Next Year's (2021) Income Dilemma?

[ShokWaveRider]

As the titles says, I am contemplating how to maintain our current income stream when our Investment CD's mature mid next year. Though I would try to get all my ducks in a row early. As most of you know I am a low risk investor (if you can even call me that).

~45% of our stash is in after Tax IRA (Taxable) moneys that is in high yielding CDs, currently earning ~4%. We live very well off this income and pay taxes on it as required. The rest is in Tax Deferred IRAs earning a similar ~4% but for a much longer term, so I am not concerned about them.

Mid next year the taxable IRAs mature, and I do not see any similar investments being available by then. Money earning ~1% is pretty much useless to us.

Currently we do not take SS, do not have any pensions or any other form of income. If we take ONLY DW's SS mid next year that will make up for the shortfall and business will be as usual, till 2022.

I do not see any other way not to use our taxable capital, we have only been adding to it since we both ER'd.

It is possible that assuming the market is not still flying in the stratosphere at all time highs, I may consider investing the taxable IRAs in a S&P ETF or Fund to help make up for the shortfall and not take DW's SS.

I also have SS and a UK SS equivalent that I could tap but would like to postpone doing so for another 3 years to maximize them.

So I am posing the question of how to address the dilemma to the smart masses here to see if there is a similar low risk solution.

 

[pb4uski]

Sounds like you are tempted to chase yield, which is probably not a great solution. If your anchor is for 4% with low risk then it is going to be frustrating.

As you know, fixed income is a really challenging space right now. The best I know is online savings accounts which are 0.8% and drifting downward... if you qualify, one-year Navy Federal CDs are about 0.9% and Dominion Energy DERI rates are 1.75% for $50k or more (though there is arguably some credit risk associated with these).

I'm not sure why dipping into principal if needed is so bad... I presume that you save this money for your retirement rather than to hoard it.

If you do tap into it in lieu of starting SS earlier, you can frame those withdrawals as just installment payments buying a COLA-adjusted life annuity... which is effectively what you would be doing.

A first-world problem for sure.

 

[nwsteve]

How about a quick refresher on ages and status of home mortgage? Have you both passed Full Retirement age and are eligible for the spousal share of SS? If so maybe, that is an option.
If it is just a matter of cash for a couple years, how much equity is in your home and does the math work to take out some cash at these ridiculous mortgage rates. DD just refied their home and got 2.85 on a 30 yr. but no cash out--down from 3.85 less than a year ago.

 

[ShokWaveRider]

How about a quick refresher on ages and status of home mortgage? Have you both passed Full Retirement age and are eligible for the spousal share of SS? If so maybe, that is an option.
If it is just a matter of cash for a couple years, how much equity is in your home and does the math work to take out some cash at these ridiculous mortgage rates. DD just refied their home and got 2.85 on a 30 yr. but no cash out--down from 3.85 less than a year ago.

Home Paid for, not about to mortgage it again after being mortgage free for the last 26 years.

DW is 62, I am 67.

As "P" said, spending some of our capital is an option, it would not really make big dent. Just looking for other ideas, but they may be slim.

OpenSS recommends that DW takes SS at 62 and me at 70. That is why I made that suggestion. It would keep our capital in tact, which is why I mentioned it.

 

[FANOFJESUS]

I don't know your number but it sounds quiet high. I think spending some capital is an option.

 

[bluelight]

DH and I are both retired and are living off his pension, SS and investment income right now. We hold Vanguard tax exempt munis in our taxable accounts in a mix of the intermediate, long and NY state. Does a twofold of keeping our taxable income low and provides monthly cash. Even though I have not filed for SS yet, we haven't needed to dip into our savings yet.

 

[HI Bill]

It sounds like 100% of your taxable and tax-deferred investments are in CDs or bonds? I'd put 60% of that to work (VTI, etc.), and go ahead and take distributions from the CDs as needed...you saved it to spend it!

 

[RobbieB]

I've been spending capitol since I retired.

 

[kaneohe]

.................................
~45% of our stash is in after Tax IRA (Taxable) moneys .......................

 

[COcheesehead]

There is nothing wrong with spending capital, if you have a total return approach.
If you simply want to live off yield, you have a challenge with no great answer right now without taking on additional risk.

 

[jazz4cash]

DH and I are both retired and are living off his pension, SS and investment income right now. We hold Vanguard tax exempt munis in our taxable accounts in a mix of the intermediate, long and NY state. Does a twofold of keeping our taxable income low and provides monthly cash. Even though I have not filed for SS yet, we haven't needed to dip into our savings yet.

I think this is a great option for OP to consider. I have similar funds that I treat as MM account. They pay 2% distribution monthly which is >2.5% taxable equivalent yield. Very stable distributions so far. I do not reinvest dividends.

 

[copyright1997reloaded]

Shok - Your post ironically points out one of the reasons why the market has done so well, namely that it is the "best" of the investment choices out there to get any type of income return.

