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

[audreyh1]

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.

As long as you have a reasonable AA with a healthy exposure to equities - at least 35% unless elderly - and you don’t exceed 3.5% to 4% withdrawals depending on your timeframe, your portfolio should be able to keep up with inflation.

The problem is if someone puts all their funds in 3% 5-year CDs and takes out all that interest every year. The principal is not growing, and thus won’t keep up with inflation.

 

[Cheesehead]

OP here:

Thanks everyone for your advice. I'll have to look at my options. Leaving money for an inheritance isn't the reason for not touching the principal, rather, it's to help my wife when I kick the bucket, which will be sooner rather than later for me, because she won't collect any of my social security. So I figure the more of the nest egg that is intact, the better, hence this "yield only" idea. But I do realize, from talking with older and richer friends, one needs several million to sweep the dividends, cap gains and interest using 3%, for a decent lifestyle.

 

[REWahoo]

OK - 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.

Are you sure you aren't recalling the bloodbath DODBX experienced at the time, which was considerably worse than DODIX? I had up close and personal knowledge of that balanced fund's decline of more than 50% from the previous high. Outrageously bad performance for a balanced fund, and soured me on ever investing again with Dodge & Cox.

(By comparison, Wellington declined [-]25%[/-] about 40% from its high.)

 

[Texas Proud]

OP.... I just looked at my Vanguard funds and from what they say I am up 18% over the last year... if you experiment is a full year then they did not do a great job for you... only earning 9%...


I am about 80/20 though...

 

[audreyh1]

Are you sure you aren't recalling the bloodbath DODBX experienced at the time? I had up close and personal knowledge of that balanced fund's decline of more than 50% from the previous high. Outrageously bad performance for a balanced fund, and soured me on ever investing again with Dodge & Cox.

(By comparison, Wellington declined 25% from its high.)

No - I was talking bond funds. But even the shocking DODBX decline recovered. Not so quickly, but recover it did.

It wasn’t just the equity portion of DODBX that swooned, it was the bond portion too (DODIX) although the bond portion recovered far more quickly. It was a good example of how eschewing government type bonds in favor of commercial bonds can really bite you when things blow up.

 

[pb4uski]

.....it's to help my wife when I kick the bucket, which will be sooner rather than later for me, because she won't collect any of my social security. ...

Just curious, why is won't your wife collect any of your social security? Was her SS larger than your perhaps so yours will "go away"?

 

[RunningBum]

OP here:

Thanks everyone for your advice. I'll have to look at my options. Leaving money for an inheritance isn't the reason for not touching the principal, rather, it's to help my wife when I kick the bucket, which will be sooner rather than later for me, because she won't collect any of my social security. So I figure the more of the nest egg that is intact, the better, hence this "yield only" idea. But I do realize, from talking with older and richer friends, one needs several million to sweep the dividends, cap gains and interest using 3%, for a decent lifestyle.

Just because you are taking from your nest egg doesn't mean you will have less left. If you have a dividend driven portfolio, you might wind up with less than with a growth or index portfolio.

Say with your $1.1M you generate $33K in dividends, and the stocks grow at 2% ($22K). You haven't touched the principal, and you have (edit correction $1.122M.

But what if you go with a total index portfolio, which I think generates about 2% in dividends these days, and it grows 4%? You get $22K in divs, withdraw another $11K, and the stocks grow $44K. OMG you've touched the principal! But you have (edit correction $1.133M, while still supplying the $33K you needed from the portfolio.

"Might" is the keyword here, because a dividend portfolio can generate a better total return. The numbers I use are just an example, not based on any reality, and are biased to support my point. But the point is, look for total return, which makes your portfolio last the longest. Whether you use dividend paying stocks, a broad index, or growth stocks is up to you, but this is why some (many?) of us look at total return rather than dividends.

 

[bmcgonig]

The Blackrock fund is just a managers pick of some mutual funds and ETFs. At the moment 40% are in junk and bank loans. Some preferred also. What you're betting is that the manager will get you out of that long before the next recession cos they will suck at that point. He might do a great job or he might do what pb's Dodge and Cox did. I wouldn't put more than a small portion of my fixed income money in it.

 

[COcheesehead]

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

Cheesehead meet COcheesehead. I grew up in Wisconsin, but now live in Colorado.
In my mind living off yield and return sequence risk are two separate issues.
Having short term resources whether it be cash, bond ladders, CD’s are the answer for the return sequence issue. Living off yield is how you choose to manage your WR.

