Hopefully approaching retirement...

[SamCro]

Hi,
I'm actually scared to write this but targeting retirement in the next couple of years (my age is 50 and my wife is 48). We have no kids and our only debt is a mortgage with remaining balance of around $80K. As perhaps most people that are still working, we have most of our pre-tax assets tied up in either a 401K or IRA from a combination of jobs over the years (using an asset allocation of 75/25 with a balance of $1.5M). We started following a dividend strategy with our after-tax investments (balance of $600K) that should throw off enough dividend income to cover our full year expected expenses. My strategy has been to have what I call quadruple protection: passive dividend income + cash cushion to cover a 25% decline in dividends for 4 years + underlying dividend investments that could be sold + IRA balances. FireCalc shows my success rate at 100% but think the scary part for me is bridging the gap until SS. Hope to learn as much as possible from this site and others that are following a similar strategy.

 

[pj.mask]

In before the comments about dividends vs total return!!

Roth conversions should help you get there so I wouldn’t focus on making your after tax last forever.

If your expenses/withdrawals are in the neighborhood of 70-80k, you’ll probably be fine.

 

[SamCro]

Thanks for response. I'm familiar with the crowd that likes to debate total returns vs dividends and hopefully have the best of both worlds.

I was thinking about Roth conversions at some point, but my understanding is that if you start a Roth ladder to convert now the drawbacks are (1) can't touch those funds for 5 yrs and (2) will have to pay taxes on conversions now. Have also looked into a 72T, but the Federal Midterm Rate for Feb 2020 is pretty low at only 2.10%. I guess you can always pay the 10% penalty and get access to your funds, but seems like a waste.

I'm sure that as I start down this path, I'll figure out some strategy to get access to my IRA funds without paying a huge penalty or tax bill.

 

[VanWinkle]

Expenses could be the thing to tip the cart in this case. How about health care for both of you? You could easily be spending 2500-3000 per month for healthcare if you have no subsidies or group sponsored healthcare to fall back on. If you plan to get onto the Affordable Care Act policy, managing income(see MAGI) will be paramount to costs and subsidies. At your ages,
a 45000 per year draw from the portfolio would be prudent in most cases.
That figure includes dividends.

Wishing you success,

VW

 

[SamCro]

Hi,
I've been thinking about healthcare a lot these last few months and have been reviewing dividend funds that have a high Return of Capital (ROC). I believe these funds would have a dual benefit of not only lowering our tax bill but also helping us qualify for a pretty hefty ACA subsidy.

I came up with this thought from a similar strategy discussed in an article a few years ago on CNBC about how millionaires were getting Obamacare subsidies. They were using bond ladders instead of high ROC funds. My understanding is that the interest part of the bond is treated as income and the bond being treated as ROC.

 

[VanWinkle]

Hi,
I've been thinking about healthcare a lot these last few months and have been reviewing dividend funds that have a high Return of Capital (ROC). I believe these funds would have a dual benefit of not only lowering our tax bill but also helping us qualify for a pretty hefty ACA subsidy.

I came up with this thought from a similar strategy discussed in an article a few years ago on CNBC about how millionaires were getting Obamacare subsidies. They were using bond ladders instead of high ROC funds. My understanding is that the interest part of the bond is treated as income and the bond being treated as ROC.

The main thrust of controlling income for subsidies is having multiple accounts with different tax treatment. A taxable account with the ability to withdraw original contributions(already taxed) roth account with tax free original contributions, and a deferred account that would require little or no withdrawals. I retired at 61 and was able to use the ACA for over 2 years with maximum subsidies and cost sharing. There are great articles to educate yourself on the subsidies and cost sharing. Take the time to study this and it can save you hundreds of thousands during pre 65 retirement.
Index fund investments that do not throw off capital gains, lower dividend types that you can control the income when you want it. High dividend funds are great, but make it difficult to control when you want income.

