Income Stream, or Income Lump

[Q_T]

Any ideas on how to create a $60,000/yr income stream or annual lump of income (pre-tax) from a $1.5mm total portfolio?

Background:
No kids, no need to leave an estate, plan on living to 95, very steady expenses of $46K over the last 10 years, but will go up a bit as we trade work expenses for more travel.

We will start in 5 years when we retire (my age 50 and wife 55), and assume our present $1.1mm portfolio has grown to $1.5mm by then. Not planning on any inheritances, but may get small windfalls here and there nonetheless.

We were thinking laddered CDs, laddered bonds, or just take the $60K from the best performing areas of our well-diversified portfolio each year (i.e., draw down the principle from the high flyers).

Looking at the entire portfolio, 75% is qualified (mostly in 403b and rollover IRA, some in Roths, $30K pension (i.e., present total worth of pension)), and 25% is non-qualified (joint mutual fund accounts, MM, savings, checking). Will plan on leaving the 403b at the University after her retirement so we can take that out without penalty at age 55 or later (402f rule). So there will be some tax noodling to do to make the best maneuvers.

Also, we will be taking SS at 62, and assume we will receive 70% of the amount they are saying we will get (so assume we will actually receive $18,000/yr total pretax). And we will still also take out the $60K from our own portfolio.

We've been told that taking dividends/interest from laddered bonds and CDs won't keep up with inflation very well, and it may be wiser to just take the principal direct from our stash.

Hope some of you have been through this tye of siphering before and can share your thoughts.

Thanks.
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[unclemick]

Hmmm

I play games with ORP calculator to see their withdraw sequences tax wise - changing end balance and portfolio returns.

Here - non cola pension, early SS, 75% trad IRA, 7% Roth.

I do a lump sum in Jan out of IRA, swag estimated taxes via Turbo Tax - have the money in VG Prime MM and transfer to checking to as needed. One years worth plus I have a second year as reserve - Short Term Bond Index.

About as many variations on the theme as posters to this forum.

Put me down as a 'lumper'.

heh heh heh - also play different scenarios with Firecalc - mainly with portfolio size - pay off the mortgage, sell my timberland in ten years - that sort of stuff.

 

[LOL!]

Aren't you just asking about a withdrawal strategy of your assets?  Much has been written and discussed on the subject.  Here is one such recent article on the subject:
http://www.fpanet.org/journal/articles/2006_Issues/jfp0406-art6.cfm

 

[Rich_by_the_Bay]

Any ideas on how to create a $60,000/yr income stream or annual lump of income (pre-tax) from a $1.5mm total portfolio?

Any desire to adjust for inflation? At 3-3.5%, it'll cut your purchasing power in half in about 20 yrs.

Assuming so, I think your needs are pretty standard: invest in a well diversified portfolio as discussed in many threads here; withdraw at about 4% a year or a little higher (adjusted annually for inflation), - barring catastrophe that should last forever. FIRECALC will help sort this out.

If you have a strong need for volatility buffering, a plan like Lucia's "Buckets of Money" may be appealing.

 

[audreyh1]

..or just take the $60K from the best performing areas of our well-diversified portfolio each year (i.e., draw down the principle from the high flyers).

That's a good way to do it. Don't worry about "income producing" assets. Focus instead on total return and draw down from the high flyers.

A few folks keep a few years of cash available for living expenses, just so that near term market events/volatility aren't so scary. But you have to replenish these from somewhere - i.e. the "high flyers" in the portfolio. So it is basically the same withdrawal strategy - just with an extra buffer up front.

Audrey

 

[Nords]

We were thinking laddered CDs, laddered bonds, or just take the $60K from the best performing areas of our well-diversified portfolio each year (i.e., draw down the principle from the high flyers).

Yup. After every year that the market was up, we start the following year with two years' expenses in cash. The cash comes from selling whatever's departed the most from its asset allocation (rebalancing). If the market's down then we hang on for another year to wait for the recovery. Some advisors (Frank Armstrong) recommend 5-7 years' expenses in cash, but that pushes your cash allocation to 20-28%.

We keep one year's cash in a money market and the second years' cash in five-year CDs.

If we got into a third year (or worse) then we'd start selling the best-performing (least-losing?) investments, perhaps balanced by tax-loss harvesting to stay close to our desired asset allocation.

 

[Q_T]

Great to hear the responses on how to do this. I definitely like the apparent simplicity of "lumping" it once a year or so.

Yes, inflation should be factored into our 60K lump, but am hoping the extra SS payout at 62 will provide a nice cushion even if we stick with 60K payout from out own stash. Some of these numbers we'll just need to adjust as we get into this FIRE thing for real.

I'll also read the FP article to see what they suggest.

Thanks for the comments!
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