Retirement drawdown

[willift]

Looking for a little help on our retirement drawdown plan.

We’ve been going through the accumulation phase, for the most part lock into the company provided 401K selections. Between the both of us we’ve saved about 1.1 million, combined in taxed deferred 401K & tax free ROTHS. We need about 32K annually out of the portfolio to live, for us, very comfortably. I’m younger than my wife and overall we’re looking a making sure the portfolio lasts 40 years.

Here’s what I’m thinking about & I’m looking for input on why or why not it won’t work.

a. Invest 600K into a dividend producing fund that keeps a pretty consistent price and has a yield in the 3% range = 18K annually
b. Invest 400K in a broad market indexed funds and draw 14K inflation adjusted from principle annually.

In retrospect the accumulation phase of retirement planning looks pretty easy, I’m struggling with the draw down phase. We’re not looking to necessarily leave a finacial legacy behind but we also don’t want to run out of money. The idea of a reliable dividend income stream is attractive to me but I'm wondering what others have found works

Sorry if this is too basic or off topic
Willift

 

[bizlady]

We need about 32K annually out of the portfolio to live,

Are you including taxes in this? Will you have medical coverage at retirement? Need to pin these down first. What age are you? Pensions or SS in the near term? Any debts?

 

[MichaelB]

Hi Willift, and welcome to the forum.

32K from a portfolio of $1.1 is 2.9%, which seems both reasonable and achievable. The key is a diversified portfolio that protects against too much volatility but still grows.

There are a number of threads on dividends. A recent one is here http://www.early-retirement.org/forums/f28/dividend-stock-portfolio-provide-higher-swr-52046.html. For the $600K, You are probably better off with equity investments among various equity asset classes – US, International and Emerging, both large and small cap instead of focusing on dividend funds.

When you say 400K in a broad market index fund, are you referring to fixed income or equities? A broad market fixed income fund like Vanguard total bond index would be appropriate. Otherwise you would have 100% equities – way too volatile and risky for someone in the withdrawal phase.

 

[dex]

Sorry if this is too basic or off topic

More info needed.
Age planning to retire.
SS & pension - if any - when taking
You might take a look at the info others provided.

 

[dex]

a. Invest 600K into a dividend producing fund that keeps a pretty consistent price and has a yield in the 3% range = 18K annually
b. Invest 400K in a broad market indexed funds and draw 14K inflation adjusted from principle annually.

PS - the above is, in fact, 100% in equities are you comfortable with that?
What are you invested in currently?

 

[willift]

32k net

Are you including taxes in this? Will you have medical coverage at retirement? Need to pin these down first. What age are you? Pensions or SS in the near term? Any debts?

The 32K is total needed including income taxes after SS. I'm 55 she's 66 already drawing her SS. I've included medical expenses in the 32K.

 

[willift]

Clarification

PS - the above is, in fact, 100% in equities are you comfortable with that?
What are you invested in currently?

Thanks for your input and sorry for the confusion.

The 600K I'm thinking of something in a Mutual Fund that more than likely would be conservative in nature and mostly bonds. A quick Morningstar search brought up American Beacon Retire Inc & Apprec Inv AANPX (purely an example of a type of fund) it seem to have a consistent price and about a 3% yield. That would spin off maybe 18K year in divinends and hold it's value over time.

The 400K goes into Total Market Equity index kind of thing that grows with the market and also provides the source for principle reduction about 14K year.

Right now we're about 60% in 401K Equity Mutual Funds & 40% in a PIMCO Bond fund the bond fund provides dividend yield that is presently just reinvested.

Retirement is as soon as I can convince my Lovely Bride that we can probably most likely afford it. She's 66 I'm 55

Willift

 

[REWahoo]

The 600K I'm thinking of something in a Mutual Fund that more than likely would be conservative in nature and mostly bonds.

Channeling Unclemick: Psst. Wellesley (VWINX)

 

[willift]

Who's Unclemick or Where's Unclemick

Yea that's probably one of the types of funds I see making this thought process work.

What's the back story on this fund? Is is the type of fund that get's bashed?

BTW I know this stuff is all one man's opinion so I won't take any of it as pure gospel, just looking for what others are thinking.

 

[Bikerdude]

What are you going to do with the extra 100k?

 

[REWahoo]

What's the back story on this fund? Is is the type of fund that get's bashed?

Of course you need to do your own due diligence, but here are the total annual returns for Wellesley, including dividends, going back almost 40 years:

2009 16.0
2008 -9.8
2007 5.6
2006 11.3
2005 5.0
2004 7.6
2003 9.7
2002 4.6
2001 7.4
2000 16.2
1999 -4.1
1998 11.8
1997 20.2
1996 9.4
1995 28.9
1994 -4.4
1993 14.7
1992 8.7
1991 21.6
1990 3.8
1989 20.9
1988 13.6
1987 -1.9
1986 18.3
1985 27.4
1984 16.6
1983 18.6
1982 23.3
1981 8.7
1980 11.9
1979 6.2
1978 3.6
1977 4.3
1976 23.3
1975 17.5
1974 -6.5
1973 -3.6
1972 9.8
1971 15.1

I'm retired and have ~40% of our nest egg in this fund. It pays generally between 3-4% in dividends, currently 3.0%. The expense ratio is 0.21% (Admiral shares), very low for a managed fund.

It works well for me, but like you say, it's just one man's opinion...

