Now Retired: We need 3% yield on a $1.1 mil nest egg

[Cheesehead]

I'm 65, wife is 60, now retired although I still service clients and bring in a few K a month for a couple of days' work, but that won't last forever because it's very physical work. We need some advice as to how to get a 3% yield ($30K annual, $2500 monthly) from a $1.1 mil nest egg, as consistently as possible. Now we're transitioning from a total return portfolio to an income yield one, which is proving trickier than I thought. We're using the Bucket Strategy where Bucket #1 has years 1-5 of retirement in safe CDs ($175K), Bucket #3 for years 11 to death has the remainder in stocks.

So Bucket #2, for years 6-10, is supposed to be in bond and balanced funds, I already have some Wellesley. But with rising interest rates I have been having a loss with bond funds. We looked into corporate bond ladders but they are doing pretty much the same as CDs and Treasurys. So how to get yield? With a measure of safety? I grew up as a Bogglehead, simple couch potato portfolios, but now I need income. I do not enjoy actively managing the fixed income positions in today's environment. As compared to my 40 years of DIY, now that I am in retirement and I don't have a lot of years to recover from a disaster ala 2008, I am now fretting over the head winds of a trade war, recession, inflation, rising interest rates, volatility, etc.

Last year, as an experiment, we call it our One Year Horse Race, we gave $200K over to the Fidelity Advisors for a growth position we said we will not touch for 14 years. It's an ER of 1%. Well, although any drunken monkey could have made money in the last year, including the correction, their portfolio made 9.16% net their fee, compared to my paltry 4.5%, including the February correction. Their AA is 70/40 whereas we're more conservative. So I do have confidence in them, although I hated the 1% fee, I now see they earned their keep.

Let me get to the point now that I gave the back story. We just went in for our annual Fidelity check up (I also get a second opinion from a local CFP we pay hourly to compare notes). And this meeting we told him we have no clue for this Bucket #2 since the bond situation isn't clear, we have perhaps $400K-$600K to get some yield. How do we make an income portfolio out of that to throw off much of the $35K? What's scary about Wellesley is that it's just 71 stocks. Although they have a great track record I have never done rear view mirror investing. What can we do to protect ourselves from the buffeting of trade wars, inflation, rising interest rates, the upcoming recession and volatility?

He recommended BlackRock Diversified Income portfolio, it will be an ER of .9% with $200K, goes down to about .6 with more investment, so that's just .4% more than Wellesley. Fidelity has nothing to do with this, they are basically custodians for BlackRock. What I like about it is that it is an alternative me doing bond funds. These are alternative positions such as: emerging market debt, MLPs, REITs, preferred stock, etc.

Please check it out and let me know what you think. I don't care about the fee, to me it's worth it since I can't successfully DIY bonds/fixed income and get a consistent income stream, protect the principal as much as possible and mange risk. What are you doing for an income yield? Hopefully this BlackRock portfolio will garner 4-6% a year.

https://www.fidelity.com/bin-public...rock-diversified-income-portfolio-factkit.pdf

Thanks from Wisconsin!

 

[REWahoo]

What can we do to protect ourselves from the buffeting of trade wars, inflation, rising interest rates, the upcoming recession and volatility?

Short answer: nothing.

The truth is both life and investing have risks. All any of us can do is diversify our investments, LBYM, and hope for the best.

 

[Cheesehead]

Well...I would think BlackRock could do it better than myself. That's their business, right? More so than Fidelity.

How is everyone here, already in retirement, getting a steady yield from their fixed income positions, besides bond funds?

Thanks

 

[Spudd]

I am still investing the same way I did before I retired, and selling shares as needed to supplement the income from dividends.

 

[Cheesehead]

I thought the idea is to not liquidate shares, to live as much as possible off the yield, correct? To avoid Sequence of Return Risk and taxes?

Got to cut the grass, will check later.

Thanks

 

[REWahoo]

I am still investing the same way I did before I retired, and selling shares as needed to supplement the income from dividends.

Same here. The bulk of our portfolio is in Wellesley and Wellington, with about 15% in CD's. The recent hit to bonds has hurt the performance of Wellesley this year, but as a long-term investor I know that won't last forever. Meanwhile the yield has continued at 3+%.

 

[Texas Proud]

I thought the idea is to not liquidate shares, to live as much as possible off the yield, correct? To avoid Sequence of Return Risk and taxes?

