Next Year's (2021) Income Dilemma?

[ERD50]

...
We have been retired for over 10 years and that is my problem. Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

Maybe this will make you feel better - take the high end of years you may have left on Earth, then divide your current stash by that number. Does it meet your spending needs/wants (after other sources of income)?

If so, you don't need any return on investment. You should factor inflation into that, but it's a start. For example, a 3% (non-inflation adjusted) WR on a zero-return portfolio is good for 33.3 years using simple math.

But the real point is, modest draw downs of the portfolio certainly do not automatically spell disaster and there is no need to fear them.

-ERD50

 

[WWDog]

I am similar age as you.SO is also. Not enough info to comment much. I'm confused. 45% after tax IRA(Taxable), rest is Tax Deferred IRA's. Is all your money in IRA's that tax will eventually be owed. Personally, for the last several years I have been converting my Taxable IRA's to ROTH IRA's and paying the tax out of already taxed money up to top of certain Tax brackets. I re-evaluate every year and plan how much to convert based on taxable income outside of my IRA's.Have you done a plan as to how you are going to pay the tax due, minimize your total tax paid, and not drive yourself into a much higher tax bracket later in life and pay much higher rates? This probably isn't worded well , so hopefully you will get my ideas.

I did exactly the same thing for several years. Calculate how much i could convert up to the next tax bracket then convert it. It is all converted now. My only problem is distributing the money among different accounts at different institutions to not top the insured amount. I couple that with CDs of taxable money. I will run into the same problem in a few years once they start to mature if the rates on CDs do not increase. We live on our pensions at present which is enough to live on and save more. The pensions and the SS is indexed to inflation. I don't see a reason to risk the market in this volatile environment.

 

[JJpop]

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.

Take a look at fixed annuities or MYGA’S. Similar to a CD if you pick a good company and your state has a 100 pct guarantee. The highest rated ones have crappy yields but you can get an A rated insurer paying about 3 pct in the 4 to 5 year range.

 

[rayvt]

We have been retired for over 10 years Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

We retired 15 years ago and our portfolio value was $XXX. Today our portfolio value just recovered to the same value. Disheartening, no?

But then I wondered just how much money we have withdrawn from the portfolio since we retired. Added it all up, and we have withdrawn $XXX/2.

Yes, we have withdrawn HALF of our initial portfolio balance and still have the same as we started with.

 

[Dave J]

I did exactly the same thing for several years. My only problem is distributing the money among different accounts at different institutions to not top the insured amount.

And that is a very nice problem to have. Congrats! I'm fortunate my SO and I have approximate equal amount in IRA's type assets, so we can each go with a great rate and get double the insurance at that bank/CU. We have one that is slightly over the insurance amount, but it is in Navy Federal, so no worries there IMO. I wonder if the OP is contemplating this?

 

[pb4uski]

We retired 15 years ago and our portfolio value was $XXX. Today our portfolio value just recovered to the same value. Disheartening, no?

But then I wondered just how much money we have withdrawn from the portfolio since we retired. Added it all up, and we have withdrawn $XXX/2.

Yes, we have withdrawn HALF of our initial portfolio balance and still have the same as we started with.

Similar story here... retired over 8 1/2 years ago... portfolio value today is about the same as when I retired... but have withdrawn and spent 38% of our retirement date portfoio balance... and 5% of that 38% was paying off our mortgage (would have only been 33% without the mortgage payoff).

 

[myself]

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.

Sorry if anyone else suggested this, I didn't read all the replies.

I'm just thinking that you could consider buying shares in a company like AT&T?
I don't know what the taxation you have would be, but right now they pay a 7% dividend and it keeps going up slightly (about 1.9%/yr) for the past 30+ years.
Obviously you shouldn't put all of your money in it, but let's say 1/4 of your money and only take 4% while it keeps growing by 3%/yr.

I know according to tax laws in the US, if it is in a taxable account that they are "qualified dividends", which means that it's at the Long Term Capital Gains tax rate.