VW

 

[pb4uski]

So if your retire at 52 and your wife at 50, you'll need about 7 1/2 years of spending before you have penalty-free access to your tax-deferred money and 9 1/2 years for your wife... so it all depends on your spending... your $600k of taxable would carry you for 7 1/2 years at $80k a year so you could set up a CD ladder to fund those years.

It'll probably be more than $80k a year due to contributions and growth of taxable account money for the next two years.

Then let your tax-deferred grow and if you don't need ACA subsidies you could do substantial Roth conversions to minimize any tax torpedo once SS and RMDs start.

You can get an idea what ACA health insurance and what subsidies you might qualify for at healthsherpa.com.

 

[24601NoMore]

Hi,
We started following a dividend strategy with our after-tax investments (balance of $600K) that should throw off enough dividend income to cover our full year expected expenses.

What are your rough projected annual expenses? Even 4% yield only gets you to $24K passive income from the after-tax investments..

Second question..how confident are you in your budget for annual expenses? Have you tracked very closely with something like Quicken to make sure you're catching every last thing you spend $$ on? There are a ton of little expenses that can add up to thousands a year that frequently are missed if just looking at the big, top-line expenses (mortgage, cars, etc).

We both ER'd last year and our "core" (housing, cars, food, utilities, etc) expenses in a MCOL area run $50-60K/yr. And that's before healthcare, taxes or vacation which I budget separately. I've used Quicken or something like it for the better part of 20+ years so those numbers are really solid and we catch literally every single thing we spend $$ on..

 

[24601NoMore]

Hope to learn as much as possible from this site and others that are following a similar strategy.

We have a similar, dividend/income-focused strategy with a second "bucket" for long-term growth. I'm a big believer in "paycheck replacement" through passive income streams, but you'll find this isn't a particularly popular approach either here on ER or over at Bogleheads. Most posters seem to prefer a total return approach and appear to be comfortable selling from their portfolios through all types of market conditions - including bear markets. That's not something I'm personally comfortable with, though, so for the most part have the investment / equity part of my portfolio chunked out separately for expenses 10+ years out, and rely heavily on CDs, bond funds and dividends from individual stocks to help pay the bills.

ETA - it should be noted that the total return approach is likely to result in a larger remaining balance at end-of-life than a strategy that's heavily income-focused. That said, my goals are different - we're not investing for legacy, to leave a big pile of $$ to anyone else or for any other reason than to fully fund retirement with the minimum amount of risk and volatility possible. So, an investor's individual goals and preferences need to be taken into account when looking at total return vs. income-focused investing..

Hope that helps..

 

[SamCro]

Our target yield on our dividends is 9% and we plan to grow our after tax portfolio from $600K to $800K so that by the time we retire our dividend income is around $72K.

I've been using personal capital for a few years to track our expenses and feel comfortable that our budget should be around $80K. If I change our dividend strategy to focus on ROC funds, that should help out on our tax and healthcare expenses (I've recently input some variables into the ACA website and it showed $0 cost on some of their basic healthcare plans).

 

[24601NoMore]

Our target yield on our dividends is 9% and we plan to grow our after tax portfolio from $600K to $800K so that by the time we retire our dividend income is around $72K.

Where are you planning to get 9% dividend yield? Even junk bond funds (eg: VWEHX) are only slightly north of 4%. Emerging market bond funds (eg: FNMIX) are ~4.5%. Core bond funds (eg: VBTLX) are only marginally above 2%.

I did the "reach for high yield" thing in the past and it didn't end well. Case in point, I had a stock that paid north of 9%. People kept saying that it couldn't continue. I pointed to the 20+ year track record the company had of paying at the dividend $ per share level, while thinking it wasn't meaningful that the share price had dropped by over 60%..management even came out on a conference call in December of 2018 and said they had "confidence in their ability to continue paying the dividend at the current rate". So, you guessed it..less than 60 days later, they cut the dividend by > 60%.

If I can get north of 4% yield, I'm very happy. Reliable yield in this market environment is very tricky at best in my experience, although I do know there's one or two other people here on the forum that have some preferred stock or PF funds that are higher than that..