As others have stated, there is nothing inherently bad about spending down capital, just our human feelings to not want to eat into capital. I too would be very careful in chasing yield (regardless of the source - bonds, stock, other). It just seems to me (not that my feeling is worth anything) that we have inflated prices in just about all asset classes.

 

[Freedom56]

If you want to remain conservative, just time your purchase of corporate bonds/notes of companies in the telecom, technology, pharma, and bio-technology sectors that are profitable in this environment and can easily cover interest payments with their operating income and those that generate a lot of free cash flow. Just avoid all other sectors (retail, energy, REITS, industrial, aerospace, airlines, etc...). When the markets sell off, funds always sell bonds to raise cash as investors head for cover. This is the best time to buy. I was buying and flipping fixed income securities mid-March when the market was in panic mode. Many of the issues that I picked up mid-march have a YTM (yield to maturity) of 8% to 14%. In many cases I flipped many investment grade preferred stocks for a quick 22-46% gain. I am holding about 45% cash with the rest in Corporate bonds/notes and CDs. I have 10% of my portfolio maturing in July through September 2021 so I am actively looking at fixed income investment opportunities.

 

[pb4uski]

SWR, another option to consider is preferreds. Over the last year and a half I've built up a portfolio of about 20 investment grade or just below investment grade preferreds that are yielding ~5.95%. IRR has been in the 8% range. It's a little work but it is fun, but it might be more risk than you would like. Check out the preferred stock thread.

 

[mrfeh]

Don't have enough info to provide a response.

What does firecalc say is your safe withdrawal rate given your portfolio? What are your annual expenses? Is there some reason you want to live off dividends/interest only?

 

[ShokWaveRider]

Lots of good ideas, thanks. Firecalc says we are fine at 2 x the income withdrawal. It is just after so many years of accumulation, it is difficult to spend more than one needs to. We have everything we want or need, and have no dependents, so our 3 charities are more than likely going to make out like bandits when we Kark it unless we start to spend a lot more.

However, the initial question still stands for now as we are a year from needing to implement something new.

I like the Muni option that BlueLight highlighted earlier. With rates so low now bonds have no place to go but up in future. What specific funds at Vanguard do you recommend?

I do not think I have the patience for the Preferred strategy that "P" suggests, although it seems fruitful.

 

[mrfeh]

Firecalc says we are fine at 2 x the income withdrawal.

Then spend some principal.

 

[pb4uski]

....With rates so low now bonds have no place to go but up in future. ...

Huh?

When rates rise the value of bonds decline. It seems to me that with near zero interest rates that if the Fed sticks to their position that they don't want to take rates negative that rates have nowhere to go but up.... though it may be a year or two before we see any increase in interest rates. At that point, the value of bonds would decline.

Or did you mena that bond interest rates rather than bonds have nowhere to go but up? In that case, I would agree.

 

[ShokWaveRider]

Or did you mean that bond interest rates rather than bonds have nowhere to go but up? In that case, I would agree.

Yes, that. Not sure if that would apply to a fund though. No experience there.

 

[retired1]

High Yield Bond Funds might be an option but no CD-like guarantee of principal as long as you only take the interest. Something like "ACTHX" maybe. I own it for a long time and have been getting >4%. Has high fees so watch for that.

 

[pb4uski]

Yes, that. Not sure if that would apply to a fund though. No experience there.

It definitely applies to funds since funds are nothing more than a portfolio of individual bonds... if rates rise values fall and vice versa.

 

[pb4uski]

High Yield Bond Funds might be an option but no CD-like guarantee of principal as long as you only take the interest. Something like "ACTHX" maybe. I own it for a long time and have been getting >4%. Has high fees so watch for that.

I think the OP is looking for more price stability than ACTHX provides.

 

[USGrant1962]

I would suggest that spending a small portion of your portfolio to bridge a defined period (3 years to full SS) is an ideal, low-risk use of capital that was accumulated for retirement.

It sounds like only maybe 6% of your whole stash based on Post#16.

 

[DayDreaming]

... after so many years of accumulation, it is difficult to spend more than one needs to...

A different way to look at it is that you are spending exactly what you need to. It's just a question of where the money comes from. If you're too focused on getting that money from dividends and interest, then you might shift some of your savings into riskier investments, which could mean you end up with less in the long run.

 

[retired1]

I think this is a great option for OP to consider. I have similar funds that I treat as MM account. They pay 2% distribution monthly which is >2.5% taxable equivalent yield. Very stable distributions so far. I do not reinvest dividends.

I like this idea also and would like to have muni funds in taxable account in lieu of CDs. Is the distribution auto adjusted for Inflation (~2.3%) ? Since it's a fund I'd think old bonds are expiring and new ones are being bought at current rates so it should be auto adjusted for Inflation. What's been your experience ?