Kitces: Four Pillars for retirement income portfolios

[walkinwood]

Another good post from Kitces.

https://www.kitces.com/blog/four-pi...s-interest-dividends-capital-gains-principal/

This is old hat to a lot of you here, but he makes a good case for what is often referred to here as the "total return" approach to financing ER. That is, get your cash flow from Interest, Cap gains, Principal and Dividends, emphasizing one or the other as conditions dictate.

 

[brucethebroker]

Interesting read. Thanks for the tip.

 

[Chuckanut]

Thanks for a good read and a reminder.

I especially liked this quote:

Diversification across all four pillars of retirement income can protect a retirement plan!

Diversification is, IMHO, the most important aspect of a retirement financial plan. I have said often on this site that it is best to have three legs of the stool - personal savings, pension/401K/403B, and Social Security. Ideally, one could survive comfortably on two of the three legs (just skip the flight to Paris once a month for dinner at Le Meurice.

Further diversifying the invested money provides that additional layer of protection. IOW - prevention is worth a pound of cure.

Diversification - don't leave work without it.

 

[Chuckanut]

For the newbies:

But again, that’s actually the whole point of relying on (all) four pillars of retirement income. You don’t necessarily know which one will produce the desired results from year to year, but diversification gives you the best shot to get it from somewhere, without taking on excessive risk or portfolio concentration in stretching for yield along the way.

 

[Big_Hitter]

kinda missed the defined benefit and social security pillars - had to ding him for that one

he also needs to change that photo - i feel like i'm being flipped off every time i go to his page

 

[nun]

kinda missed the defined benefit and social security pillars - had to ding him for that one

he also needs to change that photo - i feel like i'm being flipped off every time i go to his page

30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.

 

[Big_Hitter]

30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.

that's a pretty solid stool!

I have those but for the UK SS. My rental income is very modest too.

 

[audreyh1]

Thanks for a good read and a reminder.

I especially liked this quote:

Diversification across all four pillars of retirement income can protect a retirement plan!

Diversification is, IMHO, the most important aspect of a retirement financial plan. I have said often on this site that it is best to have three legs of the stool - personal savings, pension/401K/403B, and Social Security. Ideally, one could survive comfortably on two of the three legs (just skip the flight to Paris once a month for dinner at Le Meurice.

Further diversifying the invested money provides that additional layer of protection. IOW - prevention is worth a pound of cure.

Diversification - don't leave work without it.

The article is talking about diversification over:

Ultimately, these components of interest, dividends, capital gains, and principal form the four pillars of retirement income planning.

Not about having pension, SS, and personal savings /IRA/401K a.k.a. the three legged stool.

I see it more as a warning not to take an "income only" approach, ignoring total return.

Seems like retiring solely on investments meets Kitces criteria just fine.

 

[Mulligan]

that's a pretty solid stool!

I have those but for the UK SS. My rental income is very modest too.

A 5 legged stool is PRETTY solid? Heck I am retired on a leg and a half stool. I am surprised the thing doesnt fall over, lol.

 

[nun]

that's a pretty solid stool!

In one context that would be bad.....but in this one it's good.

 

[nun]

The article is talking about diversification over:

Not about having pension, SS, and personal savings /IRA/401K a.k.a. the three legged stool.

I see it more as a warning not to take an "income only" approach, ignoring total return.

Seems like retiring solely on investments meets Kitces criteria just fine.

Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.

 

[Meadbh]

30 years ago I took the opportunity to pay into both the US and the UK SS systems simultaneously; I bought a rental property; saved into 401k/IRA/ROTH/taxable and also bought into a employer's DB plan. So I figure I have 5 legs to my stool;

US SS
UK SS
rent
defined benefit pension
401k/IRA/ROTH/taxable.

That's not a stool: it's a 10 foot bench!

My four legs are:
Canadian CPP and OAS (will try to avoid clawback)
Rent
RRSPs/TFSAs/taxable investments
Holding company

There were rumours that yesterday's Federal Budget would come down hard on professional corporations (which my holding company originated as). There were also rumours about increased taxes on capital gains. Neither of those things happened, but they may yet come to pass. I will stay diversified.

 

[audreyh1]

Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.

Yet that is not what the article discusses. It's definitely not talking about three-legged stools.

 

[Fedup]

Frankly I read the article and it doesn't apply to me. I'm in the same 5 legged or maybe 6 legged stool as nun. I'm only invest in stocks for my IRA and non IRA. My bond is my rental. That's where I clip my coupons.

 

[audreyh1]

Our social security income will be quite low and will probably only cover taxes incurred by the extra income plus Medicare premiums with almost nothing left over. So - at least it will cover something, but it's barely a leg.

So - we are pretty much dependent on our investments. We take a total return approach. We are widely diversified across major asset classes. When CDs are a good deal relative to bonds we take advantage. So interest, dividends, cap gains and principal all play a part. And I'm just fine with this, it doesn't concern me at all.