 

[SamCro]

We have a similar, dividend/income-focused strategy with a second "bucket" for long-term growth. I'm a big believer in "paycheck replacement" through passive income streams, but you'll find this isn't a particularly popular approach either here on ER or over at Bogleheads. Most posters seem to prefer a total return approach and appear to be comfortable selling from their portfolios through all types of market conditions - including bear markets. That's not something I'm personally comfortable with, though, so for the most part have the investment / equity part of my portfolio chunked out separately for expenses 10+ years out, and rely heavily on CDs, bond funds and dividends from individual stocks to help pay the bills.

ETA - it should be noted that the total return approach is likely to result in a larger remaining balance at end-of-life than a strategy that's heavily income-focused. That said, my goals are different - we're not investing for legacy, to leave a big pile of $$ to anyone else or for any other reason than to fully fund retirement with the minimum amount of risk and volatility possible. So, an investor's individual goals and preferences need to be taken into account when looking at total return vs. income-focused investing..

Hope that helps..

Hi,
Our approach is very similar - we are focused on replacing most of our paycheck and don't plan to leave a legacy for others. I think it's nuts to have to sell ~4% of your portfolio into a bear market and would only do that if my dividend funds got cut and my cash cushion was not available. My only difference is that we probably are not going to be heavy in CD's or Bond funds in the current low rate environment. I understand total return investing is going to drive better returns in the long term, and why I have a separate bucket.

 

[24601NoMore]

My only difference is that we probably are not going to be heavy in CD's or Bond funds in the current low rate environment.

I hear ya. Unfortunately for us, I finalized my plan when CD rates were in the high 2s and 3s. Things have obviously changed since then, and yield on even 10-year Treasuries is now absolutely dismal. I'm scrambling a bit to replace CDs that are maturing this year and it's tough to find a place to put the $. Fortunately, I can pull a bit from after-tax to make-up the difference and things will be fine. Fortunately, DW only has a few years remaining to SS and Medicare and that should also help, assuming no major changes to either program before then..

 

[SamCro]

Where are you planning to get 9% dividend yield? Even junk bond funds (eg: VWEHX) are only slightly north of 4%. Emerging market bond funds (eg: FNMIX) are ~4.5%. Core bond funds (eg: VBTLX) are only marginally above 2%.

I did the "reach for high yield" thing in the past and it didn't end well. Case in point, I had a stock that paid north of 9%. People kept saying that it couldn't continue. I pointed to the 20+ year track record the company had of paying at the dividend $ per share level, while thinking it wasn't meaningful that the share price had dropped by over 60%..management even came out on a conference call in December of 2018 and said they had "confidence in their ability to continue paying the dividend at the current rate". So, you guessed it..less than 60 days later, they cut the dividend by > 60%.

If I can get north of 4% yield, I'm very happy. Reliable yield in this market environment is very tricky at best in my experience, although I do know there's one or two other people here on the forum that have some preferred stock or PF funds that are higher than that..

Thanks for your story. My dividend portfolio is diversified over a wide range of funds with no fund being >2% of my total portfolio. Most of my funds are balanced between BDC's, REIT's and Bond Funds with the occasional bargain fund thrown in (I recently bought some Altria when they went on sale and was yielding 7.6%). My PIMCO bond funds are probably the lowest risk and all yield +8%. Of course there is no guarantee that during a recession these funds would cut or stop their dividend and hence the reason for my cash cushion.

 

[24601NoMore]

I also think highly of PIMCO and hold several of their funds..but I'm not aware of any with a 30-day SEC yield above mid 5% level, and most are far below that.

I just went to the PIMCO site and did a sort by 30-day SEC yield. Highest appears to be Emerging Markets (PELBX) at 5.67%. I do see 3 funds with a >8% distribution yield, but as you probably know that's based on most recent distribution and recent NAV, which to me isn't a reliable indicator of long-term, predictable cashflow...

