Invest for total return or for income?

[pb4uski]

Someone recommended a SPIA. Like all annuities, SPIA's are a raw deal.
The salesmen who sell them NEVER talk about what happens in the later years of retirement with these duds.

Where did anyone recommend a SPIA?

What I said was:

With that low a WR you are in the zone where you have "won the game" and there are two schools of thought.

One extreme is that you don't have to take any risk so you can invest in safe assets. .....

The other extreme is that you can go 100% equities since your portfolio is more than large enough to weather any storm with such a low WR.

Or of course, anything in between would be fine as well.

Since you state that you are risk averse you could buy a SPIA that provides the 1% that you need and then invest the rest in equities. ....

You have a nice problem to have in that everything is a good answer. I'm comfortable with risk and would probably go 80/20 if my WR was 1%.

So if you knew how to read you would see that what I suggested was an 80/20 AA. That 20% could be in bonds or a SPIA that would provide lifetime income for the OP's life and that of his DW and it could be a version that refunds any excess of the premium paid over the payments they received to date if they should both die early.

I didn't "recommend" anything. If anything expressed a preference for an equity heavy portfolio but also mentioned a SPIA as being a possibility since the OP is risk averse and it would provide that 1% guaranteed income that he desires and still leave 80% to be invested in equities that would provide inflation protection. Other than the fixed income portfolio is in the form of a SPIA rather than a bond fund, what would you find wrong with an 80/20 recommendation?

Now let's look at what the video you attached objects to SPIAs...

It objects to SPIAs because they have a fixed payout rate, inflation eats into the purchasing power of those fixed payments, history has shown a diversified portfolio should not fail and should pay more than the SPIA and you retain your principal.

I agree with all of that and most of the video says other than the narrator sounds like an annoying pitch-man to me. I warned the OP that a SPIA presents inflation risk and addressed how the OP could address the inflation eating away at those payments if he chose to and also that it would be preferable to buy a form of SPIA that guarantees his principal will be returned.

 

[statsman]

Given your low WR rate, it seems to me that the question is not so much total return investing vs income investing, as it is this: What do you plan to do with your excess money? What will bring you happiness and satisfaction? You could travel the world, donate to favorite charities, leave a lot for your heirs, buy a new home or car for yourself and/or for relatives, just live on 1% of it happily because your security will be so very high, and so on.
　
It may take you a few years to look within yourself and figure out the very best use for your money. There are worse tasks. But you do owe it to yourself to give this some considerable thought.

One part of the plan is to downsize from our current house to one in a different part of the state (California) that we would enjoy retiring to. We would cash out some in the downsize, but at this point, I am not counting the extra cash.

We also have one child and no living parents. The child has graduated college and has been employed for 6 months. We would like to help out the child with the first house in the futrure (hard to do in the urban parts of California), so some/all of this extra cash may go towards that.

I, too, have a low WR (about twice yours, though!). I have invested 30% in Wellesley and the rest in broad index funds like Total Stock Market and Total Bond Market, plus I keep 5.5% in cash. I regard my investing as a total return approach although I spend less than the dividends.

I like this portfolio. Is the combination of Wellesley along with separate stock and bond funds something that was planned or something that was evolved to? Maybe bonds on the tax deferred accounts and the stocks in the taxable accounts? What about Wellesley as far as asset placement?

I just bought my Dream House and consider the cost of the house and move to be a reduction of portfolio principal rather than a withdrawal since I won't be doing that every year.

The plan above to downsize our house would be to move to an area of the state that is my wife's dream location.

 

[nun]

I like this portfolio. Is the combination of Wellesley along with separate stock and bond funds something that was planned or something that was evolved to? Maybe bonds on the tax deferred accounts and the stocks in the taxable accounts? What about Wellesley as far as asset placement?

Wellesley should go in your tax deferred accounts and you can put any equity index funds in after tax as they are more tax efficient. But I don't think you need any extra fixed income in your portfolio, be that bonds, bond funds, CDs or SPIAs. If we assume most folks would want to withdraw 4% from a 50/50 portfolio and you already have fixed income alternatives producing 3% you actually look to be overweighted in fixed income even if you go 100% equities with the rest of your portfolio.

 

[pb4uski]

Agreed, it all depends on how much taxable you have vs tax-deferred and your target AA.

