strategies for income

[nun]

How would you set things up to generate income in ER? I'll probably
have a lazy portfolio of:

VBMFX (Vanguard Total Bond Index) 25%
VWINX (Vanguard Wellesley) 25%
VTSMX (Vanguard Total Equity Index) 25%
VGTSX (Vanguard Total International) 25%

After tax accounts will be made up of VTSMX and VGTSX and a MM fund, there will have to be some equity funds in my tax deferred accounts to keep my asset allocation. I'll keep a 2 year cash float in the MM and 6 months spending money in the bank. After tax dividends and capital gains will go into MM and in good times I'll sell a little if I nee to top up the MM, in bad I'll spend some of the 2 year cash bucket.

I have a friend who swears by closed end corporate bond funds for income, funny but the 1.5% fees and use of leverage don't appeal to me.

 

[audreyh1]

I don't worry about income being generated by the portfolio. If the dividends/distributions thrown off by the portfolio are not enough to cover expenses, then I just sell assets as needed to rebalance. This is a reasonably tax efficient approach in a taxable account.

Looks like you are doing the same thing - using total return instead.

1.5% fees would kill my withdrawal rate - your friend must not be aware of portfolio survival issues.

Audrey

 

[DeborahB]

Hmmm. I have a totally different approach. Retiring soon at 62. I plan to remain fully invested with perhaps $15K in cash with Ally Bank or ING - whoever pays decently. Both of those are easy to transfer to/from my regular checking account.

I have bond funds that I inherited, corporate bonds, utility stocks that pay good dividends (and had a 25% capital gain in the past year or so), growth mutual funds... absolutely no CDs at the current rates!

I plan to spend the interest and dividends in the taxable accounts first, and then the interest and dividends from the IRA(s) if necessary. Keep the assets growing as best I can.

I live pretty frugally, no debt except a tiny mortgage that I will pay off when I turn 65 and medical bills go down somewhat (I will have to buy commercial med. insurance after COBRA ends, expensive).

I actually like watching this kind of stuff - but I won't do options, I don't feel as comfortable with them as I should. I'd love to find a cheap stock to day trade a little after I retire... but may not. You really have to watch that stuff.

So - a very different approach.

 

[nun]

I plan to spend the interest and dividends in the taxable accounts first, and then the interest and dividends from the IRA(s) if necessary. Keep the assets growing as best I can.



So - a very different approach.

Not that different, I'll be ERing so don't have access to the before tax funds without penalties or doing a 72t. When I get to 59.5 I'll start taking income from the IRAs etc if I need to top things up.

 

[LOL!]

I could not keep 2 years of cash float in a MM since it pays only 0.1%.

I would use a short-term bond fund or maybe a high-yield savings account. What's 2-years' worth ... about 8% of total portfolio? If my 2-years float dropped by 10% that would only be a 0.8% change in my total portfolio which would not be enough for me to worry about at all.

 

[DeborahB]

Different, in that it's not mutual-fund driven, is what I meant.

 

[FIREd]

How would you set things up to generate income in ER? I'll probably
have a lazy portfolio of:

VBMFX (Vanguard Total Bond Index) 25%
VWINX (Vanguard Wellesley) 25%
VTSMX (Vanguard Total Equity Index) 25%
VGTSX (Vanguard Total International) 25%

After tax accounts will be made up of VTSMX and VGTSX and a MM fund, there will have to be some equity funds in my tax deferred accounts to keep my asset allocation. I'll keep a 2 year cash float in the MM and 6 months spending money in the bank. After tax dividends and capital gains will go into MM and in good times I'll sell a little if I nee to top up the MM, in bad I'll spend some of the 2 year cash bucket.

This is pretty much the strategy that I plan on using too. Though I plan on keeping about 5 years in cash and cash equivalents. At the moment, I think that you could do better with the cash than to invest it in a MMF. A rolling short term CD ladder could provide a bit more growth while still protecting your principal. Maybe keep a bit of cash in a high yielding savings account for emergencies.

 

[nun]

I could not keep 2 years of cash float in a MM since it pays only 0.1%.

I would use a short-term bond fund or maybe a high-yield savings account. What's 2-years' worth ... about 8% of total portfolio? If my 2-years float dropped by 10% that would only be a 0.8% change in my total portfolio which would not be enough for me to worry about at all.

