Kitces: Four Pillars for retirement income portfolios

[audreyh1]

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.

Well, to me a total return approach using an AA and rebalancing automatically takes care of which pots your income is taken from. You don't even have to think about it.

The SWR methods all use this total return approach and usually recommend a good mix of equity and fixed income. You're going to get interest (cash interest and bond dividends), stock dividends, capital appreciation, and have to occasionally dip into principal after down years or if your portfolio doesn't keep up with inflation as you get older.

So you just need to pick a well diversified AA and choose your withdrawal method and rate.

I think it's very straightforward.

I certainly don't think about any "moving parts". I simply take all distributions in cash, withdraw my annual income, and rebalance the portfolio. Those are the basic mechanics.

An income only investor does it differently. They take interest and dividends as income and reinvest capital gains distributions, and otherwise leave the portfolio alone.

Neither is complex to implement once you've selected your AA and the investment to make up that AA.

 

[Mulligan]

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.

My last 6% CD I signed up for was 2007. Give me that yield and the inflation rate of today or 2007 and you would quickly be hearing about at least one forum member who is 100% invested in CDs.

 

[Chuckanut]

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

Agreed. Not everybody can do it depending on the the choices they made and the barriers life handed them. But, we do our best in our own personal situation even if there are flaws. Like my old grandpappy used to say "Never let the perfect become the enemy of the good".

 

[Meadbh]

You never heard of people who just investing in CDs here.

Never say never......there was this guy, obgyn65. He hasn't been around for a while.

http://www.early-retirement.org/forums/f26/hello-from-obgyn65-52013.html

 

[Fedup]

My last 6% CD I signed up for was 2007. Give me that yield and the inflation rate of today or 2007 and you would quickly be hearing about at least one forum member who is 100% invested in CDs.

Oh I forgot about you. But I thought you did complain about it's boring because it's so consistent.

 

[2017ish]

Never say never......there was this guy, obgyn65. He hasn't been around for a while.

http://www.early-retirement.org/forums/f26/hello-from-obgyn65-52013.html

He is still active on Bogleheads, effectively retired, and working on his medical philanthropy.

Prodigious saver.

E.T.A.--his last Bhead post was Nov. 2016. He works part-time, still extremely conservative investments.

 

[Fedup]

Never say never......there was this guy, obgyn65. He hasn't been around for a while.

http://www.early-retirement.org/forums/f26/hello-from-obgyn65-52013.html

That was in 2010, he might change his mind since then.

 

[MichaelB]

A CD is not an investment, it's a loan. You only are entitled to the agreed on rate and the return of your loan.

An equity is an investment, you acquire an ownership stake and a share of all future cash flows.

 

[Corporateburnout]

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.

It does not really require much sophistication to manage the portfolio. We've lived exclusively on our portfolio for the last 3 years with only SS coming online in a couple of years. Our portfolio consists of 8 index funds that I rebalanced for the first time back in January. I am comfortable with managing my investments but if I wasn't or if I want to simplify the process for DW in the next few years I may go to a one fund target retirement index fund.

 

[Hermit]

A CD is not an investment, it's a loan. You only are entitled to the agreed on rate and the return of your loan.

An equity is an investment, you acquire an ownership stake and a share of all future cash flows.

That is technically true. A bond would also be a loan. I think I will continue to think of both stocks and bonds as investments of where I put my money to work for me. It may be stocks, bonds, or CDs if that looks like the right place. After all, asset allocation is important for my "investments".

 

[scrabbler1]

My pillars in ER are mostly the same as what was in the linked article. But I have some differences.


Because I ERed at 45 eight years ago, I do not have unfettered access to my IRA (I know about the 72t option, it's Plan B). So, I am living off only 2/3 of my overall portfolio, the non-IRA part. And I am living off most of its monthly and quarterly dividends, not its principal. I reinvest the cap gain distributions, giving me more shares to earn my monthly and quarterly dividends from.


Once I turn ~59.5 in 2022, I can begin tapping into the first of my "reinforcements," or the other pillars of that big stool. The IRA, the rest of my portfolio, is first. In the years following that, I can begin collecting SS and my frozen company pension. Pretty good stool.

 

[Major Tom]

Never say never......there was this guy, obgyn65. He hasn't been around for a while.

