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What to do - stable retirement income
Old 10-04-2007, 09:58 PM   #1
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What to do - stable retirement income

What kind of after-tax income can one expect on $1M USD cash investment? And assuming very low tolerance for risk, would you put it in treasuries, CD's, muni's ? Looking for the real after tax monthly cash flow.

Am thinking the best you could do is AAA corp bonds at about 6% before tax....or about 40K/year after fed,state,ss taxes.

Anyone have higher returning options that are very safe?

Dont say invest it in mutual funds, ETFs, international stocks or dividend paying stocks....equities are too risky, hence not an option.
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Old 10-04-2007, 10:27 PM   #2
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Originally Posted by papadad111 View Post
What kind of after-tax income can one expect on $1M USD cash investment? And assuming very low tolerance for risk, would you put it in treasuries, CD's, muni's ? Looking for the real after tax monthly cash flow.

Am thinking the best you could do is AAA corp bonds at about 6% before tax....or about 40K/year after fed,state,ss taxes.

Anyone have higher returning options that are very safe?

Dont say invest it in mutual funds, ETFs, international stocks or dividend paying stocks....equities are too risky, hence not an option.
I am not sure that you could make a diversified portfolio of AAA corporate bonds. There may not be that many AAA rated credits; and even some of these may be overrated.

Do you need $60,000?

Ha
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Old 10-04-2007, 10:41 PM   #3
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Seeking $48K/year after tax, essentially $4K/month or about $1K/week...key is AFTER TAX.
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Old 10-05-2007, 12:35 AM   #4
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Originally Posted by papadad111 View Post
... cash investment...
... very low tolerance for risk...
... real after tax monthly cash flow...
... very safe
...equities are too risky, hence not an option...
If you're going to use vocabulary like that then you're going to end up shopping in the annuity aisle, perhaps with a COLA rider.

You'll find out how important that vocabulary is to you when it determines how long you're going to have to keep working to build up enough of an ER portfolio to give you what you want while still beating decades of inflation.

Groucho Marx was once asked what he invested in and answered "Treasuries." The interviewer said "You can't retire on a portfolio of Treasuries!" and Groucho countered "You can if you have enough of them."
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Old 10-05-2007, 06:20 AM   #5
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Yup. We finally found a real candidate for an inflation protected immediate annuity. Go get a quote on Vanguard. Remember, at 3% inflation your expenses will double in about 15 years. If you need 48K now, you will need a lot more later. Your risk free CD is useless if you can't live on the output.
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Old 10-05-2007, 06:30 AM   #6
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Yup. We finally found a real candidate for an inflation protected immediate annuity. Go get a quote on Vanguard. Remember, at 3% inflation your expenses will double in about 15 years. If you need 48K now, you will need a lot more later. Your risk free CD is useless if you can't live on the output.
And don't forget, insurance companies can go belly up too. Best of luck. It's gonna be hard to accomplish a totally risk free plan that keeps pace with inflation.
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Old 10-05-2007, 07:00 AM   #7
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It's gonna be hard to accomplish a totally risk free plan that keeps pace with inflation.
There is no such thing. As soon as OP gets over that, he can map out a real investment strategy. Otherwise, keep working.
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Old 10-05-2007, 07:07 AM   #8
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Seeking $48K/year after tax, essentially $4K/month or about $1K/week...key is AFTER TAX.
That's only one key...the other is AFTER INFLATION.
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Old 10-05-2007, 07:36 AM   #9
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ok... licking the wounds, you've collectively beat me to a pulp. But, I hear you on the inflation side of things. I should explain more. I am building a financial retirement model that assumes the following -

1) retire now with X amount of cash (say, $1M in todays dollars) and based on that,needing to earn approx 6% before tax (approx 4.8% after tax) to generate 48K/year. This would include living expenses and some level of "outside the portfolio" savings for emergencies, big ticket items, etc.

i see muni's paying 4.1 to 4.3% in my state, which are free of fed and state taxes, so i am in the ballpark of the desired return... Certainly they are not risk free...only treasuries are (or are they...) but getting closer.

2) give myself a COLA adjustment of 3% per year to keep up with inflation

3) Reinvesting any income generated that exceeds $48K+COLA from the investment

4) assume an additional $400K in todays dollars tied up in deferred retirement investments - continue to grow from now thur age 59 1/2 but can be tapped only then. From that point, begin drawing that down too.

5) assume evenutal 100% draw-down of all assets (assuming I am lucky to live that long)

Trying to model the amount needed - i think based on $1M today, at 4.8% annual after tax return, and then an additional 400K to 500K in todays dollars locked up in retirement savings that grow at 4.8% per year and become available post age 59 1/2 the money will last for about 37 years.
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Old 10-05-2007, 07:44 AM   #10
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Have you run your assumptions through FIRECalc to see what it says about your odds of success? See link in my signature line....
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Old 10-05-2007, 07:45 AM   #11
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Papadad, you are essentially describing the ~4% "safe withdrawal rate" that people talk about everywhere. It requires a diversifies portfolio with a fair amount of equities to have a high likelihood of success. You won't get there with CDs. So, if you reject any equities you are heading over to annuity-land. Depending on your age, you can get a a fairly good guarantee there with some inflation protection. But you will be giving up any estate to pass on and you will be backed by only the full faith of the insurance company you select (Brewer will advise that some of these are pretty good, others not so).
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Old 10-05-2007, 07:47 AM   #12
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Originally Posted by papadad111 View Post
ok... licking the wounds, you've collectively beat me to a pulp. But, I hear you on the inflation side of things. I should explain more. I am building a financial retirement model that assumes the following -

1) retire now with X amount of cash (say, $1M in todays dollars) and based on that,needing to earn approx 6% before tax (approx 4.8% after tax) to generate 48K/year. This would include living expenses and some level of "outside the portfolio" savings for emergencies, big ticket items, etc.

i see muni's paying 4.1 to 4.3% in my state, which are free of fed and state taxes, so i am in the ballpark of the desired return... Certainly they are not risk free...only treasuries are (or are they...) but getting closer.

