Your approach to 3-4% income with 3% withdrawal and 15 year plus horizon?

[53anddone]

I am 53 and retiring soon.

So I am looking at 15 years before pensions, etc. I have a nice next egg that I believe I can easily live on if I can get a 3-4% dividend and can withdrawal around 3% each year from principle. Funds will easily last if I simply maintain principle at this rate but of course some growth would be nice.

Looking for ideas on what approaches some of the folks on this board would use with this scenario.

FWIW I am sitting in cash now but I am still working for a few more months.

Thanks

 

[Senator]

Getting a guaranteed 3-4% dividend is not that easy in today's environment. DVY gives 3.34%. Individual stocks give more, but there is additional risk.

Most 3-4% withdrawal rate methods assume your dividends are reinvested, or are part of the annual withdrawal.

If you taking 3-4%, and another 3% of principal, you are withdrawing 6-7%. That is WAY too high. If your pension will be guaranteed to be enough, maybe.

To me, it is aggressive.

If you are in cash now, you should get that invested. That is a guaranteed losing method.

 

[53anddone]

Getting a guaranteed 3-4% dividend is not that easy in today's environment. DVY gives 3.34%. Individual stocks give more, but there is additional risk.

Most 3-4% withdrawal rate methods assume your dividends are reinvested, or are part of the annual withdrawal.

If you taking 3-4%, and another 3% of principal, you are withdrawing 6-7%. That is WAY too high. If your pension will be guaranteed to be enough, maybe.

To me, it is aggressive.

If you are in cash now, you should get that invested. That is a guaranteed losing method.

Thanks for the reply. The cash situation is very temporary - getting back in soon.

I am assuming that I am invested in dividend payers (as you said like DVY) that would appreciate in share price over 15 years that matches my withdrawal rate (3-4%) figuring that this is safe assumption over such a long period. What I am I missing on that assumption?

 

[Senator]

I am assuming that I am invested in dividend payers (as you said like DVY) that would appreciate in share price over 15 years that matches my withdrawal rate (3-4%) figuring that this is safe assumption over such a long period. What I am I missing on that assumption?

What do you do in a down market, like we might have this year? Or an extended down market, like Japan has had for the past 20+ years?

Compare DVY with IVV or SPY (S&P), it is pale by comparison. DVY is down year over year.

A 4% withdrawal rate is just that, 4% of the total, assuming that you have the proper investments. It is not 6-7%. If you do not have the proper investments, 2% may be too high.

You should also have at least a year (or 2-3) in a very short term vehicle, like a CD. You should have enough cushion so that you can cut back in lean years without going into poverty.

Retiring prior to 62 (i.e. SS) is tough without a solid pension, a lot of money, or an outside income source.

 

[Birchwood]

4% withdrawal maybe too optimistic for most.
My take:
You should have 33X not 25X your annual expenses.
Start with 4%, but not add to inflation.
Start with 3% and adjust up or down depending on the market.

 

[soupcxan]

Do you still need the principal to be there in 15 years once the pensions kick in? If not, then you can spend 6-7%/year. If you need to preserve the principal, then 6-7% is too high a withdrawal rate.

 

[53anddone]

What do you do in a down market, like we might have this year? Or an extended down market, like Japan has had for the past 20+ years?

Compare DVY with IVV or SPY (S&P), it is pale by comparison. DVY is down year over year.

A 4% withdrawal rate is just that, 4% of the total, assuming that you have the proper investments. It is not 6-7%. If you do not have the proper investments, 2% may be too high.

You should also have at least a year (or 2-3) in a very short term vehicle, like a CD. You should have enough cushion so that you can cut back in lean years without going into poverty.

Retiring prior to 62 (i.e. SS) is tough without a solid pension, a lot of money, or an outside income source.

Maybe a bit more detail would help.

Years:53 - 67

Cash to invest and live on: 5M

Years:67 and onward

Pensions: 127k annual
401k: about 1.5M

So I am figuring even if we depleted the 5M to 4M we are still OK.

At least thats what my spreadsheets says.

Anyway, my real question was about ways to safely generate a decent yield. Yes DVY can get 3.3% or so, SPY slightly less. But what are other options over this period? I own some preferred REIT stocks that pay northward of 5%, there are utilities, the AT&Ts of the world, etc. Are Bond funds worth considering? Is there a basket of investments that could safely deliver 3-4% over the period?

 

[athena53]

If you manage a 3% dividend stream and withdraw it all, you're not protecting yourself against inflation. Let's say you have $500K. If you have a 3% dividend yield, that's $15K per year. At 2% inflation, that's worth only $11,145 in today's dollars. It would be worth only $9,600 if inflation averaged 3%. Whether or not it's OK to withdraw all of your investment yield depends on what you expect to receive in 15 years, as others have noted.