It wouldn't be a lot of cash in the MM as I live frugally and 50% of my expenses are covered by rent. I like the liquidity, but I can see your point and maybe I could do 6 months expenses in bank account, 1 year in MM and 1 year in short term bond or set up a CD ladder. I think a really interesting discussion is how people manage their income/cash to provide a stable flow. How much buffer do you need and how liquid do you want to be.

 

[Danmar]

My strategy is to receive 50% of my spending requirements from my pension and the other half from common share dividends. Canadian divs taxed at about 15% in my province and I can split the pension income with my wife to lower that tax rate. Dividends are from "blue chip" Canadian Banks (up 100% in past year-back to all time highs) telecoms and utilities. Don't use mutual funds as they are too expensive (high MER's 2-2.5%) in Canada. Don't need to cash anything for forseeable future although will probably eventually do this. Two years spending in cash (only receiving 75bps). I think it is important to have a fairly high proportion of equities because of my age (59) and the prospect of future inflation.

 

[W2R]

How would you set things up to generate income in ER? I'll probably
have a lazy portfolio of:

VBMFX (Vanguard Total Bond Index) 25%
VWINX (Vanguard Wellesley) 25%
VTSMX (Vanguard Total Equity Index) 25%
VGTSX (Vanguard Total International) 25%

After tax accounts will be made up of VTSMX and VGTSX and a MM fund, there will have to be some equity funds in my tax deferred accounts to keep my asset allocation. I'll keep a 2 year cash float in the MM and 6 months spending money in the bank. After tax dividends and capital gains will go into MM and in good times I'll sell a little if I nee to top up the MM, in bad I'll spend some of the 2 year cash bucket.

I have a friend who swears by closed end corporate bond funds for income, funny but the 1.5% fees and use of leverage don't appeal to me.

My income producing strategy is very similar to yours. My taxable accounts are almost the same funds but different percentages (my tax sheltered space is limited and all bonds). I direct the dividends and LTCG to VMMXX (money market), and re-invest the LTCG when I rebalance. My income from taxable investments is provided by the dividends.

I have two other income streams:
(1) My TSP is all in "G Fund" (government bond fund but guaranteed to never lose value). I take equal monthly payments from it.
(2) I have my teeny-tiny diet-COLA'd pension.

(1) and (2) show up like clockwork. If necessary I could probably survive on them alone with some serious LBYM efforts. I also have 8% cash in money market just in case. My risk tolerance is pretty low, obviously.

Personally I would not alter my investments towards what your friend is doing. Why? Mostly because I am perfectly happy with my present income and my present portfolio meets my risk tolerance nicely. 2008-2009 was a wonderful test for that.

 

[Animorph]

I will sell equities as needed for about 6 months expenses in cash. The rest is equities. Convert more to cash whenever the portfolio is above retirement predictions. Reduce cash or reinvest if the portfolio is significantly down.

Before I started retirement I moved to about 4 years+ cash with the intention of spending it down before touching the equities. That was to avoid any problems with a serious down market, which certainly did happen. I ended putting most of that back into equities as the market went down. I'm just starting to draw that money back out now that I'm hitting the 6 month minimum cash level.

 

[Rambler]

Mine is too complicated. If it weren't for the machinations of deferred comp coming at different times, the story and the engineering of a comfortable cash flow would be pretty straight-forward. I plan to pull the plug at 51, and will have various episodes of def comp starting and stopping until 65. As far as I can tell right now, the def comp will pretty close to take care of all our needs during those 14 years. Beyond that, the taxable account will kick in, with longish munis representing about 35%, corporates and REITs at about 8-10%, 35% or so in total market, value & Int'l ETFs, and about 20% in Norwegian Widows. That does not count emergency cash bucket (CDs, MM & or HY savings, depending on what works best at the time) that will hold about 3 years of bare-bones expenses, but will not be used unless the bond interest and the dividends completely dry up.

Current thinking is that after the def comp is done, then I will have the interest and divvies flow into the MM and have an auto transfer into 2 checking accts each month: 1) one for monthly expenses, and 2) for accruals on annual or big-ticket items. #2 may end up being a high yield checking, if such exists at that time, or HY savings, or maybe even a small CD ladder.

That's how I see it today...but this plan shifts a little over time.

R

 

[FinanceDude]

Use the buckets of money approach pioneered by Ray Lucia..........

