Total Return Strategy vs. Income and Dividend Strategy for a Nestegg

[Golden sunsets]

What’s the Best Way for Retirees to Invest Their Nest Egg? - WSJ

A good discussion regarding the merits of each of these approaches to managing wealth in both the accumulation and spending phases. I'm curious to know what the majority of FIRE forum participants approach is to this discussion. In our own case, I think that we have been total return investors over the course of the last few decades, however as we move into the spending phase of our lives, I find myself more interested in building various streams of recurring income that won't require selling assets.

Thoughts?

 

[mrfeh]

Total return investor here. Entering retirement in just about a year.

I've read enough of these discussions over on bogleheads to come to, what I hope, is an informed opinion.

 

[Big_Hitter]

Total return here too - not yet FIRED

 

[ERD50]

...
Thoughts?

A distinction without a difference. Money is fungible.

If one approach was clearly superior in all ways, money would flow into it, driving up the price until it was no longer superior.

-ERD50

 

[RunningBum]

Total return. As far as the safety argument goes, my take is to allocate your investments in whatever way is needed for safety, and if that is dividend producers, fine, but I still want to look in terms of total return. Dividend streams aren't guaranteed.

 

[mathjak107]

total return - it is all that matters at the end of the day..

 

[ronin]

total return - it is all that matters at the end of the day..

A distinction without a difference. Money is fungible.

Pretty much sums it up for me.

 

[W2R]

From the article,

Two familiar strategies have pushed to the front of ideas about how to secure a steady and lasting stream of income in retirement, a stream that ideally would even grow. One is known as total-return investing, or balancing your investment allocations in a traditionally diversified portfolio—seeking income but also asset appreciation. That approach, its advocates say, in the long run reduces a retiree’s exposure to market volatility and risk.

The other approach is income investing, a strategy that focuses on stable, income-producing investments—such as bonds and equities with healthy dividends—and places less emphasis on asset appreciation and capital gains.

I thought I was a total return investor. Total return is the only approach that makes sense to me, and my portfolio consists mostly of broad index funds. However, I also do have 30% Wellesley which produces very good income. So, according to the above quote, perhaps my approach is really a meld of both.

My ultra-safe "W2R Chicken Little" approach to withdrawal has been to both:
(1) keep my WR under a certain percentage, and
(2) withdraw no more each year than my total dividends for the prior year.

If my dividends completely evaporated (which I doubt would happen), I have enough cash to last for a few years, plus SS and tiny pension, and equal monthly withdrawals from the TSP's "G Fund", which functions sort of like a pension substitute in my view.

however as we move into the spending phase of our lives, I find myself more interested in building various streams of recurring income that won't require selling assets.

I don't sell assets to get my withdrawal money, because my dividends are directed towards cash and I just withdraw that cash. However, I still have to sell assets to rebalance afterwards.

 

[eta2020]

Total Return 100% equities.

But I like dividend growth versus High yield. ETFs like for example VIG did not decrease dividends in 2008-2009 at all.

Dividend growers KO, PEP, MO, PM, CL, PG and many others in fact increased dividends in 2008-2009.

 

[papadad111]

For true early retirees, which is the focus of this board, it seems those in pre-tirement and then the first decade/ early stage of retirement, a total return approach is what will typically be chosen.

Then, as those folks approach 59.5 and /or pensions start kicking in and later social security (whether taking at. 62 or 67 or 70) the model clearly becomes more a hybred. Not everyone has a defined benefit pension but many with access to 401k/IRA money do choose to annuitized a portion of that income for longevity insurance .

My premise is that as they hit,say 65 and have a peek at the longevity tables and begin to worry about living long (nice problem to have) but not wanting to endure a protracted market downturn and a portfolio that may be partially spend down after 15 or 20 years of retirement "so far" they reach a point where ability to return to work falls to near zero, managing assets becomes harder -cognitively- etc. That the desire to have a predictable-streams-of- income oriented portfolio becomes more attractive than total return.