 

[Brat]

One option is to put 3-4 years withdrawals in CDs, the balance in Wellsely or Oakmark Equity Income (OAKBX) [the latter is closed to new investors at the moment].

 

[willift]

Extra 100K

What are you going to do with the extra 100k?

I thought we'd keep that as emergency $$. Filling in the gaps to avoid taxes, maybe avoid SS from entering into taxable area. Maybe for occasional large expenses Cars, Major Home Repair.

 

[willift]

That's total return.
How would I go about figuring what the return is if I took the dividends as income annually?

I'm thinking even in negative return years it still is producing dividend ie. my quarterly spending $$. If the return in positive years keeps my orginal principle intact I think I would be comfortable.

Is that what you have experienced?

 

[REWahoo]

That's total return.
How would I go about figuring what the return is if I took the dividends as income annually?

This page on the Vanguard website has this information going back 10 years. I'm sure some online searches will turn up more history.

I'm thinking even in negative return years it still is producing dividend...

Is that what you have experienced?

Yes.

For example, in the market meltdown of 2008 the fund lost 14.2% in value while producing 4.4% in income, a total return of -9.8%.

 

[Bikerdude]

I thought we'd keep that as emergency $$. Filling in the gaps to avoid taxes, maybe avoid SS from entering into taxable area. Maybe for occasional large expenses Cars, Major Home Repair.

If that's the case I would do the following:
I would put 100k in cash/st Cd's, 400k in an equity dividend income fund and the 600k in a bond fund as you indicated. You could do Wellesley as a substitute. I would spend the dividend from both funds (or Wellesley) and supplement with the cash to meet your needs. I would replenish the cash from capitol gain. This is harder to do with Wellesley as you sell bonds with equity.

I think you could set yourself up for failure in a down market early in your retirement by taking principal from an equity fund. Do a search on Ray Lucita's "bucket" approach.

 

[chinaco]

IMO - an allocation of some amount in bonds is a good idea... it mitigates the down-side risk.

I would stick with low-cost funds. If you have trouble rebalancing, consider balanced funds.


Take a look at your SS benefit and the options... Consider the benefits of you delaying taking your SS till 70. Do some analysis.


If you are really concerned... you could consider SPIAs.

But it would be a good idea to stick with highly rated companies!

According to this site... a non-COLA SPIA for 32k/year would be in the neighborhood of 500k.

Immediate Annuities - Instant Annuity Quote Calculator.

If you used this approach... you would be splitting the loaf (so to speak). Have a base income from the annuity and deal with inflation, emergencies, etc using the portfolio that is left.


Since there is an age difference, you should do some analysis. Also, interest rates are low at this time... so you might get a bigger payment (for your investment) if you waited to buy until rates increase.

 

[crispus]

I have a question about Wellesley. If we run into a period of rising interest rates do you think that Wellesley would be able to perform well? I am considering putting around $25k in this fund.

 

[REWahoo]

If we run into a period of rising interest rates do you think that Wellesley would be able to perform well?

I think the best indicator might be looking back at how the fund performed in the late 70's and early 80's when the Fed Funds rate rose to 18-19% in 80 and 81. From my post #11 above:

1985 27.4
1984 16.6
1983 18.6
1982 23.3
1981 8.7
1980 11.9
1979 6.2
1978 3.6
1977 4.3
1976 23.3

Once again, this is total performance, I don't have a break-out on dividends vs. appreciation.

 

[travelover]

I own a little Wellesley, but I like to keep my equities and bonds separate so that I can just sell bonds if I need to, in an extended stock downturn.

My DW is totally clueless about investments and I've instructed her to just convert everything to Wellesley when I kick off.

 

[REWahoo]

I own a little Wellesley, but I like to keep my equities and bonds separate so that I can just sell bonds if I need to, in an extended stock downturn.

I have more than a little Wellesley (~40%) but that still leaves a lot of room for individual equity and bond funds plus cash to [-]play with[/-] rebalance and ride the market roller coaster.

 

[yakers]

My DW is totally clueless about investments and I've instructed her to just convert everything to Wellesley when I kick off.

Something similar here. DW's IRA is 65% Wellesley & 35% VG Star fund, not a bad combination, it has outperformed the 1/3 of my IRA I manage myself
But best of all, her portfolio is one she can manage by herself. I recommend she just put the rest of our assets into these two funds and keep it simple when the time comes.

 

[explanade]

I'm retired and have ~40% of our nest egg in this fund. It pays generally between 3-4% in dividends, currently 3.0%. The expense ratio is 0.21% (Admiral shares), very low for a managed fund.

It works well for me, but like you say, it's just one man's opinion...

How are you taking distributions? Just using the dividends?

Or are you reinvesting dividends but selling some shares?

 

[obgyn65]

Hello Chinaco - do you have annuities ? I would like to understand more precisely how they work (i.e. taxes, fees, etc.). In my opinion, annuities sound like an ideal financial product when I reach 62.

According to this site... a non-COLA SPIA for 32k/year would be in the neighborhood of 500k.

Immediate Annuities - Instant Annuity Quote Calculator.

 

[REWahoo]

How are you taking distributions? Just using the dividends?

Or are you reinvesting dividends but selling some shares?

I've been spending the distributions and also withdrawing from our cash account (we're also both getting SS).

I should point out that in addition to the 40% we have in Wellesley, we have another 20% in Wellington (also a balanced fund) and the remaining 40% in equity and bond funds + cash. I'll need to top up the cash bucket in the 4th quarter and I'll sell some bond funds to do so.