Retire 1 Year

[Jonas]

If you had $2.5 mil in cash, bills and company stock. You wanted to retire in one year. How would you invest that amount in order secure $80,000 a year in income while protecting the principal (including inflation)

 

[retire@40]

It sounds like you want to withdraw 3.2% of your savings. Since inflation runs about 3% a year, I would say you need to earn a minimum of 6.2% on your investments as a whole.

I don't think you can "secure" this kind of return since I don't know of any guaranteed 6.2% investments today, but it is not unreasonable to expect a 6.2% average long-term return on a well diversified portfolio with a little more weight in equities and less weight in money market and bank savings accounts.

 

[cute fuzzy bunny]

This is going to sound like a broken record but...

I'd put it in Vanguards Wellesley fund or in the Target Retirement Income fund.

Both will then generate roughly 3.5-3.75% in dividends and capital gains, which you can conveniently have automatically paid out into your checking account quarterly.

Wellesley is actively managed and holds large cap value stocks (~35%) to give you enough appreciation to compensate for inflation. Large cap value is pretty high returning but volatile...the 65% bond ballast smooths that volatility out nicely.

Target retirement income is index based and holds the total stock market index (~20%) and TIPS (~25%) to resolve the long term inflation problems.

Wellesley's been around for about 35 years. No double digit losing years, no two sequential losing years, over 11% annual total returns. Target retirement hasnt been around very long, just over a year, but I'm going to guess it'll do better than wellesley if we hit a very long term high inflationary period.

If I had 2.5M and wanted smooth sailing, I'd go with one of those. Or get fancy and split your money 50/50 between them and ride both horses.


You could also go with Bob Smiths method and buy long term TIPS on the secondary market that pay a ~4% coupon, inflation adjusted. You'll pay a huge premium for them, but they might be a tad safer than either of the above funds with a lower long term value benefit due to having to overpay for the bonds to get those high coupon rates. The income from these may also be state and local tax free for you but check with your tax pro. You do have to pay taxes on the annual inflation adjustment. They would also save you the .20-.21% investment costs the above two funds charge.

A last option for pure short to medium term safety, if you live in a compatible state, is to buy intermediate or long term muni bond funds. The CA long term muni fund at vanguard is paying ~3.5% tax free right now with a long term total annual return of about 6.5%. Thats pretty safe, but you have limited upside and 15 years of 5+% inflation will kill you.

I aint afraid of inflation right now...

 

[BUM]

Jonas,

Overall...nice problem to have. Oversimplifying, by forgetting inflation and preservation of principle you could squeeze $80K/yr out of $2.5mil for 30 years and then some in a passbook account!

Yes I know $80k/yr wont be worth much in a decade or two, but in a conservative no load balanced fund and a little spicy diversification ...you're borderline bulletproof.

BUM

 

[nwsteve]

If you had $2.5 mil in cash, bills and company stock.

Jonas,
You did not mention how much is company stock, but if you have more than 10% in company stock, I think the first thing I would do is figure out to move the company stock share into some index funds, or some of the Vanguard funds as TH suggested. You have to watch the tax consequences but if in a 401k roll it over and start spreading your risk.
Nwsteve

 

[charlie]

If the company stock is a significant % of the 2.5 mil,
I would liquidate it ASAP and diversify into either
of the funds TH mentioned. You could live off of
the distributions "forever" and have a reasonable
chance of seeing a rise in income that would cover
inflation.

Cheers,

Charlie

 

[laurence]

TH,

Retirement Target Funds sees 11% annual returns? Wow, I'm 30 and that sounds good to me! With a long time horizon, I can afford 1-2 year down turns if my long term is that rosy! Thanks for the info, you've probably posted it before, but as a newbie, that was gold worth posting again!

 

[Cut-Throat]

TH,

Retirement Target Funds sees 11% annual returns?  Wow, I'm 30 and that sounds good to me!  With a long time horizon, I can afford 1-2 year down turns if my long term is that rosy!  Thanks for the info, you've probably posted it before, but as a newbie, that was gold worth posting again!

Just remember that 11% was in the past. And as they say past performance is not necessarlily future performance.

Although I think these are great funds 8)

 

[cute fuzzy bunny]

It was the wellesley fund with the 11% long term annual return... not the target retirement. Its actually just under 11% now annually since inception 7/1/1970.

Cut-throat speaks wisely. Its been a very good time for bonds and that may not be the case for the next 35 years. My expectations are to get my 3.5-4% (the yield right now is the lowest its been for some time) and another 3-4% capital appreciation to offset inflation.

I like the coupling of a heavy load of high quality shorter term intermediate bonds with the dose of cherry picked large cap value stocks that pay good dividends. They seem to only buy and sell a few stock issues a year. Hence you're mostly paying that 15% dividend tax rate on most of what the fund throws off.

I keep looking for reasons to buy something "more exciting", but I'm not finding anything compelling me to drop a fund thats beating the pants off of almost everything AND producing a consistently high dividend yield. Especially considering I'm getting active management for .20% (in the Admiral Shares version).

