Help me design a portfolio that generates $50,000 a year

[BD1]

Hello all.

I have been ready lots of posts and a number of books on investing and retirement. I am getting ready to RE at 2 to 4 years. Current age 47. What portfolio would you recommend that creates $50,000 of income a year after tax. I would like to protect my principal but am open to a reasonable amount of risk.

1. What portfolio would you recommend?

2. How much $ do I need to start to fund this portfolio?

 

[razztazz]

1. What portfolio would you recommend?

2. How much $ do I need to start to fund this portfolio?

1) Low-fee Balananced fund

2) $1,250,000 Bucks

 

[GTM]

Hello all.

I have been ready lots of posts and a number of books on investing and retirement. I am getting ready to RE at 2 to 4 years. Current age 47. What portfolio would you recommend that creates $50,000 of income a year after tax. I would like to protect my principal but am open to a reasonable amount of risk.

1. What portfolio would you recommend?

70% equities (index funds) 30% TIPS

2. How much $ do I need to start to fund this portfolio?

$1,250,000

 

[gtmeouttahere]

Run the #'s through Firecalc located on this site and you should have a lot of your questions answered.  Good luck...

 

[BD1]

Most of my assets ( $1M) are in taxable accounts. I have about 175K in tax-deferred. Plus some equity in my house but I am not counting this in my planning.

I have done Firecalc and that looks OK. But I don't know enough about how to invest my taxable vs tax-deferred in the best tax advantaged way. I know I can put REITs, etc. in the tax-deferred account. But what are some ideas that make sense from a tax perspective?

Thanks.

 

[gtmeouttahere]

A really good accountant should be able to help answer that for you...not knowing what all of your money is in right now...it's hard to say. A lot would depend on your situation. If you are only taking a 4% draw on your money, taxes should not be that big of a burden and certainly not a show stopper. Also your home is probably a big write off. You'd be suprized how much your tax liability goes down in retirement not to mention other costs. Have you read ESR Bobs book "work less live more" He has a good section on this in his book.

 

[modlair]

Opinions are going to differ, but I will offer the following:

If you include a proper Social Security estimate into your firecalc work and note that at age 50 or so your probable age at death is only 30 years out, then you should see SWRs up around 4.6%. This is a $6K difference out of a million.

Another factor. You have 10% in tax deferred vehicles. You also have some down market years coming -- and when they do they generate tax loss carryforwards. It will not require 60-70K to get 50K after taxes. The tax deferred money isn't going to be touched for a long time. When there's a down year and your living expenses of 50K have zero tax on it, plus some future tax savings from the carryforwards . . . I think if you can safely get your 50K per year after tax from not very much more pre tax.

Overall . . . 1.1 million should be more than safe.

 

[grumpy]

With most of your money in taxable accounts it will be difficult to change your allocation without taking a big hit in capital gains taxes. See an accountant.

Grumpy

 

[jdw_fire]

... note that at age 50 or so your probable age at death is only 30 years out, then you should see SWRs up around 4.6%.  This is a $6K difference out of a million.

Actually a 30 year time frame produces  ~4% W/D in FIRECalc.  And IRS life expectancy tables say that a 50 yo will live >34 years.  If you add 5 years to that number as some have suggested then the W/D rate drops to 3.78% for a time frame of 39 years.  Make sure you run FIRECalc yourself with numbers you are comfortable with.

 

[modlair]

... note that at age 50 or so your probable age at death is only 30 years out, then you should see SWRs up around 4.6%. This is a $6K difference out of a million.

You left out the most important part of the quote.

Actually a 30 year time frame produces ~4% W/D in FIRECalc. And IRS life expectancy tables say that a 50 yo will live >34 years. If you add 5 years to that number as some have suggested then the W/D rate drops to 3.78% for a time frame of 39 years. Make sure you run FIRECalc yourself with numbers you are comfortable with.

The quote responded to was partial and left out The Most Compelling Issue. Here's all of it:

If you include a proper Social Security estimate into your firecalc work and note that at age 50 or so your probable age at death is only 30 years out, then you should see SWRs up around 4.6%. This is a $6K difference out of a million.

The norm of most people is Social Security. It is going to be there in some magnitude and it has a very significant effect on SWR. That 4% number is undeservedly popular. The proper standard number is more like 4.6% for 30 yrs.

I offer in support of this runs on Advanced Firecalc. Try this. Run with the defaults. Yup, 4% SWR and just under 95% confidence. Now make just one change; put a 10,000 number in the Social Security box and accept the default year. No other change to defaults. Just pop in 10K.