2) give myself a COLA adjustment of 3% per year to keep up with inflation

3) Reinvesting any income generated that exceeds $48K+COLA from the investment

4) assume an additional $400K in todays dollars tied up in deferred retirement investments - continue to grow from now thur age 59 1/2 but can be tapped only then. From that point, begin drawing that down too.

5) assume evenutal 100% draw-down of all assets (assuming I am lucky to live that long)

Trying to model the amount needed - i think based on $1M today, at 4.8% annual after tax return, and then an additional 400K to 500K in todays dollars locked up in retirement savings that grow at 4.8% per year and become available post age 59 1/2 the money will last for about 37 years.
(Don't feel beaten to a pulp - - they are just trying to do you a favor by giving their honest evaluations, and nobody thinks the less of you. I would do the same, but I don't can't think of anything to say that they are not saying!)
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Old 10-05-2007, 10:32 AM   #13
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And don't forget, insurance companies can go belly up too. Best of luck. It's gonna be hard to accomplish a totally risk free plan that keeps pace with inflation.
risk free is an oxymoron.

He wants to avoid principal risk

he will do so at a cost of return risk/ inflation risk. He will also have a higher risk of running out of money, especially with the 6% withdraw rate suggested in OP.

I would look at an annuity.
I would then look to add TIPS or I-bonds to hedge the inflation risk.
I would also look at using dividend income for a portion of portfolio (maybe 30% position in dividend equities).

REITs would be another income option.
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Old 10-05-2007, 10:48 AM   #14
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Originally Posted by papadad111 View Post
ok... licking the wounds, you've collectively beat me to a pulp. But, I hear you on the inflation side of things. I should explain more. I am building a financial retirement model that assumes the following -

1) retire now with X amount of cash (say, $1M in todays dollars) and based on that,needing to earn approx 6% before tax (approx 4.8% after tax) to generate 48K/year. This would include living expenses and some level of "outside the portfolio" savings for emergencies, big ticket items, etc.

i see muni's paying 4.1 to 4.3% in my state, which are free of fed and state taxes, so i am in the ballpark of the desired return... Certainly they are not risk free...only treasuries are (or are they...) but getting closer.

2) give myself a COLA adjustment of 3% per year to keep up with inflation

3) Reinvesting any income generated that exceeds $48K+COLA from the investment

4) assume an additional $400K in todays dollars tied up in deferred retirement investments - continue to grow from now thur age 59 1/2 but can be tapped only then. From that point, begin drawing that down too.

5) assume evenutal 100% draw-down of all assets (assuming I am lucky to live that long)

Trying to model the amount needed - i think based on $1M today, at 4.8% annual after tax return, and then an additional 400K to 500K in todays dollars locked up in retirement savings that grow at 4.8% per year and become available post age 59 1/2 the money will last for about 37 years.
Keep in mind equtities can remove some of the tax bite.

50k in equites would be taxed differently than 50k in interest from a CD (if long term capital gains, the equity position is taxed at much lower rates).

How much of this is a Roth IRA?
How much of this is in a 401k or other tax deferred plan?

Dividend income is also taxed at lower rates than interest from a bond or CD.

I would suggest you look at the "after tax" return of various asset classes and use this as a portfolio contruction tool, more than you are looking at the "principal loss" factor.

For example:

1 M portfolio now Need 60k in income before taxes.

Put $600k (10 years of income) into cash, bonds and various conservative instruments.

I would have this as
180k into 3 CDs of 60k each. ladder these so one matures year 1, another year 2, another year 3. This is your income "next year".
180k into I-BONDs or TIPs. These need to mature every 3 years. At years end, buy a 3 year CD (this will be income 3 years out).
240k into treausuries or money markets. This is a conservative position designed to maintain principal. Put any interest gained into the I-BOND or TIP position. My math suggests this is $7200/year at 3% interest.

Put 400k into equities. Mostly into dividend paying stocks. My calculations suggest this will generate 12k of income per year. Cash out stock only in up years... meaning if 400k earns a 10% return, use the return to replenish the 60k position in the I-BONDs/ TIPs portion.

In a down year, don't sell the equities.

Not sure how many years until age 59.5. You have a 10 year cash buffer in this plan, so if you are older than 49.5, this plan should work.

Add in the additional 400k to the equity portion at age 59.5 (so this might have 800k in equities. Now only a 7.5% return is needed from equities to replace the 60 converted from TIPS/Ibonds to CDs each year.

Only convert in an up year, there is a 10 year cash cushion to ride out a down year.
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