If it were me I would put Wellesley or Wellington in tax deferred and then fill in the rest of the target AA with indexed equity or bond funds and put the bond funds in the tax deferred.

 

[statsman]

Agreed, it all depends on how much taxable you have vs tax-deferred and your target AA.

If it were me I would put Wellesley or Wellington in tax deferred and then fill in the rest of the target AA with indexed equity or bond funds and put the bond funds in the tax deferred.

A little more in tax deferred (53%) than taxable (47%). Filling out the taxable may be the greatest challenge to our risk (or, as someone mentioned, volatility) tolerance.

 

[Animorph]

Invest for total return. Dividends and interest should be greater than 1% unless you specifically avoid them. 15% to 30% equities should be better than all bonds/cash in the medium to long term for both volatility and growth. If you try something closer to 30% then use a balanced fund, like Wellesley, so that you don't see all of the market volatility. More equities just raises the portfolio value towards the end of your retirement, if that is important to you. Reinvest any distributions beyond the 1% you want to withdraw.

 

[statsman]

Invest for total return. Dividends and interest should be greater than 1% unless you specifically avoid them. 15% to 30% equities should be better than all bonds/cash in the medium to long term for both volatility and growth. If you try something closer to 30% then use a balanced fund, like Wellesley, so that you don't see all of the market volatility. More equities just raises the portfolio value towards the end of your retirement, if that is important to you. Reinvest any distributions beyond the 1% you want to withdraw.

The part in bold is something I have come to grips with. While still very conservative compared to most here, a 25/75 to 35/65 portfolio is going to be a lot better than 0/53/47 (all bonds in tax deferred; all cash in taxable).

 

[pb4uski]

The part in bold is something I have come to grips with. While still very conservative compared to most here, a 25/75 to 35/65 portfolio is going to be a lot better than 0/53/47 (all bonds in tax deferred; all cash in taxable).

Are you thinking about something like this?

	Taxable	Tax-deferred	Total
Bonds	17%	53%	70%
Stocks	30%	0%	30%
Total	47%	53%	100%

If you're looking for easy, you could plunk all the taxable in Wellington (64/36) and would end up with the above. Wellington has a 2.66% SEC yield which would give you the level of income you are looking for.

 

[rayvt]

As mentioned before, my wife and I are very risk averse, but I think that is mostly due to watching the bottom line net worth drop in bad markets. As such, we have no equities investments.

The mistake you are making here is thinking that just because you don't see a risk, that there is no risk present.

People look at the volatility of stocks and since they see that risk
[*], they presume that some other investment which doesn't have much volatility is less risky.

0/80/20 is actually very risky. When interest rates rise, bonds will have massive capital losses. You'll probably be in retirement for 30-40 years. Do you think that rates will stay this low forever?

"Over the full market cycle, investing to achieve short-term comfort costs a fortune." -- John Hussman

“You need long-term strategies to reach long-term goals, and paying
attention to short-term fluctuations in the stock market is one of
the most destructive things you can do for your long-term financial
health.” -- Jim O’Shaughnessy

--------------
[*] It's not. Volatility is not risk, although it is often viewed as such.

 

[nun]

The mistake you are making here is thinking that just because you don't see a risk, that there is no risk present.

People look at the volatility of stocks and since they see that risk
[*], they presume that some other investment which doesn't have much volatility is less risky.

0/80/20 is actually very risky. When interest rates rise, bonds will have massive capital losses. You'll probably be in retirement for 30-40 years. Do you think that rates will stay this low forever?

I agree that holding a bond fund heavy portfolio and starting retirement right now is risky. To come up with a suitable AA we need to consider the OPs finances holistically. So we should include the pensions as part of the fixed income allocation. If that is producing enough income so that only 1% is required from the rest of the portfolio then even a conservative investor would put 100% in equities if only to keep up with inflation.

 

[pb4uski]

OP has already said he plans to shift to 25/75 or 35/65, so what is you point ray?

 

[pb4uski]

Statesman, is your tax-deferred in a 401k that offers a stable value fund or in a tIRA?

 

[statsman]

Volatility is not risk, although it is often viewed as such.

I am starting to gather that. I am willing to accept volatility if the necessary withdrawals don't touch principal, at least until the RMDs started to kick in. But that appears to be income focused rather than total return, and most see that as additional weakness in a portfolio.

Are you thinking about something like this?