 

[WilliamG]

Since we are in retirement "decumulation" mode one thing we definitely do is spend all dividends and interest whether taxable or deferred. Our main income source after SS is a rollover IRA. It's dividends cover about 75% of what we take out of it. We currently have some CDs there which should cover next 2-3 years. After these expire may buy more or just take my chances with GNMA or short term bond fund for covering cash flow needs during bad market. Wellesley in IRA and 3+% IBonds in taxable are our "backup" stash.

 

[LOL!]

https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf is a treatise from Vanguard about spending from your portfolio. An "income" approach is suggested to be perhaps not the best way.

 

[explanade]

So when you retire, you stop reinvesting the dividends from the funds you were accumulating?

Or sell shares at rebalance to get the annual lump sum?

 

[WilliamG]

So when you retire, you stop reinvesting the dividends from the funds you were accumulating?

Or sell shares at rebalance to get the annual lump sum?

We do some of both. Take dividends and then sell what is needed to make up the difference. Per the reference to Vanguard paper on income vs total return, I look at this as a version of total return as we are not allocating our portfolio to produce income at a level that is sufficient for our needs. Taking the dividends we do does reduce how much needs to be sold.

 

[LOL!]

So when you retire, you stop reinvesting the dividends from the funds you were accumulating?

Or sell shares at rebalance to get the annual lump sum?

As just mentioned it is not EITHER / OR. You do BOTH.

Also, what's this about an "annual lump sum"? When you were working, did you get only one paycheck per year?

 

[jimnjana]

How would you set things up to generate income in ER? I'll probably
have a lazy portfolio of:

VBMFX (Vanguard Total Bond Index) 25%
VWINX (Vanguard Wellesley) 25%
VTSMX (Vanguard Total Equity Index) 25%
VGTSX (Vanguard Total International) 25%

After tax accounts will be made up of VTSMX and VGTSX and a MM fund, there will have to be some equity funds in my tax deferred accounts to keep my asset allocation. I'll keep a 2 year cash float in the MM and 6 months spending money in the bank. After tax dividends and capital gains will go into MM and in good times I'll sell a little if I nee to top up the MM, in bad I'll spend some of the 2 year cash bucket.

I have a friend who swears by closed end corporate bond funds for income, funny but the 1.5% fees and use of leverage don't appeal to me.

I would reduce total equity and total international and add the vanguard reit index, and increase welllesley. I would even add a little bit of the high yield corp bond fund. Remember the Wellesley fund invests up to 20% of equity holdings in foreign stocks.

 

[jerryo]

A related question -- what to do with a large chunk of cash.... I'll be closing a house in a couple of days, realizing a net return in the upper middle 6 figures. Will wire the funds to my money market account, but that's not paying much these days. Is there any place better to park the money in the short term? And, how would you cost average the bulk into stocks and bonds over the next year or two?



Where should I park the money Plan to retire in a year or two

 

[explanade]

Well if you sell shares at time of rebalancing, I assume you're selling enough at that time to meet your annual expenses.

Unless you rebalance more than once a year...

 

[easysurfer]

I rebalance each year and from the selling/rebalancing, I use that meet my annual needs.

Earlier this year, I starting investing in a Vanguard Payout Fund but have already changed my mind -- seemed to make work for myself than needed.

 

[WilliamG]

We fund cash opportunistically as needed and rebalance by bands. Since core of our portfolio is balanced funds we expect to rebalance infrequently.

 

[CyclingInvestor]

I keep almost all my savings in an actively managed set of large/mid cap domestic stocks with a long history (and expectation) of increasing dividends faster than inflation (ADP, JNJ, KO, PG, SYY, etc). These generate around 3% currently, about enough to fund the 72t withdrawals (most of my $$s are in IRAs) that I live on.

 

[Danmar]

LOL-Thanks for the article. Quite interesting. Seems like their thesis is as follows: Income approach not the greatest because: 1) Probably won't be enough income from a portfolio with a reasonable chance of growth so investor has to increase portfolio yield into low growth securities (bonds and low growth equities) 2) This portfolio won't grow enough to cover inflation. However, if a reasonable growth portfolio meets ones spending needs why wouldn't it be a good stategy? Seems that they have assumed a 1.67% yield on a 100% stock portfolio. I think I could find a portfolio of reasonable growth stocks yielding more than that. Maybe 3% in todays market?