lower MM yield = rethinking retirement income stream

[NameTaken2]

Approx 2yr since retirement. Began in "won game" mode, content with being mostly in MM earning 2.4%, and an annual yld with stock/BND holdings approx = annual expenses. Plan was to ride that indefinitely, while moving into a greater (but not high) proportion of stock when great opportunities presented.

Now, with MM 0.5% yld, my total yld is down by 60%, probably going lower, and could stay low many years (yes: who really knows!) If I knew MM ylds will return to 2.5% in 2yr then I'd ride this out, but a long low yld timeline seems likely. Taking SS would make up most of the lost yld, but plan to continue Roth conversions the next few years and prefer not taking SS for awhile.

Considering options -mainly SCHD, Schwab U.S. Dividend Equity ETF or VIG, Vanguard Dividend Appreciation ETF. Did add some stock during the mid-March sale, but the train left the station before lower limit orders hit. Now considering VTI/VIG, maybe at 50/50, instead of just VTI. Current ylds nearly equal (just <2%), but prefer the 2.5-3% range. Therefore including SCHD's 3.73% yld in the mix is tempting.

My simple analyses: companies in VIG are stronger to face C19-related challenges, and that the total market VTI has a larger ratio of companies that will be more impacted by C19. The growing VIG dividend outpacing inflation would also be nice.

The shortfall created by MM yields dropping thru the floor again isn't a disaster, but does tick me off that after years of "saving to win" now need more stock than preferred just to "chase" a measly 2.5-3% total yield!

Therefore, considering the Transgression of investing for dividends (focus on div growth). I'm not convinced it's a slam dunk that VTI total return will appreciably exceed VIG's in years ahead.

If another drop soon, may take the opportunity to move into some VIG/VTI (IMO, mkt is ahead of itself with "Happy Times Are Here Again"). Otherwise DCA into them.

No fast moves till think this over more. Aware that another big drop after buying these ETF's can erase many years of gains by the higher yld! Less stock is my Sleep At Night Formula, but have owned stocks many years and don't panic-bail ie: 2008/09, 2020. If decide I gotta add a larger proportion of stock in VIG/SCHD/VTI, then able to ride the Buy/Hold roller-coaster.

Any feedback appreciated!

 

[brewer12345]

I think we are in for a prolonged period of very low and possibly negative yields. How old are you? Does dipping into principal matter?

 

[NameTaken2]

I think we are in for a prolonged period of very low and possibly negative yields. How old are you? Does dipping into principal matter?

brewer12345, thanks for your reply-

Age 62.
Avoiding principal is a goal, not imperative.

ie: Shortfall created by low MM rates isn't blowing up my retirement.
Just makes me want to do something about the large proportion of assets not "working" at current MM rates.

 

[brewer12345]

So maybe the right choice is to figure out the lowest risk way to boost your yield to what you consider acceptable levels. I doubt that would be piling into equities. Mix in some online bank account/CD offerings, maybe some corporate bond exposure, and a small dash of some of the more exotic high yielding strategies and you can get there.

 

[NameTaken2]

Thanks brewer12345-


Best CD rates appear to be around 1.5% (lower than 2.5-3% desired range)

Corp Bonds: current ylds in desired range, but have to get my head around that option, ie: compare risk/etc for VCIT or VTC ETF (ylds 2.71/3.14%) vs BND (1.59%) and the plan being considered.
Exotic high risk sprinkled in: will consider all options, but don't normally go high risk.

 

[Sunset]

OP - One nice thing about divs from ETF's like Schd, VTI, VV, etc is the favorable tax rate of 0 or 15%, compared to interest.

 

[SecondCor521]

What would you think about a fund like VWIAX?

https://investor.vanguard.com/mutual-funds/profile/VWIAX

 

[Golden sunsets]

To the OP; Depending on how large a % you had in Cash(MM's), you were perhaps unwittingly exposing yourself to interest rate risk.

 

[bloom2708]

What withdrawal rate supports your spend?

Consider interest, dividends and selling shares. All the same.

If it is 3% or less, your portfolio should last a long time as long as you have enough stock index funds. 30-50%.

 

[Masquernom]

As our savings in mutual funds in taxable accounts grew, we were having to pay more taxes as our capital gains and dividends were being re-invested. I eventually moved a big portion of our taxable savings into Vanguard Tax Managed mutual fund. It still grew, but very noticeably reduced taxes.

 

[NameTaken2]

SC521, thanks for the VWIAX recommendation. Aware of great long-term performance of Wellesley/Wellington, and considered both in the past. Ended up going with simplicity of Boglehead 3 fund portfolio that now considering modifying. VWIAX current SEC 2.7% yld is in target range and approx 0.7% above VTI/VIG, but the 60% bonds may lower the VWIAX yld going forward(?) Have to compare risk/returns/holdings etc for VWIAX vs VIG/VTI/BND.