I've been wondering what happened to obgyn. I remember being frustrated with him, because he was talking about his fixed income instruments as if they would yield the same growth as a portfolio containing equities. I finally got him to concede that his plan was based on being able to save a particularly large sum of money, being satisfied with a conservative WR, and not expecting his portfolio value to keep pace with inflation over the long term.

I have no problem with anyone being in all fixed income, provided the long-term expectations are realistic. His philanthropic work was/is fantastic. I hope he's doing well. Certainly a valuable member of society.

 

[Mulligan]

Oh I forgot about you. But I thought you did complain about it's boring because it's so consistent.

Been doing quite well past 3/4 years in preferreds and flipping them. And it has been a lot of fun. But I would trade them all for 6% CDs and happily become bored again! It isnt happening for quite a while I suspect so I guess so, I will stay on the same path until I dont.

 

[audreyh1]

A CD is not an investment, it's a loan. You only are entitled to the agreed on rate and the return of your loan.

An equity is an investment, you acquire an ownership stake and a share of all future cash flows.

bonds are the same thing as CDs in your scenario - loans that will be paid back some day. At least with CDs you don't have to worry about getting paid back if they are FDIC insured.

Many people choose to diversifying using both equities and fixed income (bonds, CDs, cash).

 

[Fedup]

A CD is not an investment, it's a loan. You only are entitled to the agreed on rate and the return of your loan.

An equity is an investment, you acquire an ownership stake and a share of all future cash flows.

It depends on who you ask, but half of my husband's relatives think of investing in the stock market as equivalent as gambling. Only his engineering friends have investment in stocks.

 

[Mulligan]

bonds are the same thing as CDs in your scenario - loans that will be paid back some day. At least with CDs you don't have to worry about getting paid back if they are FDIC insured.

Many people choose to diversifying using both equities and fixed income (bonds, CDs, cash).

I would concur most reasonable people consider CD's a low risk investment....Even the Wall Street Journal calls them an investment. Anything thing else degenerates into an academic nerd fest food fight.

 

[Carpediem]

I certainly don't think about any "moving parts". I simply take all distributions in cash, withdraw my annual income, and rebalance the portfolio. Those are the basic mechanics.

@audreyh1...

When you say "all distributions", are you referring to dividends *only*? No cap gains?

Thanks.

 

[bmcgonig]

My last 6% CD I signed up for was 2007. Give me that yield and the inflation rate of today or 2007 and you would quickly be hearing about at least one forum member who is 100% invested in CDs.

I'd take that with even the 2007 inflation rate..

 

[audreyh1]

@audreyh1...

When you say "all distributions", are you referring to dividends *only*? No cap gains?

Thanks.

No - in my case I really mean all distributions - dividend and cap gains distributions - are left in cash until I do my annual withdrawal and rebalance in Jan. Once I rebalance, the AA is back to where it is supposed to be.

This is simply a tax efficient way of handling distributions. I need to draw income from my portfolio in Jan, and almost all of my cap gains distributions are paid in December. So I don't worry about reinvesting them until I rebalance, and I don't rebalance until after I take my annual withdrawal.

I'm a total return investor, not an income investor. I don't care whether a distribution is interest/bond dividend, stock dividend, or cap gains distribution. I only care how much the total portfolio has increased or decreased over the year. I withdraw a fixed % or the portfolio each Jan based on the Dec 31 value.

 

[NW-Bound]

I've been wondering what happened to obgyn. I remember being frustrated with him, because he was talking about his fixed income instruments as if they would yield the same growth as a portfolio containing equities. I finally got him to concede that his plan was based on being able to save a particularly large sum of money, being satisfied with a conservative WR, and not expecting his portfolio value to keep pace with inflation over the long term.

I have no problem with anyone being in all fixed income, provided the long-term expectations are realistic...

Yes, obgyn has been absent for a while.

People can invest money their way. It's their money to do as they wish. As long as they do not say theirs is the right and only way, who am I to say that mine is better.

 

[Accidental Retiree]

He is still active on Bogleheads, effectively retired, and working on his medical philanthropy.

Prodigious saver.

E.T.A.--his last Bhead post was Nov. 2016. He works part-time, still extremely conservative investments.

Thanks for the update. I've wondered how he's been --and whether he still has his pppppssssssst Wellesley. [emoji16]

I do!