The 30K spending default will yield 100% success. Start nudging it up. You'll still be at 100% well above 4% -- all the way to 4.2%. You won't drop to the standard 95% threshold of confidence until about 4.65% SWR. That's $6500 of spending on $1 million that people deny themselves because they didn't put in Soc. Sec.

THAT is the correct standard number. 4.6%, not 4%, because Social Security is the norm. I know there are people who were teachers or in the old Federal government retirement system or other configurations that will not get SS, but they are not the norm. The norm, the majority, will get at least some magnitude of Social Security. The norm should define the normal SWR number.

Note that 10K is a modest amount of SS. I picked it only to accomodate any pessimism that the system will endure benefit cuts. Even with those benefit cuts, you still manage 4.65%. The likely truth . . . is the cuts won't be that severe. If not, the right number for most people, with all other risk assessment held constant, is north of 4.65%.

 

[jdw_fire]

The norm of most people is Social Security.  It is going to be there in some magnitude and it has a very significant effect on SWR.  That 4% number is undeservedly popular.  The proper standard number is more like 4.6% for 30 yrs.

I offer in support of this runs on Advanced Firecalc.  Try this. Run with the defaults.  Yup,  4% SWR and just under 95% confidence.   Now make just one change; put a 10,000 number in the Social Security box and accept the default year.  No other change to defaults.  Just pop in 10K.

The 30K spending default will yield 100% success.  Start nudging it up.  You'll still be at 100% well above 4% -- all the way to 4.2%.  You won't drop to the standard 95% threshold of confidence until about 4.65% SWR.  That's $6500 of spending on $1 million that people deny themselves because they didn't put in Soc. Sec.

THAT is the correct standard number.  4.6%, not 4%, because Social Security is the norm.  I know there are people who were teachers or in the old Federal government retirement system or other configurations that will not get SS, but they are not the norm.  The norm, the majority, will get at least some magnitude of Social Security.  The norm should define the normal SWR number.

Note that 10K is a modest amount of SS.  I picked it only to accomodate any pessimism that the system will endure benefit cuts.  Even with those benefit cuts, you still manage 4.65%.  The likely truth . . . is the cuts won't be that severe.  If not, the right number for most people, with all other risk assessment held constant, is north of 4.65%.

Let me start out by saying that I agree with you about the 4% number.  I think people should run FIRECalc with their particulars to see what they get, and this stems from the impact on the number that a pension (from whatever source) makes.  In my runs for this thread I didn't include any pension because I didn't know what the numbers were.  However the point I was trying to make was that you chose too short of a life expectancy and I gave an example of how the longer life expectancy would affect the W/D rate.  And now that I have some SS numbers from you (remember that the IRS life expectancy tables say that a 50 yo will live >34 years).  If you add 5 years to the life expectancy of a 50 yo, as some have suggested, then the W/D rate drops to 4.44% for a time frame of 39 years. 

 

[Nords]

If you add 5 years to the life expectancy of a 50 yo, as some have suggested, then the W/D rate drops to 4.44% for a time frame of 39 years.

Detailed analysis like this makes me think of the saying "Man plans and God smiles."

We all know old people who won't buy green bananas because they're not sure they (the people, not the fruit) have enough time left. They're estimating their lifespan as too short to risk a bet on a long-term investment. If they're right, then they've saved a little money for their heirs. If they're wrong, there's no penalty-- they just go buy more bananas.

We also know people whose genetics convince them not to expect to live to triple digits. If all four of their grandparents died before their 70s then they probably wouldn't worry about their own RMDs or a Roth IRA conversion. If they're right, their heirs get to deal with the RMDs. If they're wrong, then there's no penalty and every RMD calculation is a gift. No risk, no penalties.

We also know people who'll grab Social Security the minute they're 62 because they don't think they'll live long enough to see the payback from waiting for full eligibility. However Bud Hebeler has pointed out that it permanently reduces the spouse's benefits, too, so this strategy carries some pain. If the SS recipient is right then they got a little money in the hand at the cost of permanently reducing spouse's benefits. (That may or may not be a concern.) If they're wrong then they have to live the rest of their life with a permanent reduction in benefits. This strategy has plenty of penalties, some quite severe, so can the recipient really afford to be "wrong"?

We all know that current demographics say there's little chance of us late Boomers living to triple digits. However today's centurion class is the fastest-growing part of American society, and actuarial data doesn't predict your individual longevity any more than CPI approximates your personal inflation rate. When we run FIRECalc and confidently set our lifespan at the expected lifespan for our birth year, we should realize that 50% of us will be wrong. When we raise our life expectancy by 10 or even 25 years, that still means we could be wrong 5-10% of the time. That's a big issue-- if the penalty for being wrong is the risk of running out of money, do we want to risk being wrong even 1% of the time?!?