Got to cut the grass, will check later.

Thanks

There is a group of people who think you should live on yield... I am not one..


I am in the group that thinks it is irrelevant where the money comes from that you spend... money is fungible... it does not know where it came from when you put it in your bank to spend... I invest for total return... I sell shares along the way to get the money that I need...

 

[REWahoo]

I thought the idea is to not liquidate shares, to live as much as possible off the yield, correct?

Only if you want to make your heirs very happy because you failed to spend what you had available to you.

Take a look at FIRECalc and note it bases "success" on not running out of money, not on living on dividends and interest.

 

[pb4uski]

I personally think that you are way overthinking it and that a 2.7% WR at age 60 is as bulletproof as you can get. Since you are a Boglehead, why not 42% Total Stock, 18% Total International Stock, 37% in either Total Bond or Intermediate Term Investment-Grade and 3% in Prime Money Market? Place the components as needed for tax efficiency.

Then set up a monthly redemption of $2,500 from Prime MM to your local bank and rebalance annually. KISS.

Figure it this way... if you end up even close to running out of money with a 2.7% WR then there are going to be a whole lot of people who are totally broke.

Don't get hung up on never touching principal... it causes you to invest more conservatively than necessary. If you invest for total return you may occasionally have to "dip into principal" in a bad year but will have good years that more than make up for it and are more likely to leave heirs more than if you become preoccupied with protecting principal. Dance with the girl that brung you... her name is Equities.

 

[HillCountry]

I think you are doing very good, covering immediate need with CD. Just relax and enjoy the retirement. Don’t mess up when it’s working.

You claim to be BH, but don’t hesitate to pay 1%. I never think I am BH, but no way I am going to give 1%.

 

[RobbieB]

Well...I would think BlackRock could do it better than myself. That's their business, right? More so than Fidelity.

How is everyone here, already in retirement, getting a steady yield from their fixed income positions, besides bond funds?

Thanks

I've switched to buying the individual bonds. Actually my brokers pick them for me. Bonds confuse me.

 

[youbet]

There is a group of people who think you should live on yield...

And these folks frequently are just fooling themselves because they do not account for inflation. They spend the yield without adding back to the portfolio out of the yield to keep it constant in real terms. A decade or two later, even with only 2% - 3% inflation levels, they're in real trouble.

 

[Bestwifeever]

...
Last year, as an experiment, we call it our One Year Horse Race, we gave $200K over to the Fidelity Advisors for a growth position we said we will not touch for 14 years. It's an ER of 1%. Well, although any drunken monkey could have made money in the last year, including the correction, their portfolio made 9.16% net their fee, compared to my paltry 4.5%, including the February correction. Their AA is 70/40 whereas we're more conservative. So I do have confidence in them, although I hated the 1% fee, I now see they earned their keep. ...

?

 

[davhin]

There is a group of people who think you should live on yield... I am not one..


I am in the group that thinks it is irrelevant where the money comes from that you spend... money is fungible... it does not know where it came from when you put it in your bank to spend... I invest for total return... I sell shares along the way to get the money that I need...

+1

 

[REWahoo]

?

See below.

 

[pb4uski]

Well...I would think BlackRock could do it better than myself. That's their business, right?...

Who knows. In the early 2000s I invested my bond money in a "core bond fund". Somewhere along the line, the managers decided to bet my money that mortgage backed securities would out perform the bond market. If they were right, then the fund would look great and they and the fund would prosper. They were well within the funds objectives and limitations to make this bet as like all funds, the objectives and limits were broad.

They got creamed during the financial crisis.

I finally figured it out when I saw that this core bond fund way underperformed other similar core bond funds, but by that time it was too late and $20-25k had gone up in smoke.

 

[audreyh1]

And these folks frequently are just fooling themselves because they do not account for inflation. They spend the yield without adding back to the portfolio out of the yield to keep it constant in real terms. A decade or two later, even with only 2% - 3% inflation levels, they're in real trouble.

Yep, if they don’t have any equities (sufficient equity exposure).

 

[audreyh1]

Who knows. In the early 2000s I invested my bond money in a "core bond fund". Somewhere along the line, the managers decided to bet my money that mortgage backed securities would out perform the bond market. If they were right, then the fund would look great and they and the fund would prosper. They were well within the funds objectives and limitations to make this bet as like all funds, the objectives and limits were broad.

They got creamed during the financial crisis.