Edited to add: just saw your last post. With assets like that you should be fine unless you take up polo or buy an airplane!

 

[Senator]

Maybe a bit more detail would help.
Years:53 - 67
Cash to invest and live on: 5M
Pensions: 127k annual
401k: about 1.5M

Definitely helps... As long as you do not pick up an ex-wife, you should be fine.

Of course, that assumes you can live on 127K. (with COLA?).

 

[Cobra9777]

I think you are perhaps over-thinking this. And possibly asking the wrong question. I looked over your prior thread as well. You have $6.5M investable assets, plus $127K/yr pension at 65. I assume you have SS coming as well, although that's not mentioned in either thread. Also not mentioned is whether the pension is COLAed. In either case, this should easily support your $180K/yr starting expenses. You also mentioned that the mortgage is paid off in 5 years, so I assume expenses are a lot lower after that. Additionally, if you're anything like others here, your expenses will go down when you stop working, and again when the kids are out of the house. It's also unclear whether the $180K includes taxes, which should go down sharply when you retire. You also mentioned that college for your 2 kids is funded, plus you own a second home outright.

You seem to be searching for a magical ticker or two that's going to provide a low-risk 3-4% dividend plus another 3-4% reliable growth that you can withdraw. Don't worry about that. If such an animal exists, it's not knowable now. Invest the $6.5M in a balanced portfolio of low-cost index funds. Anywhere from 30/70 to 70/30 will do just fine. Withdraw whatever you need once a year and rebalance. If you want to tilt toward income, go for it... add VYM or DVY and maybe some VNQ to the equity side, and perhaps some HYG to the bond side. You could probably get the total portfolio to spin off about 3.5% if that helps you sleep at night.

Be happy, you've won the game, big time. Don't screw it up by betting the whole $5M cash on AT&T or some utility.

 

[soupcxan]

If you manage a 3% dividend stream and withdraw it all, you're not protecting yourself against inflation.

Some of the inflation risk is mitigated by the fact that dividends have historically increased faster than inflation, as long as there's not a huge recession. Dividends on VYM have a CAGR of 11% over the last 8 years even with the recession in the middle.

 

[Fermion]

Just out of curiosity, what type of job had a $127k pension after (25?) years of service plus the ability to sock away $6.5mil?

That is one of the higher pensions I have seen on here.

 

[pb4uski]

How much do you need to live on? Ignoring your penson and SS, you have $6.5m. At a 3-4% WR that is $195-$260k a year and you can increase those withdrawals for inflation each year. Add in your pension and SS and you can spend even more.

Have you run your situation through Firecalc?

Forget about income investing and not invading principal... total return is a better way to go IMO. See https://personal.vanguard.com/pdf/s557.pdf

 

[rayinpenn]

You have 6.5 million of investible assets and you are worried about having enough? Your kidding right? If you put it in DVY, IDV and a couple of other dividend funds and get 3.3% that's $33k per million or $214,500 per year dividend income. That by the way is more then the average American retires with in total! Keep in mind unlike a paycheck there's no social security, or any of the other paycheck deductions most of us see and a lower tax rate on dividends.

People have different life styles to be sure - many people make that much or more and still manage to not have enough. However a prudent person could easily have a winter and summer homes, a club membership (no not the y) a boat and drive very nice cars on that amount .. You could also afford to be generous too...

Watch some Dave Ramsey episodes and see what other people manage on. You really are blessed, relax have fun and retire...

Oh and your portfolio of dividend funds will continue grow over time...


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[soupcxan]

Just out of curiosity, what type of job had a $127k pension after (25?) years of service plus the ability to sock away $6.5mil?

That is one of the higher pensions I have seen on here.

Warren, MI? I would guess an exec at GM.

 

[nun]

With $5M in taxable accounts tax efficiency is going to be important. I'd look at a ladder of tax free municipal bonds.

 

[pb4uski]

You have 6.5 million of investible assets and you are worried about having enough? Your kidding right? ....

Why do you have to be so judgmental? OP still hasn't indicated their expenses to my knowledge. It's all relative. IMO, good for him.

 

[timemoveson]

Similar story, similar anxiety but working on it hard

I've said this privately in the past to several similar posters, but I'll say it publicly here this time as it might be of benefit to the OP and others.

I am in a very similar snack bracket, roughly the same dimensions: my age, family of four, same investment fund, two homes, kids' school funded, no debt, future retirement cash flow of that rough amount in a few years too, etc.

