Looking to generate more income from portfolio and need advice

[pb4uski]

.....I think he changed his opinion due to his clients behavior in the past recession (i.e. selling at the bottom and doing irretrievable damage). However, his clients need to have a minimum of $25M and have clearly "won the game" where an extra million or two (or five) won't make much difference. With my puny stash, I'd be thrilled with extra gains from equities and so I have not seriously considered liability matching.

Client behavior doesn't make the strategy bad or inappropriate.... if that is the case it is an implementation problem, not a flawed strategy.


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[nun]

For the OP to generate max income it would be best to be 100% equities....of course that would also maximize volatility and might be bad if we have some down years. The OP could implement a negative glide path and rebalance each year to an AA with a higher percentage of equities. This can be done by taking disproportionately more income from bonds or other fixed income sources. Of course whether the OP feels comfortable with this strategy is the question. IMHO the portfolio is a bit small to do it and sleep well.

 

[Turn_the_Page]

I would also suggest simplifying the portfolio to a few mutual funds. You don't want to focus on income, as this will lead you into a "chasing yield" mind-set. Focus on total return and just sell what you need to get your funds each year. If you maintain 2-3 years of withdrawals in your bank account (near term 'bucket'), then you can handle some volatility. You're going to want to be in the 50 - 70% equity range for the AA.

 

[daylatedollarshort]

You are in a really nice position and matching the non cola pension with the mortgage is great. Thanks for posting your details.

You are welcome. We just had a lightbulb moment one day when we realized if we lowered our overhead we would never have to work again unless we wanted to as well as not have any interest rate or stock market stress ever again. So we all have our own paths to ER. There is low upside potential with a matching strategy, but also limited downside risk.

 

[dirt_dobber]

i thought this was interesting...
Barclays 2016 outlook for stocks laid out in a flow chart

 

[marko]

Outside of a messy, high expense PF, I wonder if the OP is just spooked by a zero growth market year. A new retiree, looking at a bad year like 2015 might assume the worst.

$900K with $10K in dividends ain't bad and a 4% withdrawal coupled to SS in a few years should easily cover his expenses.

 

[DEC-1982]

i thought this was interesting...
Barclays 2016 outlook for stocks laid out in a flow chart

Nice chart. 5% S&P increase plus 2% dividends equals 7%, which is quite satisfactory for many people.

 

[marko]

Nice chart. 5% S&P increase plus 2% dividends equals 7%, which is quite satisfactory for many people.

Someone on Bloomberg yesterday pointed out that (IIRC) since WWII, every year that was flat/down was followed by a year of 10% or greater (with two exceptions)

 

[audreyh1]

Someone on Bloomberg yesterday pointed out that (IIRC) since WWII, every year that was flat/down was followed by a year of 10% or greater (with two exceptions)

Hmmm - I guess I remember negative years 2001 and 2002 just too well (after down year 2000).

There are actually at least 5 yearly exceptions to this stated fact, not two.

Scroll down the left 'Year and Return%' window under CAGR of the Stock Market. http://www.moneychimp.com/features/market_cagr.htm

 

[samclem]

It's a shame that the enthusiasm for "liability matching portfolios" occurred after they became largely impractical to implement due to the lack of suitable investments. It might have worked pretty well for more people using those 3.5% real interest I-Bonds.

 

[samclem]

Client behavior doesn't make the strategy bad or inappropriate...

Oh, but it does from the FA's perspective, and that's Bernstrien's perspective. "Liability matching" helps assure he'll get fewer panicked calls if the markets are volatile, and that's what he wants. Lost potential? So what?

 

[daylatedollarshort]

It's a shame that the enthusiasm for "liability matching portfolios" occurred after they became largely impractical to implement due to the lack of suitable investments. It might have worked pretty well for more people using those 3.5% real interest I-Bonds.

I think largely impractical depends on your individual situation. According to Vanguard study, median financial wealth among wealthier retiree households is $395K. Even at a zero real return, a 30 year SWR would be 3.33% prior to portfolio depletion. Each 1% SWR increase would be $3,950 extra a year.

At low levels of financial wealth investment income is minimal no matter how the money is invested, and at very high levels of wealth (like Bernstein's clients) or retirees with other income sources, risk is optional, so like with LTC insurance (whether to buy insurance of self insure) there is probably only a certain range of financial wealth / risk tolerance / spending requirements where risk level becomes a big decision.

 

[mathjak107]

the problem is even getting zero real return can be a challenge .

with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..

so going forward it may be tough just staying at zero real return with all these head winds .

high stock valuations never happened before with such low rates . . at the historical times rates were so low like back in the 1920's the cpi fell so much they were actually great returns at 1.50% on bionds

 

[photoguy]

with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..

