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What do you use to create an income stream?
Old 07-20-2010, 02:27 PM   #1
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What do you use to create an income stream?

I know there are many options for this, but the safest seems to be to get a lump sum of cash and put it in a very safe investment that produces regular returns. I realize T-bills and CD rates are unacceptably low right now, but these would be the type of investments I would think most would put that lump sum in.

I looked up historic CD and 30 year T-bill rates and saw some very high rates but that 5-6% were not uncommon in years where we were not in a recession. If this was the case, why would you have to lower your SWR based on your age at retirement? For example, if I have $2 mill and am able to buy a 30 yr T-Bill with an interest rate of 6%, then I can still have an SWR of 4% and give myself an annual 2% raise.

I feel like many retirement calcs I use take your lump sum and deduct the 4% but aren't adding the interest you are gaining back into it thus eliminating any use of the lump sum.
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Old 07-20-2010, 02:30 PM   #2
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don't forget about inflation....
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Old 07-20-2010, 02:45 PM   #3
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Originally Posted by bizlady View Post
don't forget about inflation....
And don't forget about taxes due and their bite...
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Old 07-20-2010, 02:50 PM   #4
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What do you use to create an income stream?
well a few ideas come to mind in no particular order to create (passive) income streams...

Immediate annuity
Other annuities (ie. Life Insurance variations style)
TIPS bonds
Corporate and government bonds
Bond ladders
Certificates of deposit (as you mentioned)
Stocks that pay dividends ( ie. Norwegian widow style)
Buckets of money (Lucia style)
Income from a diversified portfolio (R Clyatt et al style)
rental Income
silent partner investing in business and other enterprises
pension

There are issues with every one of those vehicles. Choose your poison !
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Old 07-20-2010, 02:51 PM   #5
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Well if you use a T-bill, it is tax free. If not, take taxes out of your distribution just like a paycheck. the 2% raise would help slow inflation to approx 1% per year. If you could get an extra 1% interest on your lump sum that would cover it.
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Old 07-20-2010, 03:04 PM   #6
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I don't think T-bills are tax free. They are free of state tax, but not of Federal income taxes.

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Old 07-20-2010, 03:06 PM   #7
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I feel like many retirement calcs I use take your lump sum and deduct the 4% but aren't adding the interest you are gaining back into it thus eliminating any use of the lump sum.
Yes they are - after the first year. They are assuming your remaining "lump sum" is earning something and/or appreciating some each year. How much depends on your asset allocation.

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Old 07-20-2010, 03:07 PM   #8
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T-Bills/T-bonds paying maybe 5% or so after deducting 2-3 % for inflation and 1-2 % for taxes have little real return. Some bonds actually have negative real returns when you take out inflation and taxes.

Ditto for CDs
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Old 07-20-2010, 03:44 PM   #9
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Please read these, they'll explain a lot
(FAQ archive): Bernstein's "Retirement Calculator from Hell" articles
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