Goldensunsets, I took advantage of the higher MM rates to maintain a risk-averse allocation, adding to stocks/bonds when desired. Although lower MM rates don't allow yld to match expenses any longer, I don't feel "exposed". Could continue as-is at a low SWR, or start taking SS for an even lower SWR. I'm reacting to the lower MM rates by considering options to better put MM $ to work.

bloom278, low (<3%) SWR allows leaning toward risk-aversion. Do have to raise stock allocation, and same for bonds. No hurry -just irked by the lower MM rates and therefore thinking through options to better put MM $ to work.

Masquermom, OK with taxes. Approx 3/4 in IRA, Roth, HSA with remainder in taxable acct. Plan additional Roth conversions at least the next few years, which should provide a good ratio to manage taxes long-term.


Thanks for all replies!

 

[target2019]

What tax would be paid on the income stream? Just another variable to think about.

 

[NameTaken2]

target2019, thanks for your reply-


Approx 75% of assets are in TIRA/Roth. Delaying SS while filling 12% bracket with Roth conversions. Taxes on income stream not a concern now, and the Roth conversions should provide enough flexibility in the future to minimize tax on RMD's.

 

[Sunset]

As our savings in mutual funds in taxable accounts grew, we were having to pay more taxes as our capital gains and dividends were being re-invested. I eventually moved a big portion of our taxable savings into Vanguard Tax Managed mutual fund. It still grew, but very noticeably reduced taxes.

We moved away from funds with their unpredictable declarations of capital gain and dividends to ETF's to put the tax situation largely under our control.

 

[NameTaken2]

We moved away from funds with their unpredictable declarations of capital gain and dividends to ETF's to put the tax situation largely under our control.

Also an ETF fan: using for 3-fund portfolio and reason for interest in VIG and SCHD . (also prefer to use limit orders)

If consider Wellesley, would help if made available as an ETF. Doubt I'd re-create Wellesley using other funds, as other have considered.

 

[target2019]

What tax would be paid on the income stream? Just another variable to think about.

target2019, thanks for your reply-

Approx 75% of assets are in TIRA/Roth. Delaying SS while filling 12% bracket with Roth conversions. Taxes on income stream not a concern now, and the Roth conversions should provide enough flexibility in the future to minimize tax on RMD's.

Are you trying to create the income stream across all spaces (Roth, IRA, etc.)? I assumed you were discussing a taxable account...

 

[NameTaken2]

Are you trying to create the income stream across all spaces (Roth, IRA, etc.)? I assumed you were discussing a taxable account...

Yes, want all acct's to contribute to income stream. BND is in TIRA.

Not chasing high yld (though currently maybe the desired 2.5-3% range qualifies!), therefore the resulting income not expected to create a problem with taxation.

This is just the math that puts me in my Happy Place. I like yld = expenses, ie: the idea of living off yld. Now in retirement, want to take advantage of having assets that should allow a conservative plan to do that. Aware that "total return investing" is the normal mantra.

Bonds, which I admit not fully understanding (negative rates/etc), appear to have more risk in the current scenario based on a lot of reading here and Bogleheads. BND yld is down to 1.57%.

I'm considering whether there's a reasonably conservative option to get total yld back to 2.5-3%. Stocks have more risk, and understand that divs get cut. Regardless, leaning a little in that direction with the idea that a combination of SCHD, VIG, and VTI (3.81, 1.98, 1.90% SEC ylds) can get me to desired yld, and like the idea of rising divs vs inflation. Realize that even long-time Dividend Aristocrats go off the rails, but regardless the SCHD/VIG holdings aren't high-risk IMO. If I decide on this option and the mkt retests the lows, then could feel reasonably confident buying at that level for the LT.

Just thinking my way through this/considering options and welcoming any feedback from the ER Senseis. Feels kind of a contrarian play to "won the game" investing. Instead of bonds and other fixed income that are now low yield, instead go with quality stock funds to get a 2.5-3% yield, and ride whatever roller-coasters the market goes on. Any dividend cuts in a SCHD/VIG/VTI portfolio shouldn't hurt too much, and expect div's/yld to rise again. Again, this isn't all set in my mind at this point, just thinking over options. Maybe the 3-Fund Formula of 60-70% BND still is the Right Thing, even at 1.57% yld and with all the current doubt about bonds. I like yld = expenses and rising yld with inflation, but if no reasonably conservative way to get 2.5-3% to get there, then will consider other options such as back to 3-Fund.

Thanks for your time!

 

[Lsbcal]

For a conservative investor I don't think getting 2.5% yield is realistic at the present. So one must not get obsessed with not dipping into principle a bit.

Regarding SS, back in 2010 I started taking this well ahead of age 70. That worked out well as the money not spent on living grew in stocks faster then it would have grown by holding off SS. Admittedly this was taking on more risk but wouldn't be the end of the world even if the market had not headed up so nicely for 10 years. The decision to take SS gave me more peace of mind and I made better investment decisions.