Despite the "what are you kidding?" I would be tempted to ask myself in the mirror, I have anxiety too. Stopping (unlikely to ease out) after running so hard for so long with a goal orientation is difficult to think about. Despite all the positive factors in play, it will be brutal to cut the cord. And this despite the fact that I am now well educated in all matters financial, in control, mitigating my risks, and have everyone on board with the plan. At this level, in my opinion the matter has less to do with money and much more with the other holistic factors in play in one's life.

PM me if you wish to have a 1-1 conversation that might not be of interest to the general population on the forum.

 

[Midpack]

I've said this privately in the past to several similar posters, but I'll say it publicly here this time as it might be of benefit to the OP and others.

I am in a very similar snack bracket, roughly the same dimensions: my age, family of four, same investment fund, two homes, kids' school funded, no debt, future retirement cash flow of that rough amount in a few years too, etc.

Despite the "what are you kidding?" I would be tempted to ask myself in the mirror, I have anxiety too. Stopping (unlikely to ease out) after running so hard for so long with a goal orientation is difficult to think about. Despite all the positive factors in play, it will be brutal to cut the cord. And this despite the fact that I am now well educated in all matters financial, in control, mitigating my risks, and have everyone on board with the plan. At this level, in my opinion the matter has less to do with money and much more with the other holistic factors in play in one's life.

PM me if you wish to have a 1-1 conversation that might not be of interest to the general population on the forum.

Easy enough to just ignore the 'are you kidding crowd.' Whether or not you have enough is the same question for all of us. If you're withdrawing 6% of your nest egg per year, unless you have floor income from somewhere else, you're tempting failure whether you spend $40K/yr or $400K/yr...

The 'are you kidding crowd' is trying to turn the discussion to another question largely unrelated to retirement income planning...that we can all simply choose to ignore. There will always be someone much better off, and much worse off - no matter who you are (unless your a .01%er).

No need to refrain from participating in discussions. Just answer in percentages instead of $, more useful to more members anyway...

 

[Mulligan]

Maybe a bit more detail would help.



Years:53 - 67



Cash to invest and live on: 5M



Years:67 and onward



Pensions: 127k annual

401k: about 1.5M



So I am figuring even if we depleted the 5M to 4M we are still OK.



At least thats what my spreadsheets says.



Anyway, my real question was about ways to safely generate a decent yield. Yes DVY can get 3.3% or so, SPY slightly less. But what are other options over this period? I own some preferred REIT stocks that pay northward of 5%, there are utilities, the AT&Ts of the world, etc. Are Bond funds worth considering? Is there a basket of investments that could safely deliver 3-4% over the period?

If you are looking for part of your portfolio to be more "income orientated" you almost have to look at preferred stocks. Since you own Reit preferreds already, I assume you know the inherent characteristics of such. I do not own a lot of REITs due to the tax structure of them and the fact I have little "tax deferred or free space".
Mine are mostly electrical utility preferreds (they are qualified 15% issues which saves me in taxes since I am just short of 28% tax bracket in retirement) which yield over 6% and have never missed a payment in the decades since they were issued.
Banks also issue preferreds. A good example would be Wells Fargo. Their common dividend pays $1.52 yearly or a 2.84% annual yield. Buy their "L" issue which is WFC-L and it yields 6.44% and is essentially noncallable as it is a "busted convertible". As you know, common stock owners cannot receive a penny until the preferreds get their money first.


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[Travelwanted]

How much do you need to live on? Ignoring your penson and SS, you have $6.5m. At a 3-4% WR that is $195-$260k a year and you can increase those withdrawals for inflation each year. Add in your pension and SS and you can spend even more.

Have you run your situation through Firecalc?

Forget about income investing and not invading principal... total return is a better way to go IMO. See https://personal.vanguard.com/pdf/s557.pdf

I personally like this line of thinking.

Don't chase yield. You don't need to do that. Make sure you read the link he provided on total return. I know it sounds nice and clean to live off the dividends, never touching the principle, but a balanced portfolio will be safer and over time outperform an income oriented approach.
And, yes, I like the idea of adding bonds to the mix. They will provide income and help temper any big down turns in the market.

Good luck and congrats and your success.

 

[rayinpenn]

Easy enough to just ignore the 'are you kidding crowd.' Whether or not you have enough is the same question for all of us. If you're withdrawing 6% of your nest egg per year, unless you have floor income from somewhere else, you're tempting failure whether you spend $40K/yr or $400K/yr...

The 'are you kidding crowd' is trying to turn the discussion to another question largely unrelated to retirement income planning...that we can all simply choose to ignore. There will always be someone much better off, and much worse off - no matter who you are (unless your a .01%er). ..