Ultimately I think this is a shifting model based at part on risk tolerance no different than how one shifts asset allocations for risk tolerance

 

[steelyman]

Ultimately I think this is a shifting model based at part on risk tolerance no different than how one shifts asset allocations for risk tolerance

I think that's about right and is also the concept on which target date retirement funds are based.

 

[eta2020]

I think that's about right and is also the concept on which target date retirement funds are based.

I agree. By the time you are 70 you are different person compared to 50 year old Early Retiree.

You see world different way.

 

[Another Reader]

My strategy is rent checks. Collected rents throughout the Great Recession. My withdrawal rate is negative, even with an inherited IRA that liquidates over time. Not interested in decumulation. Didn't spend all that time and effort accumulating just to watch the money disappear. Don't want to have to worry about what the bipolar Mr. Market is doing at any particular point in time. Never ran FIREcalc or any of the other retirement success-guessing programs.


Of course, I have two small pensions now and a Social Security check waiting for me. Probably makes me a little more confident in my choice of strategy.

 

[papadad111]

What happens when health limits ability to maintain the rentals? Is it outsourced or do you plan to liquidate them ?

 

[Another Reader]

I don't personally manage or maintain the rentals that are out of state. Management is farmed out, although I manage the managers. I do own paper assets, including an inherited IRA, my own IRA's and taxable accounts. Over time, a lot of net income from all sources gets invested into more paper assets that also produce income. I have good retiree health insurance. I can self-insure long term care with the various passive income streams. I could sell a property or two (or a conservator could) if the cost got out of hand. I'm not worried.

 

[audreyh1]

Total return investor here. All my distributions go to cash during the year, and I rebalance at the same time I withdraw my annual "income" in Jan (a fixed % of the end of year portfolio value), so if I sell an asset, it's because it's still high even after distributions are paid out and withdrawing cash, and therefore requires rebalancing.

I don't worry about the yield of my portfolio. When I was working, I was pretty much 100% equities. Now I'm retired and I'm closer to 55% equities now. My fixed income is for stabilizing my equities (lower portfolio volatility), not for income generation.

 

[ejman]

For true early retirees, which is the focus of this board, it seems those in pre-tirement and then the first decade/ early stage of retirement, a total return approach is what will typically be chosen.

Then, as those folks approach 59.5 and /or pensions start kicking in and later social security (whether taking at. 62 or 67 or 70) the model clearly becomes more a hybred. Not everyone has a defined benefit pension but many with access to 401k/IRA money do choose to annuitized a portion of that income for longevity insurance .

My premise is that as they hit,say 65 and have a peek at the longevity tables and begin to worry about living long (nice problem to have) but not wanting to endure a protracted market downturn and a portfolio that may be partially spend down after 15 or 20 years of retirement "so far" they reach a point where ability to return to work falls to near zero, managing assets becomes harder -cognitively- etc. That the desire to have a predictable-streams-of- income oriented portfolio becomes more attractive than total return.

Ultimately I think this is a shifting model based at part on risk tolerance no different than how one shifts asset allocations for risk tolerance

+1 As I roll into my 13 th retirement year and approach my 65th birthday I find an ever stronger urge to simplify my portfolio and I switch more and more funds to the Wellesley and Target Retirement Income balanced type funds. Following Uncklemicks lead) Currently 63% of my IRA is in those 2 funds. I wouldn't be surprised if by the time RMD time rolls around I'm 90% there. I just don't have a strong urge anymore to futz around with rebalancing and deciding what where when. Reinvest CG and DIV's from those 2 funds take required RMDS and I be done. Added virtue is that instructions for wife when I kick the bucket is about one sentence - keep it the same - don't change a thing and stay away from annuities!

 

[imoldernu]

Ultimately I think this is a shifting model based at part on risk tolerance no different than how one shifts asset allocations for risk tolerance

+1 Well said!

Well said... Though we never "invested" or "managed"... after passing the three quarters of a century mark, we have no interest in risk, so are happy and comfortable with tiny stock portfolio that we haven't touched for 20 years, a tiny annuity that just sits there, some IRA CD's, a bunch of 2000 to 2004 I bonds that pay about 5% and Social Security which has never made a mistake or a late payment in 16 years. Managing money is at the bottom of my "to do" list.