I finally figured it out when I saw that this core bond fund way underperformed other similar core bond funds, but by that time it was too late and $20-25k had gone up in smoke.

It recovered quickly though - right?

 

[OldShooter]

You are overthinking this. First:

... Last year, as an experiment, we call it our One Year Horse Race, we gave $200K over to the Fidelity Advisors for a growth position we said we will not touch for 14 years. It's an ER of 1%. Well, although any drunken monkey could have made money in the last year, including the correction, their portfolio made 9.16% net their fee, compared to my paltry 4.5%, including the February correction. Their AA is 70/40 whereas we're more conservative. So I do have confidence in them, although I hated the 1% fee, I now see they earned their keep.
...

This is really faulty thinking. First, one year is not an investor's horizon. I have a couple of test portfolios, one with a DFA guy, and I am monitoring a couple of portfolios being run for nonprofits my wife is involved with. I don't even START to look for year. Five years is a more statistically reasonable time to wait, though I will begin comparing to benchmarks after a couple of years.

Second, the only thing you have learned from your experiment is that, during one year of a stable and rising market, a more risky portfolio outperformed a less risky one. This is not news. If you absolutely insist on measuring over just one year, separate the equity and the fixed income tranches of your portfolio and Vanguard's and calculate total return for each equity tranche. Compare it to the TR of the Russel 3000 or Wilshire 5000. If you're numerically inclined, calculate Sharpe ratio as well.

OK, more to your question: Sometimes the way we state a problem limits the range of solutions that can be discussed. Psychologists call this "framing."

The way you have stated your problem is effectively that you want to increase risk in order to increase yield on your fixed income bucket #2. The reason we have these fixed income investments, though, is to reduce risk. So why is it so common that we all run out and immediately increase volatility and risk by chasing higher fixed income returns? I don't know. Maybe it's genetic due some obsolete evolutionary pressure. But change the framing a bit, you might consider equity investments for bucket #2. Or maybe make bucket #2 a tad smaller and bucket #3 a tad bigger, just for management simplification?

At the end there is no free lunch. More return entails more risk.

 

[Chuckanut]

I thought the idea is to not liquidate shares, to live as much as possible off the yield, correct? To avoid Sequence of Return Risk and taxes?

Some people advocate that and if it works for them and they sleep well at night, that is great. However, total return is the true measure of success. Money is fungible (love that word!) and where it comes from does not matter.

The best way I know to avoid sequence of return risk is by dollar cost averaging into assets over a period of a year or two.

Are you taking inflation into account? 3% in today's environment may keep you even with inflation after taxes. So, in real terms you have earned nothing. That is not a good plan for a comfortable long-term retirement if you 'only' have a million or so to invest. (Remember the days when a million dollars meant you were set for life? Not anymore. )

IMHO, dollar cost averaging your money into a 50/50 asset allocation over the next two years would be a good start. Re-balance every year. Clean simple and seems to beat most investment schemes. Or, put the money into Vanguard Wellesley, collect the dividends and be happy.

My 2¢. Take it or leave it.

 

[pb4uski]

It recovered quickly though - right?

I don't think so.... I dumped it and shortly thereafter our 401k sponsor dumped it... in 2010 it merged into a Well Fargo fund.

 

[Bestwifeever]

See below.

 

[marko]

And these folks frequently are just fooling themselves because they do not account for inflation. They spend the yield without adding back to the portfolio out of the yield to keep it constant in real terms. A decade or two later, even with only 2% - 3% inflation levels, they're in real trouble.

Dunno. Don't want to get into an argument over it but we haven't sold a share in the 14 years that we've been RE'd. Just living off dividends (and SS).

We have a healthy dividend bucket as a set-aside and over the years the portfolio has grown (doubled) and the dividends have increased as well.

True, inflation has been tame but I don't see a risk to the strategy at this point in time.

 

[racy]

I have Vanguard sell a certain dollar amount monthly from the fund in our portfolio that is most above it's target allocation. No buckets & no particular focus on "income" stocks for me. I'm in the "money is fungible" camp, too.

 

[audreyh1]

I don't think so.... I dumped it and shortly thereafter our 401k sponsor dumped it... in 2010 it merged into a Well Fargo fund.

OK wow, no recovery! I was thinking of the dramatic dive of DODIX which did recover smartly, but was a pretty scary ride. They were overweight commercial paper which they tend to do.