Same for choosing an extremely conservative "sleep at night" retirement portfolio at the risk of losing to inflation. If you unexpectedly exceed your life expectancy and get savaged by inflation, can you really afford to be wrong at all? If there's a 25% chance that at least you or your spouse, let alone you and your spouse could live into your 90s, is it really responsible to set your portfolio survivability at 30 years?

So when you're tweaking your FIRECalc numbers, think about the consequences of being wrong and having to live the rest of your frail elderly years on just an SS check. Think about long-term care in a Medicaid facility instead of being able to afford long-term care insurance or being able to pay your own way for home care. The consequences of being wrong are far worse than any potential regrets of sitting on a huge pile of your heirs' money feeling maudlin about missed spending opportunities.

No matter how short you expect your life to be or how low a success rate you're willing to risk, if you're pushing the SWR boundaries then you should also be able to vary your withdrawal rate in case you fall into a nasty bear market for a year or two. I don't care whether you start at 4% and raise it for inflation, or use ESRBob's 4%/95% rule, or try for Bernicke's brass balls ring-- if your portfolio drops by 25% when oil hits $250/barrel and you can't work a Wal-Mart shift then you will really wish that you could reduce your spending that year.

I think any SWR over 4% is a tradeoff whose (admittedly minor) risks outweigh any rewards. To survive any SWR over 4% it'd be far better to raise a portfolio's equity allocation than to attempt to sleep soundly at night on a bond mattress. I think any SWR over 5% is downright foolhardy without an all-equity portfolio and two years' expenses in cash, and even then the risks outweigh the putative rewards if the portfolio's success rate isn't at least 80%.

If your ER success nosedives when the length of your ER goes from 30 to 50 years, then I wouldn't risk ER. If the success rate of your ER drops below 80% before your expected lifespan exceeds 100 years of age, then I'd hesitate to ER. Anything above 80% is an unquantifiable crapshoot between your lifespan and Bernstein's "Retirement Calculator from Hell" articles.

Personally our ER numbers are based on an expected lifespan of 120 years, a minimum success rate of 80%, and a 10% margin of potential belt-tightening. We think inflation also merits the aforementioned equity/cash allocation. We don't necessarily expect to be invited to our kid's 90th birthday party, but we want to be able to afford to pay for the trip...

 

[modlair]

The gentleman above is correct about life expectancy and his comments about my suggestion that 30 would be the more proper number than 40 as the years to fund. It will likely be in between.

But That's Not The Compelling Point.

I'm on a soapbox here. Even Nords says SS should be considered, and then retreats to the 4% number.

Social Security Is The Norm. Or as the other gentleman pointed out -- perhaps some other pension (which I suspect will not be the norm within as few as 5-10 yrs as companies gut them). But SS is going to be around in some magnitude or other and It Is The Norm For Most People.

Because it is the norm, then 4% Is Not The Norm. 4.65% is.

It is just as horrible a prospect of dying with an 8 figure portfolio as it is to spend 6 months at end of life destitute. One could say it is even more horrible because that would equate to possibly decades of needless self denial versus a few months of possible discomfort at end of life.

4% is NOT the correct standard number. 4.65% is. Start from 4.65% in nudging things upward or downward according to one's perception of risks. 4.65% is the result of conservative, likely-to-be-too-low estimates of SS. It is already the result of pessimism. Going further is extreme, not prudent.

 

[cute fuzzy bunny]

Given I have 17 years until I can collect social security, I'll consider it Pretty Frickin Abnormal If Its Still There In Its Current Form.

Nords...spot on about overcalculating/overanalysis. Sometimes god doesnt feel like smiling. Anything other than ballparking it with 30-40% margins is a folly. But then a lot of people want to analyze and plan to the finest details, even though they cant control them.

 

[modlair]

Given I have 17 years until I can collect social security, I'll consider it Pretty Frickin Abnormal If Its Still There In Its Current Form.

Look, if you're 45 then you're also not typical. I'm okay entirely with the concept of individualism. What I object to is a standard number that is incorrect. As for SS not being there in current form -- the 4.6% number is from a SS number that is cut just about in half for the typical person.

It already has Not In Current Form built into it. It's the result of just 10K expectation per year. That's low in comparison to a typical retiree. The erosion of the program is already reflected in that number.

The changes to SS would be most easily done politically by adjusting the COLA calculation. That will reduce benefits, but not to zero. The 4.6% number reflects a reduction.