Your suggestion that I'm trying to turn the 'discussion' is both ridiculous and without merit. I sensed the OP doesn't have a handle on what the $5MM will produce in income. I offered up some figures as a sanity check.. I suggested that the op enjoy the money and not worry. Which all sounds pretty prudent to me. The op is an adult - if they were offended they can speak up..

Not sure what your agenda is but it isn't helpful at all...






Sent from my iPad using Early Retirement Forum.

 

[Midpack]

Your suggestion that I'm trying to turn the 'discussion' is both ridiculous and without merit. I sensed the OP doesn't have a handle on what the $5MM will produce in income. I offered up some figures as a sanity check.. I suggested that the op enjoy the money and not worry. Which all sounds pretty prudent to me. The op is an adult - if they were offended they can speak up..

Not sure what your agenda is but it isn't helpful at all...

Agenda? You're kidding right? Just as members can ignore your judgements, they can ignore my POV, no skin off my nose.

Even though you quoted me, evidently you don't grasp this point:

Whether or not you have enough is the same question for all of us. If you're withdrawing 6% of your nest egg per year, unless you have floor income from somewhere else, you're tempting failure whether you spend $40K/yr or $400K/yr...

What the OP chooses to spend has little to do with what anyone else thinks is reasonable or doable. You compare his assets to what the "average American retires with" - and what you think is reasonable. And then go on suggest he read Dave Ramsey's ideas on spending? Seriously?

Our role is to assess whether a families assets will support their spending. Not to judge what they choose to spend.

You might have also noticed several other members found your judgements beside the point if not unwelcome...but it's really not worth getting worked up over. Relax...

You have 6.5 million of investible assets and you are worried about having enough? Your kidding right? If you put it in DVY, IDV and a couple of other dividend funds and get 3.3% that's $33k per million or $214,500 per year dividend income. That by the way is more then the average American retires with in total! Keep in mind unlike a paycheck there's no social security, or any of the other paycheck deductions most of us see and a lower tax rate on dividends.

People have different life styles to be sure - many people make that much or more and still manage to not have enough. However a prudent person could easily have a winter and summer homes, a club membership (no not the y) a boat and drive very nice cars on that amount .. You could also afford to be generous too...

Watch some Dave Ramsey episodes and see what other people manage on. You really are blessed, relax have fun and retire...

Oh and your portfolio of dividend funds will continue grow over time...


Sent from my iPad using Early Retirement Forum.

 

[Fermion]

Easy enough to just ignore the 'are you kidding crowd.' Whether or not you have enough is the same question for all of us. If you're withdrawing 6% of your nest egg per year, unless you have floor income from somewhere else, you're tempting failure whether you spend $40K/yr or $400K/yr...

The 'are you kidding crowd' is trying to turn the discussion to another question largely unrelated to retirement income planning...that we can all simply choose to ignore. There will always be someone much better off, and much worse off - no matter who you are (unless your a .01%er).

No need to refrain from participating in discussions. Just answer in percentages instead of $, more useful to more members anyway...

True to a point, except the person spending $400k per year at a 6% withdrawal rate can probably cut back a serious amount while still maintaining an above average lifestyle. Cutting back to $200k in an extreme market slide might hurt, but is still likely possible.

If you are spending $20k per year and that is a 6% withdrawal rate, you are probably screwed if you need to cut back to $10k a year.

$6.5 mil is a lot, but I think we could have achieved that if we worked until 58 or 60 instead of retiring at 45. The pension is pretty jaw dropping though.

There is a limit to how patient most on here will be with high net worth individuals. If someone comes on stating they have $120 million and want to know if they can retire early, I think I won't be able to respond seriously.

 

[timemoveson]

Just saying

I really enjoy this forum and many of the posts, as I also do White Coat Investor, and some threads on Bogleheads. And, I try to understand and respect all opinions when politely pitched. However, I frequently caution upper snack-bracket posters privately that unless they are dealing with responders who are living in or close to their reality, the advice must be taken with a healthy dose of salt.

While much of the advice on these types of forums is well intentioned and generically useful, "average responders" really have little insight into the psychology of the .1-1% wealthy and what we want or need. It just doesn't fit and it isn't highly relevant. It is typically nothing or little to do with money and much to do with everything in personal history, how you got to this place in life financially, and money psychology. And I would say the converse is true too, even if you came from "nothing" and are now "something" financially you've forgotten what it is like on the financial margin or at average. You are just working in a different path.

Living this now with many contemporaries and a range of similar circumstances lending credence to this opinion. Note, this OP has many millions of dollars and is coming to an Internet forum blindly for the MOST BASIC advice, eliciting a wide range of responses from many perspectives.