Oh, and never bother selling the stock unless you have to, even if it dips down to $25/share, it's been at the same level as it is not for over 30 years.

 

[myself]

AGO is a stock... this is AGO.PRB.... an exchange traded bond. AGO went down in March and has pretty much stayed there... AGO.PRB, like many preferreds and exchange traded bonds, dipped in March as the SHTF but then recovered.

Everything dropped in March.... see below. Blue is AGO.PRB, black is PRS, green is TBB and orange line is VCIT (Vanguard Intermediate-Term Corporate Bond ETF).. for some reason the colors in the chart are caddywhompus.

But aren't ETF's often taxable as regular income? I know that not all are, but dividend paying companies that pay "qualified dividends" - which are all of the dividend aristocrat stocks, the dividends are actually taxed at long term capital gains rates. So 0% on up to $80,000 for a married couple starting in 2020.

 

[myself]

Dividend paying stocks are never a suitable replacement for fixed income.

How so? Take a look at AT&T. If you bought shares at $30/share in 1997. Compare that to having a fixed interest (say 4%) compounding annually over the same time frame.
Results are shown below.

The company still increases it's dividends about $0.04/yr, so next year it would pay $2.12/share or if you had 1,000 shares now it would give you $2,080/yr if you didn't reinvest dividends for all those years, or $4,022/yr if you DID reinvest dividends, starting in 2021.

Please note that I do currently own some AT&T shares at an average price of $27/share and take the proceeds and reinvest it in other stocks as I see fit, including sometimes buy more AT&T stock. But I'm in the accumulation phase of my life still. I don't see it splitting shares anytime soon, until they pay down their debt which is also covered by their free cash flow along with their dividends that they pay to shareholders.


To put it into better perspective:

1. Buying 500 shares of AT&T on 6/1997 for $15,000 would yield you 1,000 shares because the shares doubled one time in 1998, and
   • $35,613 in dividends alone if you did NOT reinvest the dividends, and would be worth $50,613 and would pay you $2,080/yr currently
   • $52,165 in dividends alone if you reinvested all the dividends into AT&T stock at an average share price of $36/share, but the account would be worth $109,354 today and would be paying you $4,022/yr next year if they don't increase the dividend again
2. Fixed interest investment 4% compounded annually would be about $36,970, so it would have paid $21,971 in interest

PS Edited many times to fix formatting and correct numbers.

 

[RetireBy90]

I suggested looking at dividend paying stocks also, but I would stick with those paying around 3-5% at this point. One way the yield goes up on a stock is an increase in the dividend, another is a decrease in the share price. I see in 2000 AT&T was selling for about $50 and it is about $30 today. There are others that have seen steady increase in share prices and dividend payout that I use for some income. Of course if AT&T were to keep the dividend payout steady or increasing, and you can live off that then share price is not that important. Just remember GE and Pan Am, both stocks I owned thinking that dividend was a safety in case of shares declining, until they killed the dividends. I hope I have learned my lesson from these 2.

 

[mrfeh]

How so?

This is how so:

Just remember GE and Pan Am, both stocks I owned thinking that dividend was a safety in case of shares declining, until they killed the dividends. I hope I have learned my lesson from these 2.

Fixed income serves a specific purpose in a portfolio. Equities are not a suitable replacement.

 

[pb4uski]

But aren't ETF's often taxable as regular income? I know that not all are, but dividend paying companies that pay "qualified dividends" - which are all of the dividend aristocrat stocks, the dividends are actually taxed at long term capital gains rates. So 0% on up to $80,000 for a married couple starting in 2020.

Not an ETF Exchange Traded Fund)... AGO.B is exchange traded debt... and is taxed as regular income just as the OPs CD interest is currently are taxed as regular income.

Dividend stocks, aristocrat or not, are still stocks and thus are subject to much more volatility than CDs.

Exchange traded debt is higher yield than CDs and less volatility than stocks. Another option would be preferred shares, which is good yield but less volatility than common stock and most dividends are qualified dividends.

