular here?

It isn't a Monte Carlo simulator. And result are generated on a separate tab on your browser.

Spend a little time learning about how it works here: FIRECalc: Why another retirement calculator?

And note the series of tabs near the top of the first page of FIRECalc.

 

[COcheesehead]

Yes that's true but the way the rep explains it, the returns are much greater therefore it's worth the higher fee. However, they only have two years of history and there are no impartial sources such as Morningstar to confirm this. I know they wouldn't outright lie, but I'd like some verification.

Also, I just tried FIRE calculator and when I hit submit, nothing happens. Do I have to pay for it somewhere? It is not as sophisticated as other Monte Carlo simulators we used, such as at a CFP's office and at Fidelity. For instance, I can't put in all my expense categories and differentiate the ones susceptible to inflation. So, why is it so popular here?

Fill out ALL the tabs for best results.

 

[Cheesehead]

OK, will do. An interesting thing, which caused our Fidelity rep to suggest an annuity (the good kind), since the other option of life insurance on me is out of the question, is:

When the simulators showed me living to 92 we were golden. However, when I insisted the simulator shows me croaking at say, 75, since my wife will not receive one penny of my social security because she receives a government pension, there was a $25K shortfall in all simulations. That upsets her. Not me dying, the shortfall.

We are still considering it, non COLA'd, where in six years we'd get $30K for life, but our alternative according to their calculator is: Cut expenses by $1K a month (we could do that) and then don't buy the annuity and invest in a balanced fund with a WR of 3%.

I did not see anywhere on this FIRE calculator where I can put in the husband kicking the bucket at various ages.

But!!! I don't want to hijack my own thread. I have searched on this forum the Wellesley & Wellington words and was wondering if there was anything else I should consider, but I'm figuring for a simpleton such as myself, they're the way to go for auto-pilot?

 

[Another Reader]

This Fidelity rep makes me nervous. Sounds like he is selling you expensive products, not giving you the information you need to make sound decisions. I might ask to meet with someone else that won't sell you an unproven fund with a high expense ratio because "the return is higher."

You could do a lot worse than Wellington and Wellesley. Spend some time learning about the various options first, however. The time spent educating yourself will help you avoid "advisors" selling you products that do not meet your needs.

 

[respond2u]

Yes that's true but the way the rep explains it, the returns are much greater therefore it's worth the higher fee. However, they only have two years of history and there are no impartial sources such as Morningstar to confirm this. I know they wouldn't outright lie, but I'd like some verification.

Also, I just tried FIRE calculator and when I hit submit, nothing happens. Do I have to pay for it somewhere? It is not as sophisticated as other Monte Carlo simulators we used, such as at a CFP's office and at Fidelity. For instance, I can't put in all my expense categories and differentiate the ones susceptible to inflation. So, why is it so popular here?

That's a self-serving observation on Fidelity's behalf: all the studies I've heard on active managers say that most of them woefully under-perform the market.

You'll be taking the chance that you're going to pay 1% / year to someone that's the next Peter Lynch or Warren Buffet.

I'm not sure why you're opposed to the etf idea. Just do the bogleheads 3-fund portfolio (https://www.bogleheads.org/wiki/Three-fund_portfolio) and not worry about it.

3% is a sustainable withdrawal rate for many years. No need to take on more risk.

Another calculator is Crowdsourced Financial Independence and Early Retirement Simulator/Calculator.

 

[Cheesehead]

We went in to meet with our new Fidelity rep just because we wanted to run their Monte Carlo simulator, which we really respect. We had also met with an independent CFP on a $250 hourly rate, who works as a fiduciary, we told him we wanted to run scenarios on his Monte Carlo simulator, which took a couple of hours to input the parameters and would not buy anything from him. He used software from Money Tree:

https://www.moneytree.com

But after being with Fidelity for over 20 years, we realized their software was much more sophisticated. We have had great reps there but...sooner or later they leave. We were recently randomly assigned by their office a "kid", barely out of college and I blew a gasket and said, "I want the oldest guy there". He's good, like some others he came from T.D. Ameritrade. They aren't on commission per se, rather, they get points for selling annuities and in our case, with me dying and not leaving any SS, it's not a bad option. Besides life insurance, there really isn't any other option besides life insurance, which is unaffordable for a guy with conditions like mine, at 63.

I think that Fidelity really can't compete against Vanguard in certain areas, especially the fees. So perhaps this alliance with Blackrock, which is highly respected, is a good thing, even though it costs more. I must say, when I started to compare annuities between them, Vanguards customer service was lacking. If they don't feel you are going to pull the trigger NOW, they don't respond quickly and there's no brick & mortars to go into and run scenarios with a humanoid. Also, although a financial guru I follow, Bob Brinker, insists one should always compare with the annuities from Vanguard for lower costs, it is impossible. It reminds me exactly of mattress shopping. You can't do apples-to-apples comparisons of their annuities, nor on annuities.com. They have slightly different versions of somewhat similar features, but none exactly.

Tha annuity they offered is the New York Life Clear Income Fixed Annuity. It's easy to understand. From all the press releases and marketing info I have read, it was designed for Baby Boomers who don't like annuities yet want peace of mind. So this one allows some liquidity and something at the end to leave to heirs.