No one can plan for an asteroid hitting the earth, or a nuclear attack on NYC that devastates the economy. But if you're planning on the basis of less than catastrophic events, then 4% simply does not deserve to be the yardstick. 4.6% does. If an asteroid hits, 4% was wrong too. And if an asteroid hits, you denied yourself the extra 0.65% draw out of your million each year before impact.

 

[cute fuzzy bunny]

Look, if you're 45 then you're also not typical.

Wow, a more accurate statement has likely never been made

Do note we arent talking about asteroid hitting the earth sorts of odds. Just the odds created by dumb politicians.

I guess once again we've gotta look at the "customer base" here. I'd imagine retirees thinking of bugging out after their mid-50's arent really "early" retirees.

Anyone more than 10 years away from social security that thinks they can DEFINITELY include it in their planning, in my opinion, is being very optimistic.

Same with any pension.

Further, I think for a good number of people, the CPI adjustment on SS will be inadequate and they'll lose buying power over time. Thats not easy to calculate.

The toughest part, as I think Nords alluded to, is that a mistake in the plans probably wont show up until you're too old to do anything about it.

I guess if that last ten grand a year showing up in your 60's is what makes or breaks your plan, and your risk tolerance is up to it, then there ya go. I just wouldnt call it a sure thing or a slam dunk.

I'd also question any plan thats cut that finely. You're one perfectly reasonable minor personal disaster away from being screwed.

I did my planning sans social security and pensions, even though my wife and I are both eligible for SS and she has a pension coming from her employer. If those show up, they're bonus dollars. We'll hire a maid and a gardener and a handyman and start taking our cars to the dealer for maintenance.

 

[Cut-Throat]

Anyone more than 10 years away from social security that thinks they can DEFINITELY include it in their planning, in my opinion, is being very optimistic.

I don't think so! - Let's say that you are 15 years away and you run the SS Calculator today. It says you'll get $15K per year. I think a 'Worst Case' plan would say that you'll get $10K per year. The politics are just too immense.

What is more likely to happen, is that inflation will be higher than imagined. Social Security will be there! I've listened to far too many debates on this topic, between economists and historians and understand the Politics. A year ago on this forum, I told everyone that Bush would get no where with Social Security. - Lot's of folks did not believe me and went so far to say "Mark my words, Bush will get a Bill passed before the end of 2005"

You can safely plan on getting Social Security more than you can plan on your Personal Nest Egg being worth something when you are 66 due to the ravages of inflation!

 

[cute fuzzy bunny]

So you feel that you can accurately determine what your social security payout is going to be 10-15-20 years from now?

I dont doubt there will be some sort of program still in place, paying something, to someone. I'm sure people already collecting it will continue to. I'm sure people close to collecting will receive a majority portion of what they expect.

Past that, I wouldnt split hairs in a retirement calculator to include any specific amount...but then a lot of people are way more optimistic than I am.

...and again, if thats your make or break on your retirement plan, perhaps you need a different plan?

Who would be in bigger trouble...someone who factors in social security 15 years out, gets a reasonable 'safety' result, and quits working in their early 50's...only to not get the SS number they thought they would in their 60's...or someone who works out the plan without the money and then maybe gets something?

As far as optimism...i'm quite sure you'd get a lot of input from the people who are losing the sure-thing pensions and other benefits from their 1950's and 1960's behemoth companies that either dont exist or barely exist.

 

[d]

You can safely plan on getting Social Security

1. definitely
2. you can also plan that it will be fully taxed
3. but you cannot plan on how much you will get

long before SS was a matter of political discussion (it was apparent to me in the 60's that it was a Ponzi scheme) I had concluded that for planning purposes it would be best to assume SS = 0.  as one gets older, and closer to actually collecting, it seems reasonable to up that a bit.  but given the magnitude of both the SS and medicare problems, it would likely be unwise to assume 100%.

 

[Cut-Throat]

So you feel that you can accurately determine what your social security payout is going to be 10-15-20 years from now?

No and I didn't say that. I said if you run the SS Calculator and it says that you get $15K at age 62, I think you can safely plan on getting at least $10K per year. I've never heard of a proposal from any Congressional committee or anyone else who is familar with it project anything that extreme.

 

[modlair]

I have some data to offer.

I just ran a primitive sensitivity analysis on Firecalc for various values of SS. The methodology was to accept all defaults in Advanced Firecalc and change nothing at all other than the SS number. I left the SS date alone for each run. I selected the option that provides the withdrawl magnitude that yields 95% confidence.