Overall we hope over the long run our nest egg grows enough after withdrawals to keep up with inflation, so at this point we don't feel like we are dipping into "principal". Still, if we ended up with say half of where we started, inflation adjusted, I would feel like we did great. So I'm not against dipping into principal, in principle, over a lifetime.

 

[Fedup]

I think it's much harder and it takes skills to live off investments. I admire people who can do that. If it were me, I might be tempted to buy an immediate annnuity.

 

[audreyh1]

I think it's much harder and it takes skills to live off investments. I admire people who can do that. If it were me, I might be tempted to buy an immediate annnuity.

Skill? Not so much. Discipline maybe. You just set up a simple asset allocation. Rebalance rarely, and try to ignore the news/noise. I don't see that as requiring skill. Lots of people here are doing this - some with just one or two funds!

Immediate annuity - well I might decide to purchase such a thing when I'm considerably older and the payout is much greater. But at this time I'm not ready to make the such a long-term bet on the insurance companies, nor take the current payout rates.

 

[Meadbh]

Skill? Not so much. Discipline maybe. You just set up a simple asset allocation. Rebalance rarely, and try to ignore the news/noise. I don't see that as requiring skill. Lots of people here are doing this - some with just one it two funds!

Immediate annuity - well I might decide to purchase such a thing when I'm considerably older and the payout is much greater. But at this time I'm not ready to make the such a long-term bet on the insurance companies, nor take the current payout rates.

+1

What Audrey1 said.

 

[nun]

Yet that is not what the article discusses. It's definitely not talking about three-legged stools.

Agreed, it's about diversification and income from your investments ie just one "leg". I think we got to the "3 legged stool" via a criticism that the article should have considered the other two legs as those will influence your income strategy from IRAs etc.

 

[LOL!]

Right, the article is about income from portfolios to spend and not about income from other sources It's right there in the title.

 

[Chuckanut]

Yet that is not what the article discusses. It's definitely not talking about three-legged stools.

I agree it is not.

But, the principle of diversity still holds true, IMHO, whether we are looking at one leg of the stool or the whole stool. In Kitces article he wants us to diversify our investments and that, I think, is a good idea. It makes that leg of the stool stronger.

Not all legs can be easily diversified - for example a pension and SS. Though I suppose one might argue that choosing the right survivor option in the pension along with when to take SS might allow for a bit of diversity that can reduce overall risk.

 

[Fedup]

Skill? Not so much. Discipline maybe. You just set up a simple asset allocation. Rebalance rarely, and try to ignore the news/noise. I don't see that as requiring skill. Lots of people here are doing this - some with just one or two funds!

Immediate annuity - well I might decide to purchase such a thing when I'm considerably older and the payout is much greater. But at this time I'm not ready to make the such a long-term bet on the insurance companies, nor take the current payout rates.

I read the article and it's about what pot to take your money from, coordinating your cash flows, not just simple AA. I'm sure some people I know won't be able to do it. AA is easier. Determine how much in stocks and how much in bonds.
I also read the Janet Quinn Bryant book about retirement, she is my favorite financial author since high school. She also recommends an immediate annuity as part of your retirement income, just a small part. I think very few people that I know is able to manage this complexity and they are all engineers or accountants. My secretary was a teacher and at age 65, she is even more clueless. I had to help her many times on just basic stuff. Maybe people in this forum has the smart to do it. Not many people I know can.

 

[walkinwood]

How do you define your "principal"? Is it the amount of cash that you invested before any reinvested dividends, interest or capital gains?

For anyone who has invested for years without withdrawing anything (during the working years), this amount would be a fraction of your portfolio value at ER.

 

[audreyh1]

I know some folks think diversity in retirement income sources is really important, but what choices does one actually have practically speaking?

To get a pension, you have to go work for a company that offers one. These have been shrinking rapidly over decades, so making that a requirement limits our choices of companies and jobs. The substitute annuities are much more expensive than what pensions usually offer, and IMO, also don't usually make sense until one is considerably older.

To have a large social security income, you have to work a long time earning a good salary so you have 30-35 years of good earnings to maximize that SS payout.

It may work out that way for many folks. But some of us worked in industries that stopped offering pensions a long time ago. And some of us retired too early to build up a big SS earnings record (and that's OK because it was so far off we weren't counting on it being there anyway).

Not everyone wants to deal with multiple property ownership and landlord challenges in order to have a rental income stream in retirement.

Do we not retire early then because we don't have these other legs? I didn't think so. IMO if you have sufficient liquid assets you can retire early. It's just fine to live entirely on your liquid investments.

 

[Fedup]

I don't think that's what suggested by anyone here, but people retire on liquid assets have to have a little more sophisticate knowledge of managing their investments or hire somebody who does. There are many ways to do early retirement. It's not one way. For those of us who are not so confident about our ability, we tend to hedge a different way.
I know people who retire early strictly on a small pension and CDs. They don't trust the stock market. But what they can count on is their ability to manage spending. You never heard of people who just investing in CDs here.