I'm Getting Close...Could Use Some Ideas

[cb7010]

In short, I'm 42 and single, have a paid off condo, appx $1.5M in cash and another $400K in 401K and I'm just about ready to exit corporate america..maybe for good. I really see my self easing into a second career of my choosing and doing something I enjoy; so, I do expect some form of income stream to kick in at some point in the future. But, for some interim period, I will live off of what I have accrued and would love to hear some ideas on income investments I've mostly been an equity investor to date and would consider myself a newbie when it comes to strategies for producing passive income.

I'd like to have $3,500 a month ($42K) cash to live with and I'm thinking that this is achievable; but, how to structure the mix of investments to get there is a bit daunting in this macroeconomic climate.

I'd love to hear ideas that I can go research..

Thanks,

Chris.

 

[Midpack]

This would do it (non-COLA) and you'd still have about half your $ nest egg to invest as you see fit. But I wouldn't buy an annuity either unless I was about 75...

 

[Purron]

Info on your health and health insurance options would be helpful. That's often a big question for early retirement. Otherwise, I congratulate you on accumulating a very nice nest egg at a young age.

 

[obgyn65]

Hello Chris

Can you use a spreadsheet ? I would create a retirement model up to age 95, and optimize the annual withdrawals using laddered CDs, munis, deferred annuities bought around ages 40-50 and SPiAs around ages 70-80. A lot of iterations are needed, and changes are made on an annual basis.

I'd love to hear ideas that I can go research..

 

[cb7010]

Thanks for the quick feedback..I'm in perfect health and would have to purchase my own health insurance. And, YES, I am well versed in the use of Microsoft Excel! I guess my question comes as a result of some initial research and discussions with those I know currently retired. There seems a plethora of investments that yield in the 4-6% range and I'm just looking for ideas to research that may have worked for people on this board. It's easy to model by assuming a 5% return; but, actually coming up with an allocation and putting it into practice is my next step. Thanks Again!

 

[rbmrtn]

Info on your health and health insurance options would be helpful. That's often a big question for early retirement. Otherwise, I congratulate you on accumulating a very nice nest egg at a young age.

HI was a major issue for many ERs, but with PPACA kicking in starting 2014 this should be a non issue now.

 

[pb4uski]

Thanks for the quick feedback..I'm in perfect health and would have to purchase my own health insurance. And, YES, I am well versed in the use of Microsoft Excel! I guess my question comes as a result of some initial research and discussions with those I know currently retired. There seems a plethora of investments that yield in the 4-6% range and I'm just looking for ideas to research that may have worked for people on this board. It's easy to model by assuming a 5% return; but, actually coming up with an allocation and putting it into practice is my next step. Thanks Again!

Google "psst" at the top of this webpage.

Vanguard Wellesley Fund Admiral shares is a popular simple choice by many on these board for a well rounded income fund. $1.5m invested at the beginning of the year would have provided over $50k of income distributions in 2012 (plus CG distributions and unrealized appreciation as well).

Another popular option is one of the Vanguard Target Date funds - just look them over and pick the AA you feel most comfortable with.

Is the $1.5 really cash?

YMMV

 

[travelover]

You might want to do a simple portfolio of stock and bond index funds rather than Wellesley, so you can concentrate the bonds in the 401(k) for tax efficiency.

 

[donheff]

Assuming you have accurately forecast your expenses and can get by on $42K, it sounds like a number of approaches could work. That is a 2.2% withdrawal rate so approaching it as a single $1.9m retirement portfolio you could invest in a simple diversified portfolio of index funds and withdraw based on various SWR guidelines that have been discussed frequently around here. You need to think through where you will keep what (e.g. concentrate dividend producing bonds in the 401K) and how and when you will liquidate for expenses and re-balance. You will also need to choose your AA -- I would go for something around 50/50 but that is a very personal option. At 2.2% real you could go even more conservative, especially if you are not flexible in your spending requirements. There are threads on all of those topics around here. If you already qualify for SS and that will be coming in as a cash inflow, you sound golden. If you really go back to work and have another income stream, platinum.

 

[travelover]

You might want to do a simple portfolio of stock and bond index funds rather than Wellesley, so you can concentrate the bonds in the 401(k) for tax efficiency.

I meant to say Lazy Portfolio. My approach is a split between stock and bond index funds. Bonds split 50/50 between VG Total Bond and TIPS, and stocks split 33/33/33 large cap, small cap and international. All bonds in IRAs.

Lazy Portfolios - Bogleheads

 

[Lsbcal]

Thanks for the quick feedback..I'm in perfect health and would have to purchase my own health insurance. And, YES, I am well versed in the use of Microsoft Excel! I guess my question comes as a result of some initial research and discussions with those I know currently retired. There seems a plethora of investments that yield in the 4-6% range and I'm just looking for ideas to research that may have worked for people on this board. It's easy to model by assuming a 5% return; but, actually coming up with an allocation and putting it into practice is my next step. Thanks Again!

First, I'd focus on total return of the portfolio and not on yield. For "risk free" rates look at Treasuries. Everything else carries risk which you should fully understand or else just don't invest there. Today it is not a good idea to talk of very low risk 4 to 6% returns when the 10 year Treasury yields just 1.8%. And we have to acknowledge that even that 10yr nominal Treasury carries inflation risk.

Second, have you run FireCalc? Have you done it using the advanced features and maybe even looked at the spreadsheet output using Excel? Highly recommended as a start in understanding equity/bond historical outcomes given your situation.

 

[nun]

I'd consider buying a rental property. It's a good diversifier.

I spent $110k on a one bedroom apartment in 1997. It's now paid off and worth $190k. I get $1200/month rent from it and the monthly expenses are around $200. So I net $12k a year and you can deduct the expenses and depreciate it as well.

So if we use the $190k current value of the property that $12k income is equivalent to a 6% return

 

[rodi]

Is the 42k the *net* amount you'd like to have to spend, or is that before taxes.

That's important. I figured out my budget after taxes - then had to up the amount I needed to account for the taxman. It definitely changed my plan.

 

[pb4uski]

If you want something really simple but tax efficient you could put the $1.5 in either Wellesley or Wellington and the 401k in Total Bond or some similar bond fund.

If Wellesley then the combined AA would be ~30/70 and if Wellington then the combined AA would be ~50/50.

 

[target2019]

Two tools which are must haves:
Trevh backtest spreadsheet,
EZbacktest

I know you can easily find these, and as a techie will have no problem using either.

 

[racy]

First, I'd focus on total return of the portfolio and not on yield. ....

+1 what Lsbcal said. Here's a research paper from Vanguard on a total return approach vs. an income approach. https://personal.vanguard.com/pdf/s557.pdf

 

[fritz]

If you want something really simple but tax efficient you could put the $1.5 in either Wellesley or Wellington and the 401k in Total Bond or some similar bond fund.

If Wellesley then the combined AA would be ~30/70 and if Wellington then the combined AA would be ~50/50.

+1 these are great choices