I still have it as my largest holding, although I tapped some of it off into the similar Wellington fund, which uses the same type of securities but has more stocks than bonds.

If you split half your money into wellington and half into wellesley, you end up with an almost 50/50 split of stocks and bonds. Up until the internet boom and everyone becoming a day trader, that split was a fairly common one for "old money" people.

 

[MSDOGS1976]

I will put in a plug for T Rowe Price Cap Appreciation Stock fund.(prwcx) It currently has a blend of 60% stocks, 20% cash, and the rest in convertible securities and bonds. Has the flexability to add/delete to all asset classes depending on the situation. I like it for this reason as the fund manager certainly knows more than I do when it comes to market timing. It's a 5 star rated fund and has had only 1 down year(1.25%) in its 19 year history. It has averaged 13.5% over the last 10 years. This is my core holding although I do have some cd's, I-bonds, a REIT, commodity fund, and a mortgage backed security fund.

A good mix should give you a 6% return on average but I don't count on anything over that. Good luck with your 2.5 mil!

 

[unclemick]

TH

I wish you would stop talking about Wellesley - after all I'm a 'born again' Bogle indexer. I used to own a large chunk back in my muti - asset (market timer) days.

At the tender young age of 61, thinking of going 50/50 via a mixture of Target Retirement Series. The 'old Ben Graham' defensive investor - except with index funds.

I checked - I have 6 of Wellesley's top ten stocks in my dividend stocks and am watching FPL for an entry point.

Generally I agree with diversifing out of company stock - unless you own the next Microsoft or something like it.

 

[yakers]

I have not worked out a detailed asset allocation plan but seem to have evolved an allocation that suits me based on an anticipated indexed pension. I am otherwise pretty much in stocks and cash. I do a few ibonds and I own my house. But my RothIRA is in a non indexed Vanguard fund, their Asset Allocation Fund (VAAPX). I have had this since 1989 and I am pleased with it. In that time it has slightly beat the S&P500 but with less volitility. I look at the holdings and I like them. When I think I ought to get out of bonds they are lowering their bond holdings. Its fees are fairly low. OK, its not an indexed fund but neither are Wellington or Wellsley. As much as some people like Target Retirement, Wellington or Wellsley I like this fund and I might add another fund but I can't see selling this one.
But there are some good thinkers on this board and I would be happy to hear any comments on this fund by anyone who has looked at it and why they decided not to use it based on their circumstances.

 

[cute fuzzy bunny]

Thats my Roth IRA holding as well. 100%.

I like the autoadjust and the slight beating of the s&p500 but the volatility aspect doesnt bother me in a holding I wont touch for 20 years.

I dont see a lot of reason to hold an awful lot of bonds in any IRA unless you're less than 10 years from tapping it.

 

[johnblake]

Thats my Roth IRA holding as well. 100%.

I like the autoadjust and the slight beating of the s&p500 but the volatility aspect doesnt bother me in a holding I wont touch for 20 years.

I dont see a lot of reason to hold an awful lot of bonds in any IRA unless you're less than 10 years from tapping it.

I'm thinkin of going 100% bonds in the IRA and adjusting the taxable account accordingly. I'm 25 years from drawing on the IRA. The reason is to keep a balanced portfolio (about 50.50) but with the assets that generate taxable income sheltered in the IRA for now.

 

[phhj]

My taxable vs. retirement accounts are about 50% each of the total. My plan, while working, is to use my taxable accounts to buy Vg's Interm Muni fund and use my Roth/401k for things like value stocks, RE & PCRIX.

When I retire I'll probably sell everything and buy something like Wellesley or another balanced fund in both accounts for the simplicity & low volatility.

I know I should buy TSM & Tax-Managed Intl in my taxable account for *optimal* tax efficiency, but I'm just not comfortable holding mkt cap weighted funds.

Sound like a decent plan?

 

[Eagle43]

Vanguard Index funds. 60% Bonds all intermediate and 40% stocks. I have the VG REIT Index, but they count it as stocks. Also have cash and govt bonds sitting in a security box in the bank.

Presently retired with sufficient pension cash flow for annual expenses (pleasure). I also believe in LBYM.

I'm gonna put some more cash in I-bonds, unless someone thinks EEs or something else is better.

 

[Solid_A]

I also have our IRA money in the Asset Allocation fund, and my Roth in SP500/Extended Market funds. 403B is invested in a mixture of what little they give us choices of.

Wish I had the 'problem' of where to invest $$$$ for retirement next year - good luck!

 

[laurence]

O.K., so I'll admit Jonas I'm pretty jealous of you right now! I think you should be forced by the government to hand over half of it to me! Seriously, I noticed you mentioned principal protection as one of your goals, how long is your time horizon (is that a subtle way of asking how old you are? Maybe not so subtle). Any particular reason you want don't want to dip into the principle? Just curious anyone, is there a tax free annuity type solution to Jonas' "problem"? Forgive my ignorance in advance!