Another reason to consider an annuity is my wife's teacher's pension is with Illinois, and the state is doing soooooo bad financially, it's always in the back of our mind that they might default, or give a hair cut to the pensioners. So that, and me croaking, has her scared and an annuity looks better than to the average regular on this forum.

But! Back to a Vanguard balanced fund that will throw off 3%. Looks like everyone still loves Wellesley.

 

[Cheesehead]

I've been doing what's basically a couch potato management style: Total Market, Total Int, Total Bonds. That was to make the Nest Egg grow. But now that I'm in retirement, meaning I need the income NOW, I feel that there should be some smart eye balls on the thing and I don't want to mess with AA tweaking. That's why I want to go with a known, tried and true product, such as Wellesley, where the need for a WR is part of the deal: Income.

I suppose using the Vanguard Conservative Lifestrategy Fund would be a cross between couch potato and W, in that it consists entirely of indexes, yet they do the balancing for me. Does anyone here use them for their monthly WR?

Thanks

 

[pb4uski]

I think you are confusing income with cash flow... your need is for cash flow to paying living expenses.

Let me use an example of Total Stock (VTSAX) and assume that you owned 1 share at the beginning of 2016 and needed 3%. On 12/18/2015 a share was worth $48.83 so 3% would be $1.465. In 2016 you would have received $1.078 in dividends but on 12/20/2016 when you receive your dividend your share would have been worth $56.63.. so you sell a little to raise the additional $0.387 needed to get your 3%... but your holding is still worth $56.243... much more than the $48.83 that your started they year out with so you are ahead.

So your sources of income are dividends and realized appreciation rather than just dividends... the $0.387 in the example above being realized appreciation a portion of the increase in the value of the stock that you cashed in for retirement... after all, that is why you saved that money to begin with.

It's called total return investing.

See this Vanguard paper on it: https://personal.vanguard.com/pdf/s557.pdf

In conclusion, the total-return approach to spending
is identical to the income approach for investors
whose portfolios generate enough cash flow to
meet their spending needs. For those investors
who need more cash flow than their portfolios yield,
the total-return approach is the preferred method.
Compared with the income-only approach, the total return
approach is likelier to increase the longevity
of the portfolio, increase its tax-efficiency, and reduce
the number of times that the portfolio needs to be
rebalanced. In addition, for most investors, a total return
approach can produce the same cash flow
as an income-only approach with no decrease in
return and a lower tax liability.

 

[DEC-1982]

We went in to meet with our new Fidelity rep just because we wanted to run their Monte Carlo simulator, which we really respect.

I am not clear whether you are already a Fidelity customer. If you are, you may have direct access to their Retirement Income Planner (RIP), which is possibly what you refer to as the "Monte Carlo simulator"; RIP runs through 250 simulations of different scenarios, IIRC. It takes a while to get the hang of it, especially the value of breaking out expenses in the detailed budget worksheet instead of just "fixed" and "discretionary" expenses, but it is well worth it. Actually, if the Fidelity rep did all this for you, all the entered data may still be there waiting for you to rerun it.

 

[Terryjm51]

What are you in now?


Sent from my iPhone using Early Retirement Forum

 

[panacea]

When the simulators showed me living to 92 we were golden. However, when I insisted the simulator shows me croaking at say, 75, since my wife will not receive one penny of my social security because she receives a government pension, there was a $25K shortfall in all simulations. That upsets her. Not me dying, the shortfall.

Did you adjust the spending at all with just the surviving spouse? Generally spending will decline by 20-25% with a 1-person household. Half the food, clothing, cars, travel, entertainment, etc. Might try rerunning the analysis that way.

 

[Cheesehead]

Thanks PB4uski, I'll re-read that till I get it. Like I said, I am bad with numbers! You do agree that I can just ask for them to send a 3% annual check monthly (.25%) and unless there's a bear market I can leave it on auto-pilot, correct?

Yes, DEC-1982, we've been a customer of Fido from the beginning of our IRAs, we have the basic knowledge of tweaking their calculator, but going in and seeing a pro, wow, they know the nuances of it. For instance, I have $8400 a year listed for vacations. If we go to Fiji that may cost $10000 but then if we just throw the dogs in the van with a cooler and do a road trip vacation, that could be just $3000, so I averaged it and I know when we hit our late 70s we'll be homebodies, so I want to delete that expense, yet I don't know how to adjust the calculator so it shows no more vacations.

And Panacea, I also need to figure out my croaking scenarios, meaning less food expense, etc.

Thanks everyone for your advice.

 

[DEC-1982]

For instance, I have $8400 a year listed for vacations. If we go to Fiji that may cost $10000 but then if we just throw the dogs in the van with a cooler and do a road trip vacation, that could be just $3000, so I averaged it and I know when we hit our late 70s we'll be homebodies, so I want to delete that expense, yet I don't know how to adjust the calculator so it shows no more vacations.

The way you do that is to click "Edit Details" and then put the amount, the start year and the end year. For example, for medical insurance, I put

Amount Start Year
280 2015 2016 (insured differently)
600 2017 2020 (me)
600 2017 2025 (DW)

And medical insurance is of course different from out of pocket medical costs, medicare costs and medigap costs.