The results are like so:

SS SWR
20K 5.1%
19K 5.05%
18K 5.01%
17K 4.97%
16K 4.92%
15K 4.87%
14K 4.81%
13K 4.75%
12K 4.69%
11K 4.63%
10K 4.57%

My previous result above in the thread for 10K was 4.65% because the guy we were talking about needed the year of first receipt nudged per his age. This result here is the pure Firecalc default for the current discussion.

9K 4.51%
8K 4.45%
7K 4.39%
6K 4.33%
5K 4.27%

And I stopped there because it is pretty clearly a 0.05ish adjustment to SWR per thousand bux of Soc Sec. at that number of years into the future.

There's probably a consensus that SS is going to be lower in the future than today. How much lower you can evaluate as you wish consistent with your own pessimism. I guess everyone will do their own SS evaluation and then apply a reduction in the magnitude by X%. The result of that should go to the table above to get The Correct SWR Number, which is just simply, profoundly NOT 4%. It's higher.

 

[Nords]

Even Nords says SS should be considered, and then retreats to the 4% number.

Rodmail, you're quoting me out of context in order to support your point. I don't appreciate that.

I don't care one way or the other whether SS is "there for us" or whether it's included in FIRECalc. My point about SS, as was my point about SWRs and allocations, is that there are risks & rewards to be considered. The reward may be enticing in the early stages of retirement, but it's not worth the risk in the later stages if we're too frail to do anything to mitigate that risk. I don't have a strong opinion one way or the other on when I take SS and I'm probably going to keep flip-flopping on the issue until my 62nd birthday. Or my 67th. Or maybe my 70th.

You may be right about your 4.65%, however I think your estimate is excessively precise when you're using a calculator whose definition of success is pretty much anything 80% or higher. SWRs are cut with chainsaws and don't need to be measured with electron microscopes. I'm not going to nitpick the quantities and I think that there's enough room in this area for there to be more than one right answer.

So go find your own quotes. Or go build your own calculator.

 

[modlair]

Rodmail, you're quoting me out of context in order to support your point. I don't appreciate that.

It was a hurried quote; not a provocative one and not contrived because mathematics is on my side in this. But without question I am not looking to cause upheaval and my apologies for the annoyance.

A tenth of a % on SWR is not nitpicking. It's a serious difference. It's $1000 of spending on a million dollar portfolio. 4.6 is 6K more than 4%. 4% is therefore a 15% pay cut. The evolution of 4% to become a rule of thumb is misleading the typical cognizant American by a full 15% as to what they should be able to safely spend.

It needs to be undone.

 

[Nords]

It was a hurried quote; not a provocative one and not contrived because mathematics is on my side in this.  But without question I am not looking to cause upheaval and my apologies for the annoyance.
A tenth of a % on SWR is not nitpicking.  It's a serious difference.  It's $1000 of spending on a million dollar portfolio.  4.6 is 6K more than 4%.  4% is therefore a 15% pay cut.  The evolution of 4% to become a rule of thumb is misleading the typical cognizant American  by a full 15% as to what they should be able to safely spend. 
It needs to be undone.

Thank you, although I'm not sure if that apology is coming from you or from my old math teacher.  If math is on your side then you can enjoy your ER with the serenity that comes from being truly virtuous.  Quote the numbers & percentages if you want, but I'll say it again-- I'm not nitpicking the numbers.  By cluttering up the conversation with them it's possible that you're also missing or avoiding my point.

"It" doesn't need to be undone.  Nothing's "wrong", no laws are being "violated", and no one is being hurt by an SWR that's a little different than someone else's SWR.  if a poster is more comfortable with 4% than 5% then I'd stop arguing the math in order to accomodate differences in risk tolerance and "sleep at night" peace of mind. 

You're trying to apply logic to a situation where its application is inappropriate.  There may be binary math but there's also the mathematics of chaos theory.  Both can peacefully coexist and both can be equally wrong if incorrectly applied to inappropriate situations.

You're haranguing a bunch of people who've managed to get this far with 4%.  Some of us enjoy 5% and a few enjoy 6%, just as there are some out there with 3%.  We're interested in seeing what range of SWRs is going to lead to what risks, and some are more interested in seeking out those risks than others.  If you're concerned about a 15% paycut then it should give you great pleasure from withdrawing a little extra money.  But if someone else is comfortable at a lower SWR then we should also be able to bask in the warm glow of their success without feeling compelled to point out that they're failing to fully optimize their SWR...

 

[Hydroman]

Anything other than ballparking it with 30-40% margins is a folly.

I am not completely sure what you mean by 30-40% margins. Could you clarify what you are saying and how you calculating the 30-40% margin? Not sure what Nord's means by 10% belt tightening either.

Thanks