 

[azanon]

If you had $2.5 mil in cash, bills and company stock. You wanted to retire in one year. How would you invest that amount in order secure $80,000 a year in income while protecting the principal (including inflation)

If you're also going to have SS and pensions, i'd go about 50% stock, 25% bonds, 25% other asset classes.

If you dont have a pension and no/little SS coming in, i'd probalby lower the stock percentage to 30-40% and keep it in predominately larger, dividend playing companies.

So commonly forgotten, your principle has to be protected from inflation too, and the best way to do that is hold at least 30% stocks.

 

[JOhn Galt]

Re. "hold at least 30% in stocks", that is one way.
Real estate is another.

JG

 

[azanon]

Re. "hold at least 30% in stocks", that is one way.
Real estate is another.

There's stocks... and there's all other investments.

Over the past century, real estate has provided about 6.5% in return.   Stocks?   about 11-12%.

And anyone that understands compounding and exponential growth knows that 11-12% vs 6.5% provides a lot more than twice the growth rate.

I'm not saying real estate is a bad investment.  I'm just saying its not in stocks league as far as long term growth rate and interest rate protection goes.  

(edit) I look forward to the day real estate isnt my #1 asset class. So far it still is. My house which i bought just over a year ago is worth just over 150K. That's MORE than enough real estate exposure for now, IMHO.

 

[brewer12345]

There's stocks... and there's all other investments.

Over the past century, real estate has provided about 6.5% in return.   Stocks?   about 11-12%.

Data source, please? What kind of real estate? How about leverage? What are after tax, cash-on-cash returns?

I would not be too glib on this. I have yet to see a source for LT returns of RE that even comes close to a benchmark like the S&P 500 in terms of accuracy.

 

[azanon]

Data source, please?  What kind of real estate?  How about leverage?  What are after tax, cash-on-cash returns?

I would not be too glib on this.  I have yet to see a source for LT returns of RE that even comes close to a benchmark like the S&P 500 in terms of accuracy.

Oh gosh - i've read a gagillion books on the topic, and several different websites of all kinds on the topic.  It is one of my hobbies for sure.  I'm assuming you dont need a data source for market returns for the past century; figures for the market are readily available everywhere.

Real estate?  The last "specific" figure i recall reading is from Gordon Williamson's "low risk investing"... or maybe it was another site or book.   I recall 6.4% being quoted a few years ago.  I imagine the strong runup of late in real estate over the past 5 years maybe could have pushed that "century" percentage to over 7%.

"Real Estate" is a generic term encompassing so many things; mortgage investment, property management, real estate development, REITs, etc.  Sure there are those that have personally made far greater than 12% in "real estate".  Then again, there are those that bought 10K worth of Dell in 1990 and sold it in 1999... my point being obvious.

I agree, there probably isnt some very accurate average real estate returns over the past century as there is with a market index.  But i'm feel confident real estate as a long term investment focus will continue to underperform stocks over a very long term.

Personally buying and selling real estate for profit 30hr/week or more though is more like a job than a pure investment option.  From that perspective, we might be talking about apples and oranges.  It took me only a few hrs to set up my initial stock investments and have them put on autopilot.  Now 0hrs/week for that.

 

[cute fuzzy bunny]

I'm thinkin of going 100% bonds in the IRA and adjusting the taxable account accordingly. I'm 25 years from drawing on the IRA. The reason is to keep a balanced portfolio (about 50.50) but with the assets that generate taxable income sheltered in the IRA for now.

See, I did it exactly the other way. My Roth is 100% asset allocation fund, my IRA is 100% stocks and mostly rockets (health care, energy, small cap value, emerging market, REIT, etc). My taxable fund is VERY heavy with bonds...a lot of Wellesley, a little Wellington, some high yield corporate, some intermediate term california muni, etc. The whole mess balances out to about 50/50 in total. But my volatile stuff wont be touched for 20 years, while my current and low volatility stuff provides a lot of current income and good sleeping. If my current taxable piece starts losing ground to inflation or my spending needs go up later on in life (say if I my wife retires early and/or I have to start paying for our health care), I'll be recharged by the IRA and/or Roth. The 20 year time window makes me forget about the volatility.

Which brings me to a completely different idea for Jonas. Keep 3-5 years worth of income in a CD ladder (say 300k) and put the rest into a stock heavy fund like lifestrategy growth or target retirement 2045. In good years charge your cd stack back up to the full 300k (+inflation adjustment). In bad years, continue eating the cash component.

Statistically with backwards looking data, unless we hit a sustained very, very bad period you wont ever tap the stock component down enough to impair its ability to recover.

 

[azanon]

From a purely tax perspective Johnblake is right; bonds are better off in tax-sheltered accounts (anything that throws off income is) and stocks, esp those that pay dividends or those you hold over a year, are actually treated very mildly now in taxable accounts (15% cap now), due to the recent changes by the Bush administration.

That being said, tax alone is no reason to sabatoge your IRAs with the anemic growth of bonds over a 25-30 year period. The main reason one avoids stocks is to avoid short term volatility, and someone with a 25 year time frame should not be worried that much, if at all about volatility.