Like you, I found a lower rate of success if I died earlier than 92.

BTW, the Fido RIP does reduce expenses when one dies, a 23% reduction in my report. Unfortunately the income drops by more than 23%. For example, if the couple was getting 150% of 1 SS (social security benefit), after one death SS becomes 100% of 1 SS, a 33% reduction. (although that's simplistic).

Note that FIDO says RIP is an "educational" tool.

 

[wmc1000]

Cheesehead, I use the FIDO RIP all the time. To input vacation expenses for the years up til late 70's you can enter the detailed monthly expenses worksheet and under Recreation click add details - you can then add your annual vacation expenses as a monthly amount and use the custom years to plug in from now until the year you expect to become homebodies. Then click update total and then the save and continue button to see the results with the new info.

 

[wmc1000]

DEC - 1982 beat me to it! I also plug in a 20% SS cut in the year 2033 by adding a custom expense in that year!

 

[bingybear]

I use FSTVX instead of VTSMX, lower cost. It use to be Vanguard always had lower costs. Not so much anymore.
The idea of using Wellesley and Wellington as most/all of your portfolio leaves you with a portfolio that is not well diversified. Many people use total stock, total bond and total international stock to provide diversification. Note I do not practice this method completely... well not really much at all.
You asked about finding an objective (morningstar) rating of the fidelity backrock income portfolio. Can you find a single moringstar rating for a 45/55 split of Wellesley/Wellington? But you can look up each of these. I don't know if Fidelity would tell you which ETFs they actually use, but you could ask. From their documentation they use

This portfolio seeks exposure to a broad range of income-producing investments including investment-grade bonds, high-yield bonds, domestic and international high dividend equities, preferred stocks, and REITs.

To get higher income, one usually takes higher risk components. I would assume they use diversification to reduce some of that risk. I know people who use these higher income investment and typically have done well... but some got bit with the old rout in the last 2 years. One was getting much of his income from one MLP paying about 10%. It slashed its dividend and the price dropped by 75%. Don't put all your eggs in one basket.
I tend to agree with the total return approach, but I do lean my portfolio more to value (dividend payers). Note that in creating in income stream, you need to consider taxation as well. You can't spend what the tax man takes.

When you ran the fidelity RIP (monte carlo analysis), were you evaluation success using their worst down market they model on the customer site? Note that this is a really pessimistic metric. It is the right thing to use for conservative retirees, but you also need to realize that you likely will do much better.
Look at what you are comfortable with in investing. There are many ways to skin the retirement game. Sometimes the worst thing can be getting into some more risky investment that makes you not sleep at night... and then you sell it when it is down in some short term volatility.

If interest rates are going up, it may pay not to buy an immediate annuity yet... but this is market timing.

 

[HadEnuff]

Cheesehead, I would urge you not to spend 1.1% on any kind of money management. You state you need your nest egg to deliver 3%. You can do this with very little risk exposure.
If you pay someone 1.1%, they need to deliver 4.1%, so you can get your 3%. In other words they need to be 36.6% better than your couch potato approach. Independent studies have shown, repeatedly, they almost never ever do this.

As far as your concern with rising interest rates, look for example at Vanguard's VICSX, which is an Intermediate Term Corporate Bond Index Fund, https://personal.vanguard.com/us/funds/snapshot?FundId=1946&FundIntExt=INT, with a stated SEC Yield of 3.41 %.
Say you have 100K in that fund, and you are getting 3.41%, and interest rates rise. While your principle amount will drop, as old bonds mature, and new ones come in, the yield will rise, so your income from the fund will be stable, unless you decide to sell shares.

Within a fund like Wellesley or Wellington, their exposure to rising interest rates will be managed the same way. Keep in mind that Wellington will be more exposed to stock prices falling than Wellesley, because they are "about" 2/3 stock/bonds invested, as opposed to Wellesley's "about" 1/3 stocks/bonds ratio.

Only needing 3% puts you in great shape to get what you need, and stay conservative.

BTW, your age and your wife's age are exactly the same as mine and my DW. I could survive on a 3% return, but to live the life I desire, I'd like to coax 3.5%, which I still feel is very doable with a conservative approach.

EDIT: I don't think you've mentioned if the bulk of your nest egg is "tax advantaged-deferred", as in IRAs. Mine is, so I don't worry about what some people on this forum refer to as "tax efficient", which is another way of saying "what your real return will be after Uncle Sam, and your state, take their tax bites". You might want to let us know about this, as there are many folks who have this figured out. I'm not one of them.

 

[eytonxav]

I don't like putting all my eggs in one basket, so to produce an income stream, I use a combination of equity and bond assets, including Wellington and Wellesley. For the equity side, I am more comfortable with low cost index investments both funds and etf, while for bonds, I am more willing to go for active management, except for term specific etfs. Right now, I am also considering an annuity for a small portion of my assets. Regarding the Fidelity Blackrock fund, did the advisor provide the funds return after fees are taken out. Personally, I think 1.1% is very high for managing a bond strategy.