Taxable Tax-deferred Total

Bonds 17% 53% 70%

Stocks 30% 0% 30%

Total 47% 53% 100%

If you're looking for easy, you could plunk all the taxable in Wellington (64/36) and would end up with the above. Wellington has a 2.66% SEC yield which would give you the level of income you are looking for.

More stock than I was imagining for the taxable, but again, it's the volatility issue for us. But 2.66% yield on the total taxable would be a WR of 1.25%, enough with some room to spare.

Statesman, is your tax-deferred in a 401k that offers a stable value fund or in a tIRA?

Mine is in a tIRA. My wife's is in a 401(k) as she is still working, but she doesn't have any stable value funds.

 

[petershk]

Since you have such a low WR, my thought is your biggest risk is timing errors and transaction costs. Imagine the market drops 50% (stock or bond), what allocation would make you think "meh" and go on with your life? Because I think the danger if even a 30/70 split if that 30 goes to 15 is that you yank it all out and suddenly have a 1.5% WR .

I thought I was an 80/20 person but I'm closer to 60/40 or 50/50.

Another thing you could do us put 3-5 years in an ally savings account (pays 1%) and put the rest in a conservative stock/bond mix (30/70 or 40/60) and then DONT LOOK AT IT.

Check it out every 3 years or so and then refill the (most likely higher interest rate) 1% ally account... If you want to get fancy you can build a CD ladder.

I seem to remember a study on fidelity (I think) that the top performing 401ks were the ones that people forgot about .

While I am not advanced enough to give the awesome ideas around tax optimization and allocation... I personally am trying to optimize for inactivity. I crave activity and its pretty bad for investing to have that disposition.

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[nun]

Is anyone actually considering the entirety of the OP's finances? If they have non COLAed pensions and say they need only 1% from the rest of their investments right now, have they thought about keeping up with inflation. What percentage of the OPs portfolio is the pension? If it's 75% of the entire worth then investing the rest in equities would give a 25/75 equity/fixed income split. Some numbers would help.

Nobody has suggested that they withdraw more than 1% so the OP's spouse can delay taking SS until age 70....surely that is the most conservative approach. I feel the OP is getting potentially poor advice, based on incomplete information.

 

[NW-Bound]

I missed the fact that the pension is non-COLAed. Else, with 1% WR they can do whatever with their stash (except for handing it over to an Oppenheimer advisor as described in a concurrent thread where a $186K account got shrunken down to $20K in 3-1/2 years). If the pension were COLA'ed, they can just go 100% index stock which is paying 2% dividend. And with bonds, even if they lose a bitty bit with inflation, they would still be OK.

With a non-COLA'ed pension, there is now some inflation risk. I would suggest they make some FIRECalc runs to see for themselves.

 

[Mulligan]

I am starting to gather that. I am willing to accept volatility if the necessary withdrawals don't touch principal, at least until the RMDs started to kick in. But that appears to be income focused rather than total return, and most see that as additional weakness in a portfolio.


More stock than I was imagining for the taxable, but again, it's the volatility issue for us. But 2.66% yield on the total taxable would be a WR of 1.25%, enough with some room to spare.


Mine is in a tIRA. My wife's is in a 401(k) as she is still working, but she doesn't have any stable value funds.

Very good thoughtful guidance provided by many here. But keep in mind its all theoretical as anything can happen. It is easy to say, "I can handle X amount in stocks" until the first big correction occurs. Until then you really don't know. I am only saying this because your posts have been very consistently cautious and you presently don't have any money in stocks. As Danmar said you have enough money to do what you want.
Heck Vanguard today has 2.85% 10 year brokerage CDs offered that kick out interest every 6 months. There is no loss of principal with that option. This is not a recommendation just presenting a different side. All of our posts are influenced by the manner in which we invest. I doubt any here are telling you 50/50 ratios while secretly having their entire stash in a passbook savings account.
My posts are a reflection of myself too. I was a very cautious and smaller investor. That last swoon in August really pi$$ed me off. Now the amount I have in common stocks is also small compared to what I the majority of my money is in so a total stock wipeout would not have encroached on my lifestyle one bit. But still I didn't like it and I am selling the rest after January when I have room in my AGI to do it without losing a tax credit.
You have the luxury of setting up what you want in a manner that will not cause you stress. Make sure you know what that amount truly is, and not just what you would ideally think it should be.
Ok, ok! I confess... I have drank a bit of the "why fight a battle when you already have won the war" koolaide.


