Running_Man
Thinks s/he gets paid by the post
- Joined
- Sep 25, 2006
- Messages
- 2,844
The speaking on the monthly payment of the portfolio got me to thinking about the retirees who might not be real comfortable with standard advice of becoming a do it yourself by reading the Boglehead boards, a few retirement books and determining a withdrawal rate your risk tolerance will allow you to withdraw.
Many retirees enter retirement with little money, these retirees end up being the 70-80 year olds living on Social Security, so I thought 5 percent withdrawal could be possible, here is how I did it:
First the portfolio:
66.6% DNP - Managed Closed End Utility Fund that pays a monthly .065 cents per share distribution I mentioned on the another thread. These are mostly regulated industries with mostly predictable revenue streams that have been capitalized on to provide a steady .065 cents per share for 18 years. Currently trading at a 4 percent premium to assets
16.7% SDOG - S&P 500 ETF dividend dogs, tracks S&P500 very closely with much higher dividend rate. This is for exposure to large cap stocks, trades at NAV.
16.7% RVT - Royce Value Trust - a managed small cap fund that has a managed distribution policy of paying 7 percent of the prior 12 month average net asset values. The fund currently trades at an 11 percent discount.
So as this portfolio is composed with today's asset prices, DNP's monthly dividend at this percentage of the portfolio leads to a 5 percent payout based on the total portfolio value. I implemented this as a real portfolio in one of my IRA's using $36,375.63 to set up a payment of $150.00 per month. I had a small keying error on my purchase of RVT that led to an extra 375.63 investment but I wanted to have an actual portfolio to track going forward to see how this would actually do. I think real numbers are far more interesting as an experiment:
Actual Portfolio Shares:
2,308 DNP = $150.02/mo distribution
150 SDOG ~ $52.50 Quarterly
420 RVT ~ $102.90 Quarterly
Total at current distribution is $51.33 for reinvestment/future increases
The rules I developed to address inflation needs are:
1) Payout will start at $150 per month on March 23rd 2015 and continue for the rest of my life with annual increases each March 23rd of the lessor of the annual change in CPI or 3 percent. Should inflation exceed 3 percent the increase will only exceed 3 percent to the extent prior increases in the payout were less than 3 percent. So that the maximum payout band for the next 10 years per month are, but can be less if inflation is less over that time period:
2015: 150.00
2016: 154.50
2017: 159.14
2018: 163.91
2019: 168.83
2020: 173.89
2021: 179.11
2022: 184.48
2023: 190.02
2024: 195.72
2) Reinvestment of excess funds will be done annually on March 22nd and in a way to best optimize the 66/16/16 balances.
3) Rebalancing by selling/purchasing shares of RVT SDOG and DNP will occur only if value of RVT or SDOG exceeds 25% of portfolio value and shares will be sold to reduce that overvalue back to 16.7 % of portfolio. Shares of DNP once purchased are never sold, no matter the portfolio percentage of DNP. Shares of DNP are for base payout and RVT and SDOG for growth of portfolio to meet inflation.
4) At end of each year 1 months future distributions will be held in cash for cash reserve of distributions. So that March 22 2016 $154.50 will be held in cash before reinvestment of excess. Total cash should be in the area of $605 next year.
5) Payments are only made from distributions and shares are to never be sold to meet distribution, if distributions do not "earn" the monthly payout then the monthly payout will be the amount of distributions. This at present does not appear to be an issue for the next ten years, based on present data.
That is it actually simple to implement, aggressive in it's hopes and done when stocks are at an all time high. Yet I still believe this is very likely to be successful in the long term. An annual review needs to take place for the outlook for the next ten years to see if the plan needs adjustment.
If I knew someone who had limited funds and needed to be able to maximize withdrawals while being able to have the individual withstand market drops by showing with real data the investor is actually buying more distributions at lower costs in a falling market this is the way I would do it. It provides a limit for distributions based on performance without selling shares allows for an initial 5 percent withdrawal and a slowing mechanism if this turns out to be too aggressive, thereby allowing the 5 percent withdrawal.
Many retirees enter retirement with little money, these retirees end up being the 70-80 year olds living on Social Security, so I thought 5 percent withdrawal could be possible, here is how I did it:
First the portfolio:
66.6% DNP - Managed Closed End Utility Fund that pays a monthly .065 cents per share distribution I mentioned on the another thread. These are mostly regulated industries with mostly predictable revenue streams that have been capitalized on to provide a steady .065 cents per share for 18 years. Currently trading at a 4 percent premium to assets
16.7% SDOG - S&P 500 ETF dividend dogs, tracks S&P500 very closely with much higher dividend rate. This is for exposure to large cap stocks, trades at NAV.
16.7% RVT - Royce Value Trust - a managed small cap fund that has a managed distribution policy of paying 7 percent of the prior 12 month average net asset values. The fund currently trades at an 11 percent discount.
So as this portfolio is composed with today's asset prices, DNP's monthly dividend at this percentage of the portfolio leads to a 5 percent payout based on the total portfolio value. I implemented this as a real portfolio in one of my IRA's using $36,375.63 to set up a payment of $150.00 per month. I had a small keying error on my purchase of RVT that led to an extra 375.63 investment but I wanted to have an actual portfolio to track going forward to see how this would actually do. I think real numbers are far more interesting as an experiment:
Actual Portfolio Shares:
2,308 DNP = $150.02/mo distribution
150 SDOG ~ $52.50 Quarterly
420 RVT ~ $102.90 Quarterly
Total at current distribution is $51.33 for reinvestment/future increases
The rules I developed to address inflation needs are:
1) Payout will start at $150 per month on March 23rd 2015 and continue for the rest of my life with annual increases each March 23rd of the lessor of the annual change in CPI or 3 percent. Should inflation exceed 3 percent the increase will only exceed 3 percent to the extent prior increases in the payout were less than 3 percent. So that the maximum payout band for the next 10 years per month are, but can be less if inflation is less over that time period:
2015: 150.00
2016: 154.50
2017: 159.14
2018: 163.91
2019: 168.83
2020: 173.89
2021: 179.11
2022: 184.48
2023: 190.02
2024: 195.72
2) Reinvestment of excess funds will be done annually on March 22nd and in a way to best optimize the 66/16/16 balances.
3) Rebalancing by selling/purchasing shares of RVT SDOG and DNP will occur only if value of RVT or SDOG exceeds 25% of portfolio value and shares will be sold to reduce that overvalue back to 16.7 % of portfolio. Shares of DNP once purchased are never sold, no matter the portfolio percentage of DNP. Shares of DNP are for base payout and RVT and SDOG for growth of portfolio to meet inflation.
4) At end of each year 1 months future distributions will be held in cash for cash reserve of distributions. So that March 22 2016 $154.50 will be held in cash before reinvestment of excess. Total cash should be in the area of $605 next year.
5) Payments are only made from distributions and shares are to never be sold to meet distribution, if distributions do not "earn" the monthly payout then the monthly payout will be the amount of distributions. This at present does not appear to be an issue for the next ten years, based on present data.
That is it actually simple to implement, aggressive in it's hopes and done when stocks are at an all time high. Yet I still believe this is very likely to be successful in the long term. An annual review needs to take place for the outlook for the next ten years to see if the plan needs adjustment.
If I knew someone who had limited funds and needed to be able to maximize withdrawals while being able to have the individual withstand market drops by showing with real data the investor is actually buying more distributions at lower costs in a falling market this is the way I would do it. It provides a limit for distributions based on performance without selling shares allows for an initial 5 percent withdrawal and a slowing mechanism if this turns out to be too aggressive, thereby allowing the 5 percent withdrawal.