Is total bond return giving negative real returns? Just looking at vanguard's performance summary of total bond (VBTLX) seems to show zero or positive real return over 1,3,5,10 year periods. (I'm just eyeballing it)

In any case, one option Bernstein is recommending are short-term bonds which should do a much better job tracking inflation than a total bond fund with longer duration. I'm guessing, but don't know for sure, that if real yields on TIPs increased he would prefer that option over short-term.

 

[nun]

the problem is even getting zero real return can be a challenge .

with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..

so going forward it may be tough just staying at zero real return with all these head winds .

high stock valuations never happened before with such low rates . . at the historical times rates were so low like back in the 1920's the cpi fell so much they were actually great returns at 1.50% on bionds

This is why I sold most of my bond funds and my fixed income is now TIAA-Traditional. I figure a guaranteed 4% is hard to pass up today.

The OP has the problem of poor bond fund returns and a high stock market P/E ratio. However, if we use historical trends and data the OP will be able to generate most income from a 100% stock portfolio, but who know what that will do to his/her mental health.

 

[daylatedollarshort]

the problem is even getting zero real return can be a challenge .

I-bonds and individual TIPS (5 - 30 years) all return at least zero real return right now:
United States Government Bonds - Bloomberg
Ten year TIPS are at inflation + .59%.

The liability matching strategy does not imply a 100% portfolio of TIPS, inflation adjusted annuities and I-bonds - only enough, along with other income like SS, pensions, and rental income to meet your essential retirement living expenses, such as food, housing and medical care. The around the world cruise money can be invested in riskier assets, if you like. Then as Bernstein puts it, if your riskier investments don't do as well, at least you're not pushing a shopping cart under an overpass.

 

[MooreBonds]

Is total bond return giving negative real returns? Just looking at vanguard's performance summary of total bond (VBTLX) seems to show zero or positive real return over 1,3,5,10 year periods. (I'm just eyeballing it)

Those 1, 3, 5, 10 year periods involved net declining interest rates, for the most part. Which means that total real return involved capital gains (realized and unrealized). If there is any upward movement in rates, your return will almost certainly be negative real return, since there will be zero capital gains to speak of to contribute to your total return (and likely capital losses).

Perhaps rates will barely nudge up, and will stay as-is for the next 3 years. If so, at best you have nominal rates which are even to or a little under inflation, since you (again) still have zero capital gains to speak of.

 

[photoguy]

Those 1, 3, 5, 10 year periods involved net declining interest rates, for the most part. Which means that total real return involved capital gains (realized and unrealized). If there is any upward movement in rates, your return will almost certainly be negative real return, since there will be zero capital gains to speak of to contribute to your total return (and likely capital losses).

I understand your point but I took Mathjak's statement about returns (based on his wording and example) to be actual returns we've experienced and not future expected returns. Perhaps I mis-interpreted him.

However, rates have already gone up -- we saw a step up in 2013 and total bond is still positive in real terms over the past 3 years. I have no doubt that going forward returns will be crappy but I don't believe they will be negative when averaged over a few years.

 

[audreyh1]

I don't worry about getting a positive real return from the fixed income portion of my portfolio. It's there for stability, and safety during periods of market turmoil. Which means it's going to hold a good amount of higher quality bonds, and they don't yield as much as riskier bonds do.

During good equity market years, some of the gain in equities is trimmed to grow the bond portion. During bad equity market years, the bond portion will be trimmed somewhat to restore the equity portion.

The equity portion plays the role of keeping up with inflation, and for that reason at least half of the portfolio is in equities. But equities are a rollercoaster compared to bonds, and since we're retired and living off our investments, we prefer to have that rollercoaster smoothed by fixed income, which includes bonds.

BTW - total return investor, if you didn't already figure that out. I don't worry about what anything is yielding.

 

[nun]

I don't worry about getting a positive real return from the fixed income portion of my portfolio. It's there for stability, and safety during periods of market turmoil. Which means it's going to hold a good amount of higher quality bonds, and they don't yield as much as riskier bonds do.

This shows how much retirement planning has changed in the last generation. There was a time when fixed income was expected to produce real returns and was the default for retirement....stocks were just too risky.

 

[marko]

This shows how much retirement planning has changed in the last generation. There was a time when fixed income was expected to produce real returns and was the default for retirement....stocks were just too risky.

A very astute observation! Yeah....I had aunts who got by quite nicely clipping coupons. Today, they might be more challenged.

(As a side note, I once mentioned "clipping coupons" to someone. They thought that things were so desperate that the folks were clipping grocery coupons)

 

[Taxman59]

(As a side note, I once mentioned "clipping coupons" to someone. They thought that things were so desperate that the folks were clipping grocery coupons)

LOL!


Have the day you deserve, and let Karma sort it out.

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[audreyh1]

This shows how much retirement planning has changed in the last generation. There was a time when fixed income was expected to produce real returns and was the default for retirement....stocks were just too risky.

I think these folks were ignoring inflation while spending their interest or dividends.