 

[Zathras]

Combination of both.
We use dividends as an income stream, however we also target growth.

 

[ERD50]

...

Ultimately I think this is a shifting model based at part on risk tolerance no different than how one shifts asset allocations for risk tolerance

But as audreyh1 pointed out, that's a reason to move some higher % to fixed income. It's just an AA decision. You can still consider yourself a 'total return' investor.

I feel you are mixing terms. AA and volatility is one thing, 'living off the dividends' is another.

-ERD50

 

[Mulligan]

I agree that total return with proper AA is the prudent way to go. But mentally I couldn't do it. I have probably now 40% of mine in preferred stock concentrated mostly in electric utilities and insurance companies. I like safe 6-7.5% dividends, what can I say? It's just all mental gymnastics to get me in the market and out of CDs and IBonds, knowing if they crater 25% I will be made whole in about 4 years if they don't come back. In fact, I will just buy more.
I fully acknowledge it certainly isn't a "better way" or even safer necessarily. But, I don't live off my investment money either, so I don't have to follow the most prudent of plans.


Sent from my iPad using Tapatalk

 

[audreyh1]

"Know Thyself" is the most important criteria in choosing an investment plan. If it doesn't suit you, you won't stick with it, no matter how clever or rational it appears.

 

[GTFan]

total return - it is all that matters at the end of the day..

Same here, retired at end of last year. If Vanguard and Fido say it's the best approach that's good enough for me, they have all my money anyway.

 

[Cobra9777]

I read the WSJ piece. I guess I'm not really appreciating the significance of the debate. I tend to think that most retired investors use a hybrid strategy, with appropriate modifications at various stages, which is probably preferable to a rigid strategy on either side of the spectrum. But it's entirely possible that I'm missing something in the distinction as well.

I suppose we lean toward the income side. We elected the annuity payout on two DB pensions and have income-producing real estate. Those income streams cover 70% of expenses, with taxable dividends covering most of the remainder. And this is all pre-SS. We do very little selling (except to rebalance), yet we also have a substantial equity position for inflation protection and growth. But even the equity portfolio is skewed toward large dividend payers and dividend growth; and 20% of the bond allocation is high-yield corporate.

So, yeah, we like income, especially guaranteed income from pensions, and later SS. But we still have a substantial diversified portfolio of stocks/bonds/real estate, which we expect to provide a nice balance of income and asset appreciation with reduced volatility, to hedge all the unknowns that the future inevitably holds (inflation, lengevity, LTC).

 

[nun]

I read the WSJ piece. I guess I'm not really appreciating the significance of the debate. I tend to think that most retired investors use a hybrid strategy, with appropriate modifications at various stages, which is probably preferable to a rigid strategy on either side of the spectrum. But it's entirely possible that I'm missing something in the distinction as well.

I suppose we lean toward the income side. We elected the annuity payout on two DB pensions and have income-producing real estate. Those income streams cover 70% of expenses, with taxable dividends covering most of the remainder. And this is all pre-SS. We do very little selling (except to rebalance), yet we also have a substantial equity position for inflation protection and growth. But even the equity portfolio is skewed toward large dividend payers and dividend growth; and 20% of the bond allocation is high-yield corporate.

So, yeah, we like income, especially guaranteed income from pensions, and later SS. But we still have a substantial diversified portfolio of stocks/bonds/real estate, which we expect to provide a nice balance of income and asset appreciation with reduced volatility, to hedge all the unknowns that the future inevitably holds (inflation, lengevity, LTC).

That's my approach too. I don't use any of my retirement savings for income, I just have them in an 75/25 AA of low cost index funds and let them accumulate. I get my income from rent, a pension and eventually from SS checks from the US and the UK. I am doing IRA to ROTH rollovers to mitigate RMDs, but I expect to reinvest most of my RMDs once they start.