 

[pb4uski]

.... He might do a great job or he might do what pb's Dodge and Cox did. I wouldn't put more than a small portion of my fixed income money in it.

Agree, but for the record my bad experience was with Evergreen, not Dodge & Cox... that was REWahoo.

 

[HFWR]

My yield in 2017 was roughly 2.77%, from boring index etfs, though that includes a 10% stake in a REIT that yields in the high sevens...

 

[daylatedollarshort]

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

Our solution is to continue to live below our means, focus on sustainable living and use a matching strategy. If you can keep up with inflation, with a matching strategy your safe withdrawal rate over 30 years is 3.33%, more with any returns over inflation. More on matching strategies - https://www.bogleheads.org/wiki/Matching_strategy

 

[Gumby]

Just curious, why is won't your wife collect any of your social security? Was her SS larger than your perhaps so yours will "go away"?

I'm not cheesehead, but my wife doesn't get any Social Security spousal benefit now and won't get a survivor benefit when I die due to the Governmental Pension Offset (GPO), because she gets a teacher's pension. She's not eligible on her own account, since teachers in this state do not contribute to social security. This circumstance affects our financial planning. For example, I will take social security at 62 and thereby avoid taking money out of the nest egg so it will be larger for her (she will likely survive me). I also have a paid up whole life policy that, if annuitized, will make up for the loss of my social security.

 

[Bigdawg]

Say with your $1.1M you generate $33K in dividends, and the stocks grow at 2% ($22K). You haven't touched the principal, and you have $1.32M.

Umm, I'm not very good at math. Help me out here.

$1,100,000 generates $33,000 =$1,133,000

and another $22,000 in growth so $1,133,000 plus $22,000 = $1,155,000

Even if you add the div's to the principal and growth you still don't have $1.32M.

Did I miss something?

 

[RunningBum]

Umm, I'm not very good at math. Help me out here.

$1,100,000 generates $33,000 =$1,133,000

and another $22,000 in growth so $1,133,000 plus $22,000 = $1,155,000

Even if you add the div's to the principal and growth you still don't have $1.32M.

Did I miss something?

Apparently I'm not as good at math as I thought I was. I made the corrections in my post. I assumed you'd spend the 33K so in the dividend scenario your portfolio would be $1,122,000 with the 2% growth. $1,133,000 in the index scenario where you grow 4% but spend 1% of that, along with your 2% dividends.

 

[DrRoy]

I have an investment grade (mostly BBB) corporate bond ladder for fixed income. I will get the return the bonds gave at the time of purchase when they mature, and reinvest at the generally higher rate as rates rise.

 

[traineeinvestor]

I'm not sure if there is any such thing as a risk free investment - you can pick and choose which risks to take (to some extent) but you can't avoid every risk.

FWIW, most of our portfolio is in equities and real estate – the cash flows are enough to meet our expenses and I've effectively chosen to accept volatility risk to obtain some long term protection against inflation risk. That said, with bond yields picking up and equities looking expensive, I'm starting to add some short dated bonds to the portfolio.

As others have said, even 2-3% pa inflation will take a big chunk out of real income over a couple of decades and that worries me far more than the prospect of a 20% market decline.

 

[marko]

OP here:
But I do realize, from talking with older and richer friends, one needs several million to sweep the dividends, cap gains and interest using 3%, for a decent lifestyle.

Dividends, cap gains and interest should deliver an average of about 5% when you factor in cap gains; that's my 15 year average. Cap gains are more lumpy and some years are better than others and we generally re-invest them.

But there's tons of stocks and funds that deliver 3% in dividends. I have TRP's RPSIX that's been paying about 3% for 20 years now. XOM is also a good dividend payer right now as are many of the oil stocks.

 

[ShokWaveRider]

I know most everyone here is pro market and significant in equities, I am not, and cannot afford to loose 20% of our Nest Egg to a market correction, let alone the lack of sleep along the way. We feel we have enough where as (for us) we have won the game. We have no heirs. If we take NestEgg/30 + SS we have a surplus, (SS actually is the surplus) that will last us till our demise. Add 3 - 4% Fixed returns from a MYGA or CD and there is more gravy there. Plus I do not need to worry about the market.


OK, so we are leaving 3% on the table. But We do not need sleep aids as a result. Unfortunately we do not have confidence that the country will maintain it's gung ho economy with it's current spending rate, overall debt rate and general attitude.