Maybe consider a 5 year plan. Accept the low rates now and gradually move some more into stocks in a year or two. See this thread for some paths past bad recessions took in stocks to get a sense of what worked in some past eras: https://www.early-retirement.org/forums/f44/chart-comparing-this-decline-to-1929-1973-and-2008-a-103378.html

 

[Midpack]

MM yields fell to almost zero following the 2008-09 meltdown, for exactly the same reason they seem headed there this time. We shouldn’t be surprised or “ticked off” that it seems about to happen again. I’d be surprised if this is the last time, so plan accordingly. I moved all my cash to online savings after 09, not great but far better than any MM fund.

 

[LOL!]

A recent article about low interest rates may worth reading:
https://www.nytimes.com/2020/05/15/business/strategies-investing-interest-rates.html

However, you may also not want to read it because it offers absolutely no solutions.

 

[audreyh1]

MM yields fell to almost zero following the 2008-09 meltdown, for exactly the same reason they seem headed there this time. We shouldn’t be surprised or “ticked off” that it seems about to happen again. I’d be surprised if this is the last time, so plan accordingly. I moved all my cash to online savings after 09, not great but far better than any MM fund.

The regular MM funds at Fidelity are already at 0.01% yield excepting the Prime type MM funds.

 

[Lsbcal]

The regular MM funds at Fidelity are already at 0.01% yield excepting the Prime type MM funds.

Current SEC yields:
VMMXX (Prime MM) 0.43%
VMFXX (Fed MM) 0.33%

VFIRX (Short Term Treasury, duration =2.2yrs) 0.60%

 

[Starsky]

brewer12345, thanks for your reply-

Age 62.
Avoiding principal is a goal, not imperative.

ie: Shortfall created by low MM rates isn't blowing up my retirement.
Just makes me want to do something about the large proportion of assets not "working" at current MM rates.

I feel the same way sometimes about our cash, and then I go into town for a short drive. I think the hardest thing about investing is patience. It applies to getting in as much as getting out. Sometimes when I think I'm losing, I'm actually winning. 'Missing out' can be a blessing.

In the short-term it seems logical for conservative investors to wait until the path forward is more clear. If we go into deflation and a depression, then yields may be much higher than the bank interest rates. If we start up an inflationary spiral, then interest rates will be forced to follow, and you can get your higher return, but potentially lower yield.

I'm giving myself until late July/early August to think about investing in the market again. The Fed is muddying the water terribly right now. I think we're in a much more bearish situation, and I'd like to see what happens to the job market. There will be major disruptions taking place. If consumption is the engine of our economy, how many cylinders did we fry?

I think some serious economic restructuring will take place as a result of behavioral changes adopted during the lockdown - i.e. working from home - that may ultimately prove very beneficial in the long-run, but painful in the near-term. (Just imagine the massive square footage of office space Twitter will be giving up! More are sure to follow.)

 

[NameTaken2]

I feel the same way sometimes about our cash, and then I go into town for a short drive. I think the hardest thing about investing is patience. It applies to getting in as much as getting out. Sometimes when I think I'm losing, I'm actually winning. 'Missing out' can be a blessing.

In the short-term it seems logical for conservative investors to wait until the path forward is more clear. If we go into deflation and a depression, then yields may be much higher than the bank interest rates. If we start up an inflationary spiral, then interest rates will be forced to follow, and you can get your higher return, but potentially lower yield.

I'm giving myself until late July/early August to think about investing in the market again. The Fed is muddying the water terribly right now. I think we're in a much more bearish situation, and I'd like to see what happens to the job market. There will be major disruptions taking place. If consumption is the engine of our economy, how many cylinders did we fry?

I think some serious economic restructuring will take place as a result of behavioral changes adopted during the lockdown - i.e. working from home - that may ultimately prove very beneficial in the long-run, but painful in the near-term. (Just imagine the massive square footage of office space Twitter will be giving up! More are sure to follow.)

+1

Agree patience is key, and that the water is currently very muddy.
Content to wait for it to clear while absorbing info and investigating all options, with no set timeline to make a decision.
Having a very conservative portfolio helps me sleep while trying to verify the course from here.

 

[HI Bill]

I would avoid new investments in dividend funds right now. I've read that many corporations will be cutting or eliminating dividends.

The Expense Ratio for VIG is 0.06%; it's only 0.03% for VTI. The YTD yield for VIG is <16.83%>, and for VTI is <20.85%>. So, for new investments, there's more of an upside potential for VTI. VIG is made up of only 183 stocks, and is less diversified than VTI's 3,513. For more details, here's a comparison from VG:

https://personal.vanguard.com/us/funds/vanguard/compare?navigatingFrom=4