 

[pb4uski]

....To put it into better perspective:

1. Buying 500 shares of AT&T on 6/1997 for $15,000 would yield you 1,000 shares because the shares doubled one time in 1998, and
   • $35,613 in dividends alone if you did NOT reinvest the dividends, and would be worth $50,613 and would pay you $2,080/yr currently
   • $52,165 in dividends alone if you reinvested all the dividends into AT&T stock at an average share price of $36/share, but the account would be worth $109,354 today and would be paying you $4,022/yr next year if they don't increase the dividend again
2. Fixed interest investment 4% compounded annually would be about $36,970, so it would have paid $21,971 in interest

PS Edited many times to fix formatting and correct numbers.

I don't think that your numbers are right. The calculator on the AT&T website indicates that $15,000 invested on June 1, 1997 is worth $15,148.72 today without dividends reinvested.... not $50,613.

https://investors.att.com/stock-information/investment-calculator

 

[JJpop]

Sorry if anyone else suggested this, I didn't read all the replies.

I'm just thinking that you could consider buying shares in a company like AT&T?
I don't know what the taxation you have would be, but right now they pay a 7% dividend and it keeps going up slightly (about 1.9%/yr) for the past 30+ years.
Obviously you shouldn't put all of your money in it, but let's say 1/4 of your money and only take 4% while it keeps growing by 3%/yr.

I know according to tax laws in the US, if it is in a taxable account that they are "qualified dividends", which means that it's at the Long Term Capital Gains tax rate.

Oh, and never bother selling the stock unless you have to, even if it dips down to $25/share, it's been at the same level as it is not for over 30 years.

Do you really think a retiree should put 25 % of their money in one stock?

 

[pb4uski]

Do you really think [-]a retiree[/-] anyone should put 25 % of their money in one stock?

Fixed it for you.

 

[JJpop]

Fixed it for you.

I have a lot of other things that need fixing

 

[daylatedollarshort]

I had a chat to my BIL today, he has been retired for over 25 years and says the hardest thing was realizing he had to draw down on his savings to maintain his SOL after stopping W%#K. He was so used to maintaining or adding to his stash that it potentially going down was heartbreaking. He is used to it now at 83!

We have been retired for over 10 years and that is my problem. Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

Will it still go down once you are both on Social Security? If so, it seems like a short term issue or one you could change by taking SS sooner.

 

[SecondCor521]

Similar story here... retired over 8 1/2 years ago... portfolio value today is about the same as when I retired... but have withdrawn and spent 38% of our retirement date portfoio balance... and 5% of that 38% was paying off our mortgage (would have only been 33% without the mortgage payoff).

And between the two of you, you have 22.5 fewer years of living expenses to fund.

I'm in a similar spot where I've got more money, fewer years of living expenses, and most specifically fewer years of child support left (zero) and fewer years of kids' college ahead of me (approximately 7 left out of 12) than when I started.

OP, what did your plan call for? I haven't been following this thread closely, but it seems like you're running into reinvestment risk, which is a predictable risk.

Did you not think about it, or think the risk was low, or have a contingency plan if the risk happened?

 

[Reese]

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.

+1

 

[friar1610]

I had a chat to my BIL today, he has been retired for over 25 years and says the hardest thing was realizing he had to draw down on his savings to maintain his SOL after stopping W%#K. He was so used to maintaining or adding to his stash that it potentially going down was heartbreaking. He is used to it now at 83!

We have been retired for over 10 years and that is my problem. Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

I periodically listen to a podcast called "The Retirement and IRA Show". It's done by a couple of very chatty guys who run a planning practice in Colorado focused entirely on retirement planning. I find their approach very interesting. They very often make the point that many of their clients have big problems making the mind-set change from accumulation to drawdown. For so many years we keep tracking our portfolios and watching them grow. Then when we retire we have a hard time realizing that seeing the portfolio become smaller to meet the very objective we grew it for in the first place is in the natural order of things.