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Kitces: Four Pillars for retirement income portfolios
03-22-2017, 09:36 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,519
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Kitces: Four Pillars for retirement income portfolios
Another good post from Kitces.
https://www.kitces.com/blog/four-pil...ins-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.
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03-23-2017, 01:44 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Dec 2010
Location: Midwest
Posts: 1,795
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Interesting read. Thanks for the tip.
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03-23-2017, 09:04 AM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,263
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Thanks for a good read and a reminder.
I especially liked this quote:
Quote:
Diversification across all four pillars of retirement income can protect a retirement plan!
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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.
__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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03-23-2017, 09:11 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,263
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For the newbies:
Quote:
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.
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__________________
Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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03-23-2017, 01:08 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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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
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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03-23-2017, 01:49 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by 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
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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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-23-2017, 02:02 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by nun
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.
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that's a pretty solid stool!
I have those but for the UK SS. My rental income is very modest too.
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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03-23-2017, 02:39 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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Quote:
Originally Posted by Chuckanut
Thanks for a good read and a reminder.
I especially liked this quote:
Quote:
Diversification across all four pillars of retirement income can protect a retirement plan!
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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.
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The article is talking about diversification over:
Quote:
Ultimately, these components of interest, dividends, capital gains, and principal form the four pillars of retirement income planning.
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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.
__________________
Retired since summer 1999.
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03-23-2017, 07:49 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2009
Posts: 9,343
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Quote:
Originally Posted by Big_Hitter
that's a pretty solid stool!
I have those but for the UK SS. My rental income is very modest too.
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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.
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03-23-2017, 08:01 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by Big_Hitter
that's a pretty solid stool!
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In one context that would be bad.....but in this one it's good.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-23-2017, 08:04 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by audreyh1
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.
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Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-23-2017, 08:06 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Posts: 11,401
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Quote:
Originally Posted by nun
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.
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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.
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03-23-2017, 09:00 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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Quote:
Originally Posted by nun
Yes, but the relative strengths of the 3 legs can influence the way the 401k/IRA leg is invested and how income is taken.
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Yet that is not what the article discusses. It's definitely not talking about three-legged stools.
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Retired since summer 1999.
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03-23-2017, 09:04 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
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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.
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03-23-2017, 09:14 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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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.
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Retired since summer 1999.
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03-23-2017, 09:22 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Mar 2014
Location: Southern Cal
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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.
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03-23-2017, 10:49 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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Quote:
Originally Posted by 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.
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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.
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Retired since summer 1999.
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03-23-2017, 11:33 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
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Quote:
Originally Posted by audreyh1
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.
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+1
What Audrey1 said.
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03-24-2017, 06:44 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by audreyh1
Yet that is not what the article discusses. It's definitely not talking about three-legged stools.
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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.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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03-24-2017, 08:57 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Right, the article is about income from portfolios to spend and not about income from other sources It's right there in the title.
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