 

[WyomingLife]

Thanks for your story. My dividend portfolio is diversified over a wide range of funds with no fund being >2% of my total portfolio. Most of my funds are balanced between BDC's, REIT's and Bond Funds with the occasional bargain fund thrown in (I recently bought some Altria when they went on sale and was yielding 7.6%). My PIMCO bond funds are probably the lowest risk and all yield +8%. Of course there is no guarantee that during a recession these funds would cut or stop their dividend and hence the reason for my cash cushion.

I would love to know how to get $72K in dividend (or related) returns from a $800K portfolio. I just don't understand how this is going to work. Are you willing to provide more details?

 

[SamCro]

I also think highly of PIMCO and hold several of their funds..but I'm not aware of any with a 30-day SEC yield above mid 5% level, and most are far below that.

I just went to the PIMCO site and did a sort by 30-day SEC yield. Highest appears to be Emerging Markets (PELBX) at 5.67%. I do see 3 funds with a >8% distribution yield, but as you probably know that's based on most recent distribution and recent NAV, which to me isn't a reliable indicator of long-term, predictable cashflow...

Your correct that the SEC yield is lower on those funds and i'm using yield on cost in my comments. Also, depending on my timing of when I bought would be reflected in those funds yield rate. A couple of funds that I bought in 2018 was PTY and PCI. Those funds are way overpriced now (imo).

 

[24601NoMore]

i'm using yield on cost in my comments. Also, depending on my timing of when I bought would be reflected in those funds yield rate.

Ah..that makes more sense. Of course, that also assumes those funds continue to pay at the same distribution rate, which is not always a given..

 

[WyomingLife]

Your correct that the SEC yield is lower on those funds and i'm using yield on cost in my comments. Also, depending on my timing of when I bought would be reflected in those funds yield rate. A couple of funds that I bought in 2018 was PTY and PCI. Those funds are way overpriced now (imo).

I know I'm dense, but I'm still confused.

Yield on cost is a relevant metric, but doesn't necessarily reflect current cash flow, right? https://www.investopedia.com/terms/y/yield-on-cost.asp.

It seems to me the question is how to invest X dollars today to generate dividend returns to fund your future budget (which I think is $72K). But just because your YOC is 120% today based on an investment made in 1973, for example, that doesn't reflect current cash flow needs.

Again, maybe I am a moron and not understanding this.

 

[24601NoMore]

I know I'm dense, but I'm still confused.

Yield on cost is a relevant metric, but doesn't necessarily reflect current cash flow, right? https://www.investopedia.com/terms/y/yield-on-cost.asp.

It seems to me the question is how to invest X dollars today to generate dividend returns to fund your future budget (which I think is $72K). But just because your YOC is 120% today based on an investment made in 1973, for example, that doesn't reflect current cash flow needs.

Again, maybe I am a moron and not understanding this.

I think I see what he's doing..

Looking at PTY, for example, it paid $1.59 in income in 2019. Current price is $19.59/share. So, assuming dividends either remain constant or increase going forward, if you buy a share today, you're getting 8.1% yield on cost.

I don't currently use CEFs - maybe I should - but similar concept to yield on cost for a dividend paying stock.

So, if you start off with $X (600K in his original post) and allocate it this way, you could conceivably get the type of 8+% cash flow mentioned, ASSUMING dividends remain the same or increase - which is of course a big assumption as I learned the very hard way with CTL..

 

[24601NoMore]

My dividend portfolio is diversified over a wide range of funds with no fund being >2% of my total portfolio.

If I follow this right, that means you have ~$600K invested across 50+ different funds? I get the desire to diversify, but this must be a heck of a thing to track and to do taxes on..

 

[WyomingLife]

I think I see what he's doing..

Looking at PTY, for example, it paid $1.59 in income in 2019. Current price is $19.59/share. So, assuming dividends either remain constant or increase going forward, if you buy a share today, you're getting 8.1% yield on cost.

I don't currently use CEFs - maybe I should - but similar concept to yield on cost for a dividend paying stock.

