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The mechanics or retirement income
Old 10-17-2008, 08:05 PM   #1
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The mechanics or retirement income

I'm about 8 years from ER and my current allocation in Vanguard is

Cash 8%
Total Bond Index 22%
Wellesley 21%
Total Stock Index 23%
Total International Index 21%
REIT 5

I'm starting to think about the mechanics of taking income form my investments and I'd be grateful for your suggestions. Firstly would you suggest any asset allocation adjustments?

I'm thinking of dividing 3 year's of living expenses between 3 year, 2 year and 1 year CDs and having another years expenses in a MM. I'll also pay dividends and interest into the MM and make regular transfers to my bank account. At the end of the year I should have enough in the MM to buy another 3 year CD and transfer the 1 year CD to my MM. Does this sound sensible?
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Old 10-17-2008, 08:13 PM   #2
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What is your age?
Do you have a pension; if so when does it start?
When will you be taking SS?
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Old 10-17-2008, 09:43 PM   #3
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Quote:
Originally Posted by dex View Post
What is your age?
Do you have a pension; if so when does it start?
When will you be taking SS?
I'm 47 and planning to ER at 55 when the house will be paid off. It's a 2 family that generates $12k/year in rental income after taxes and home insurance. At 55 I also get a $5k/year pension. I'll leave my IRA until 59.5, but I'll have full access to my after tax savings and my state tax deferred retirement savings. I'll also qualify for state retiree health insurance, the current cost is $62/month.

I also qualify for SS and will get a UK state pension at 67. The current UK basic state pension is $10k/year
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Old 10-17-2008, 09:56 PM   #4
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OK,
This is how I would do the math to compute the amount to amount of expenses in CDs

Total Estimated Expenses
Less:
$12k/year in rental income
$5k/year pension
SS and will get a UK state pension (when you begin to take them)
Equals amount to be funded by CD ladders.

Subtract the annual amount to put in the CD when you do your annual portfolio re balance calculation.

I would suggest leaving the interest and dividend reinvest.

====
Allocation, to me is a factor of comfort level, expense budget etc. It is even difficult to know if the 8% is too high or low without at least knowing how many years of expenses it would cover.
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Old 10-17-2008, 11:42 PM   #5
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After the mortgage is paid my annual expenses will be $30k max (maybe a bit less). I'll get $17k from rent and my small pension and a 4% return from my investments will more than cover the rest. I want to do a 3 year CD ladder as a buffer against market down turns, although with a 50/50 equity/bonds portfolio I suppose I could always sell bonds if the market tanks like it has recently. So given my $17k stable income I only need to put $13k in each CD to cover my annual expenses. So how about this?

3 year CD $13k
2 year CD $13k
1 year CD $13k

Unless I need the cash I'll buy a 3 year CD with the money from the maturing 1 year CD.

MM $20k (emergency cash)
Bank account $17k income and $13k from dividends

Reinvest any surplus dividends and interest in my 50/50 portfolio
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Old 10-18-2008, 09:04 AM   #6
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Quote:
Originally Posted by nun View Post
After the mortgage is paid my annual expenses will be $30k max (maybe a bit less). I'll get $17k from rent and my small pension and a 4% return from my investments will more than cover the rest. I want to do a 3 year CD ladder as a buffer against market down turns, although with a 50/50 equity/bonds portfolio I suppose I could always sell bonds if the market tanks like it has recently. So given my $17k stable income I only need to put $13k in each CD to cover my annual expenses. So how about this?

3 year CD $13k
2 year CD $13k
1 year CD $13k

Unless I need the cash I'll buy a 3 year CD with the money from the maturing 1 year CD.

MM $20k (emergency cash)
Bank account $17k income and $13k from dividends

Reinvest any surplus dividends and interest in my 50/50 portfolio
If you want to get annal about it you could take inflation into the expense budget equation - slightly increasing the outer year CD amounts. Also, the initial amount of the CD should be the net amount before interest - e.g. investment 12K + 1k interest to get to the 13K you need

"Bank account $17k income and $13k from dividends"
This part confuses me - Is this a savings account; that is the 8% cash above?
30K in interest and dividends?
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Old 10-18-2008, 09:38 AM   #7
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The 8% cash is what I have right now, it's in a MM fund. When I'm closer to retirement I'll set up the CD ladder and have $20k in the MM as an emergency fund.

I'll pay $17k/year into my checking account from the rent and pension and deposit $13k of dividends over the year to bring me up to my $30k annual expenses. Any dividends above the $13k will be reinvested.
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Old 10-18-2008, 09:58 AM   #8
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looks good to me.
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Old 10-18-2008, 10:29 AM   #9
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As a matter of interest does anyone use the interest ( sorry for the pun) from a CD ladder to fund their retirement? I've generally thought of it as a buffer against market downturns; a safe place to stash some cash that gets better interest than a saving, account while the majority of your money is held in a stock and bond portfolio to give some income and some growth. You'd have to have a sizable stash to forgo the growth of a more diversified investments and be able to settle for the safe harbor or a completely CD funded retirement.
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Old 10-19-2008, 12:04 PM   #10
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I am setting up a 5-year CD ladder. I think 3 years is not enough to smooth out the valleys. To be really safe, a 10-year ladder would be the best. I use 4% of my portfolio each year to buy another. I have not quite settled on the pay-out mechanism. The simplest would be to live off the maturing CD (through a MM account) and fund the next one.
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Old 10-19-2008, 01:05 PM   #11
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I appreciate your thoughts on this and after looking at some other threads I think I'll go with a 5 year ladder too and fund each at $20k. I see that you can buy CDs through Vanguard, has anyone done this? as I like to keep things as simple as possible it's my initial preference.

Is it preferable to live off the maturing CD and buy a new 5 year CD with dividends form your stock/bond portfolio, or live of the dividends and just buy the 5 year CD with the maturing CD? Is suppose it depends on the rates of return.

Also are you setting up the CD ladder in an after tax or tax deferred account. Is one better than the other? Say you had $200k in after tax and $800k in tax deferred investments and needed to generate a comparatively small amount of $20k/year with some market buffering, how would you set up the CD ladder?
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