 

[iloveyoga]

My investment strategy is similar to when I was working, I have moved to a bit less in stock mutual funds as we get older.

 

[Dawg52]

I know most everyone here is pro market and significant in equities, I am not, and cannot afford to loose 20% of our Nest Egg to a market correction, let alone the lack of sleep along the way. We feel we have enough where as (for us) we have won the game. We have no heirs. If we take NestEgg/30 + SS we have a surplus, (SS actually is the surplus) that will last us till our demise. Add 3 - 4% Fixed returns from a MYGA or CD and there is more gravy there. Plus I do not need to worry about the market.

You're not alone.

 

[24601NoMore]

I know most everyone here is pro market and significant in equities, I am not, and cannot afford to loose 20% of our Nest Egg to a market correction, let alone the lack of sleep along the way. We feel we have enough where as (for us) we have won the game. We have no heirs. If we take NestEgg/30 + SS we have a surplus, (SS actually is the surplus) that will last us till our demise. Add 3 - 4% Fixed returns from a MYGA or CD and there is more gravy there. Plus I do not need to worry about the market.

OK, so we are leaving 3% on the table. But We do not need sleep aids as a result. Unfortunately we do not have confidence that the country will maintain it's gung ho economy with it's current spending rate, overall debt rate and general attitude.

Ditto that. Same here. When you've "won the game", quit playing (as Dr. Bernstein famously said). This bull has run long and hard. A 20-50% drop in the next few years is increasingly likely, and I sure don't want to watch potentially half of my net worth evaporate on paper like it pretty much did in 2008. Those who are OK with this either have way more time to wait for recovery (ie: are younger than we are) or haven't experienced a big (albeit, on paper) drop like many of us have gone through. It's not as easy psychologically to stomach as one may think.

We're heavy cash (2.8 - 3% CDs) + bonds and only ~25% equities. The cash and bonds will throw off enough dividends & interest to pay our core expenses. I'll still need to dip into the investment portfolio or cash bucket to pay HC and travel, but the plan is for the investment portfolio to replenish any cash I pull through dividends..

I KNOW that the cash will be worth less in 20 years. So? We eliminate the market risk and sleep much better at night. Plus, I'm not planning to leave a 'legacy' - the others (potential heirs) can earn their own keep, just as we have.

 

[njhowie]

You're not alone.

Ditto.

Sentiment on this site and many, many others are overly pro-equities at this time only as a reflection of current conditions and that folks have been made complacent towards. Most who are older have been through this all before and knows how it ends. This time it is not different. As Buffett says, we'll find out who's been swimming naked when the tide goes out.

Investment objective and risk profile - that's what counts. Folks most always overestimate their risk tolerance.

 

[ShokWaveRider]

To follow up on my previous post, there is a time in life where capital preservation outweighs the risk of continued growth. Especially if one has enough to last for the predictable future. IMHO that is.

 

[audreyh1]

I KNOW that the cash will be worth less in 20 years. So? We eliminate the market risk and sleep much better at night. Plus, I'm not planning to leave a 'legacy' - the others (potential heirs) can earn their own keep, just as we have.

As long as you figure the bite of inflation and are reinvesting enough to keep up with it, otherwise your standard of living will decline dramatically.

Worth how much less in 20 years:

Total inflation from May 1998 to May 2018 is 54.54%*

So there is the >50% hit to your cash like investments right there over the past 20 years - assuming you were withdrawing all the interest. And that’s during a period of overall low inflation, with even some deflation mixed in.

*from inflationdata.com

This bull has run long and hard. A 20-50% drop in the next few years is increasingly likely, and I sure don't want to watch potentially half of my net worth evaporate on paper like it pretty much did in 2008. Those who are OK with this either have way more time to wait for recovery (ie: are younger than we are) or haven't experienced a big (albeit, on paper) drop like many of us have gone through. It's not as easy psychologically to stomach as one may think.

Many, many people on this forum went through 2008 (even many while retired) and still maintain 40% or more in equities. Some of us are still looking at potential 30+ years retired.

We live only off our investment portfolio. I just spread my bets, stay around 50/50 AA, and rebalance when markets shift dramatically. While our portfolio is high we have excess income, so some of that gets put aside for rainy days. When we reach our 70s we’ll probably start dialing back on the equity exposure. BTW we retired in 1999, so went through two very nasty bear markets.