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[NW-Bound]

Ok, ok! I confess... I have drank a bit of the "why fight a battle when you already have won the war" koolaide.

As for me, even if I have won the war (and I have not), I would still want to go on to become the Emperor of the World.

 

[nun]

I missed the fact that the pension is non-COLAed. Else, with 1% WR they can do whatever with their stash (except for handing it over to an Oppenheimer advisor as described in a concurrent thread where a $186K account got shrunken down to $20K in 3-1/2 years). If the pension were COLA'ed, they can just go 100% index stock which is paying 2% dividend. And with bonds, even if they lose a bitty bit with inflation, they would still be OK.

With a non-COLA'ed pension, there is now some inflation risk. I would suggest they make some FIRECalc runs to see for themselves.

What about the spouse taking SS at 64 instead of delaying to age 70? If the OP has enough to only require a 1% return to cover expenses it sounds like can withdraw more and delay SS....

 

[Mulligan]

As for me, even if I have won the war (and I have not), I would still want to go on to become the Emperor of the World.

But, but....you are a Warrior! Some of us are sheep... Seriously though you know NW, you have been in the trenches for years and know your risk tolerance and can/will accept it.
I just get nervous for someone when they have been out of market for 8 years minimum and express reluctance for risk.


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[NW-Bound]

True. From March 2000 to Oct 2002, I was down to 55c on the dollar. And I got it all back, then some.

Yes, I am a warrior and have plenty of scars to prove it. Have not lost any eye, ear, or limb, and trying hard to stay that way.

PS. A favorite book on investment of mine: The battle for investment survival (1955) by Gerald M. Loeb.

 

[pb4uski]

....More stock than I was imagining for the taxable, but again, it's the volatility issue for us. But 2.66% yield on the total taxable would be a WR of 1.25%, enough with some room to spare...

It doesn't matter where the stock is located in terms of volatility. It should be in taxable for tax efficiency purposes (qualified dividends and LTCGs are tax preferenced).

If stocks go up 20% or down 20% the total impact before taxes is the same whether stocks are in taxable or tax-deferred. However, in taxable the tax impact is 15% and if in tax-deferred it is 25% (or more).

 

[W2R]

I like this portfolio. Is the combination of Wellesley along with separate stock and bond funds something that was planned or something that was evolved to? Maybe bonds on the tax deferred accounts and the stocks in the taxable accounts? What about Wellesley as far as asset placement?

This combination of Wellesley along with index funds was my original planned post-retirement asset allocation, and something that I have not changed since I got everything in place in preparation for retirement. As I believe "nun" may have said in his post above, it is preferable to put bond funds in tax deferred for tax reasons. Wellesley is a balanced fund so it too would be better in tax deferred if you have room for it there.

 

[statsman]

This combination of Wellesley along with index funds was my original planned post-retirement asset allocation, and something that I have not changed since I got everything in place in preparation for retirement. It is generally considered to be preferable to put bond funds in tax deferred for tax reasons. Wellesley is a balanced fund so it too would be better in tax deferred if you have room for it there.

Our problem (and it's a nice one to have) is we have almost as much cash (47% of NW*) as we do bond funds in tax deferred (53% of NW*). We either need to put some/all of the balanced funds in our taxable (going for something more stock heavy like Wellington), go with stock index funds in the taxable, or substitute some of the bond funds in the tax deferred with munis in the taxable. I think the latter is a better bet if you're still working and want to avoid adding more income to salary.

* - Net worth not including the equity in our house

 

[W2R]

Our problem (and it's a nice one to have) is we have almost as much cash (47% of NW*) as we do bond funds in tax deferred (53% of NW*). We either need to put some/all of the balanced funds in our taxable (going for something more stock heavy like Wellington), go with stock index funds in the taxable, or substitute some of the bond funds in the tax deferred with munis in the taxable. I think the latter is a better bet if you're still working and want to avoid adding more income to salary.

* - Net worth not including the equity in our house

That does sound like a good idea in your case, to me, although I am no investment guru. It definitely merits some thought. You might also want to discuss your retirement AA with the folks over at the Bogleheads Forum, which is a bit more investment oriented than ours and has a considerable number of experts who might give you their thoughts on your portfolio.