So, if you start off with $X (600K in his original post) and allocate it this way, you could conceivably get the type of 8+% cash flow mentioned, ASSUMING dividends remain the same or increase - which is of course a big assumption as I learned the very hard way with CTL..

Thank you so much, 24601NoMore.

 

[WyomingLife]

If I follow this right, that means you have ~$600K invested across 50+ different funds? I get the desire to diversify, but this must be a heck of a thing to track and to do taxes on..

+1

We have about $3.8M in the market (not counting house value here), with a current AA of roughly 63/30/7. Nearly everything is with Vanguard ETFs. Last year, our "returns" in the form of dividends and related returns (all re-invested, but would what we would draw upon in a retirement scenario without touching the corpus, if that was our draw down strategy; we actually plan on doing total returns) amounted to $55K, short of our annual spend but close. At least that is what Personal Capital tells me.

I'm just amazed that there is a way to generate $72K in comparable returns with $800K.

It's also worth noting that our NW increased $800K last year; minus contributions, about $650K of that was appreciation -- and from a fairly conservative portfolio.

OP's strategy seems to be labor-intensive, tax-complicated, otherwise complicated -- and leaving a lot on the table. And all in the pursuit of dividends based upon an accounting metric that I still don't fully understand vis-a-vis generating cash to fund daily living.

 

[24601NoMore]

+1

We have about $3.8M in the market (not counting house value here), with a current AA of roughly 63/30/7. Nearly everything is with Vanguard ETFs. Last year, our "returns" in the form of dividends and related returns (all re-invested, but would what we would draw upon in a retirement scenario) amounted to $55K, short of our annual spend but close. At least that is what Personal Capital tells me.

I'm just amazed that there is a way to generate $72K in comparable returns with $800K.

Agreed. OP's approach is interesting, but I candidly wonder (quite a bit) about the risk involved. If it were that easy, wouldn't everyone do it? You could really live one heck of a nice lifestyle with that kind of income stream. Heck, I could probably afford to go to Tahiti multiple times a year with the type of income I could generate at 8+% yield..

I know there are a couple of posters that use CEFs and get a good yield..but I also seem to remember that's not the main part of their investing strategy also.

I've always been happy to get 3-4% yield, and take some considerable risk with corporate bond funds (PIGIX), Junk bond funds (VWEHX) and EM funds (FNMIX), etc to do so. If I could boost that to 7-8% with reasonable confidence it would continue at those levels throughout ER, life would get very, very good .

Would be interested in hearing from others on the potential risks and cons of the approach mentioned, beyond the obvious (eg: the CEF fund cuts it's divvy).

 

[SamCro]

I would love to know how to get $72K in dividend (or related) returns from a $800K portfolio. I just don't understand how this is going to work. Are you willing to provide more details?

I'm not sure how much I can share on these forums, but will share some thoughts around my strategy which has been a combination of timing, luck and research.

In the recent past, Altria was a stock that people absolutely hated because of the vaping scare and the fact that it's a "sin" stock. I was thinking here is a stock that paid +50 yrs of consistent dividends and I could just hold forever and get close to a 7.5% yield at the time of purchase. Even if people gave up vaping, they are probably going to go back to cigarettes and this company is probably one of the better run smoke shops in the US.

Same thing on mall REIT's. Lots of people think that they only own those old enclosed multi story buildings that are anchored by failing retail chains (Sears, Macy's, JCP). Every time one of these big retail chains announce store closings, people dump these funds. They don't realize that a lot of mall REIT's now own open retail space now and are growing. If you go out and look at mall REIT's you can find bargains with good yields in Macerich, Tanger Outlets and Simon Property.

Energy stocks and related funds have been hit by the recent Coronavirus scare. Some of the stocks in this sector have double digit yields. I just read an article on motley fool yesterday describing a "solid" 12% stock (MPLX). I'm sure there are others in this space that are bargains now.

Again, I like to spread my risk and cap my investments at 2% of my portfolio, but when events like the above appear I'll hit the buy button.