Looking to generate more income from portfolio and need advice

[petestan]

This post may be a little long and I apologize, but I really need some advice. I just turned 58, no longer working and will now start to live off savings. Have about $900k saved with expenses $35k-$40k/yr. I have no debt, single, no kids, own home and in good health. I should get about $11k/yr from SS when I decide to file. Presently my portfolio is generating about $10k/yr in dividend income. My portfolio is as follows:
Taxable
Vanguard FTSE All World Except US 8.7%
Vanguard Massachusetts Tax Exempt Fund 3.3%
Vanguard Mid Cap Index 10.8%
Ridgeworth SEIX Floating Rate High Income 3.8%
Vanguard Mega Cap Index ETF 23.8%
Exxon Mobil 3/8%
I Bonds 5%
Roth IRA
Vanguard Total Bond Mkt Index 9.3%
Brown Capital Mgmt Small Company Fund 6.6%
Regular IRA
Doubleline Core Fixed Income 3.3%
Doubleline Total Return Bond 3.3%
Loomis Sayles Bond 4.2%
TCW Emerging Markets Income 3.8%

Cash about 10% in non interest checking account.
I am looking to generate as much income as possible to last rest of my life and would welcome any suggestions. I do have a couple of questions.
Should I put cash in CD ladder or high yield savings account?
Should I increase bond allocation? about 37% at present
Where I have no earned income for 2015, should I convert some of IRA to ROTH.

Again, would welcome any feedback.

Thank you

 

[braumeister]

expenses $35k-$40k/yr.

Sounds like you might be on the edge.
Do those expenses include all taxes, healthcare and emergencies?

 

[jim584672]

Just sell some shares as needed for income. Better to have growth than divs/interest.

 

[nun]

I'd probably simplify your holdings and reduce the number of funds so there are no single digit percentages. If you increase you 37% bond allocation you'll reduce volatility, but also reduce the potential total return. Pretty soon you'll need to generate $29k from $900k and if we use 4% return you are there. However, there's not much room for error and a few bad years could ruin your plan. If you took the bond allocation and bought an SPIA you could get around $20k and then generate around $22k from the remaining portfolio to give you some inflation protection......Of course you give up the principal and SPIAs are really only better from a total cash point of view if you live for a very long time, but being so close to the edge you need to manage risk too and an SPIA would buy you some reduced risk for the price of potential higher returns.

 

[ownyourfuture]

I'd probably simplify your holdings and reduce the number of funds

The best suggestion I've seen so far.

 

[Senator]

Have you looked at what you are paying in fees? I listed the fees on your non-vanguard funds/ETFs. Switch those first.


Ridgeworth SEIX Floating Rate High Income .77%
Brown Capital Mgmt Small Company Fund 1.06%
Doubleline Core Fixed Income .75%
Doubleline Total Return Bond .47%
Loomis Sayles Bond .91%
TCW Emerging Markets Income 1.13%

 

[pb4uski]

Consider ditching the tax exempt fund now that you are in a low tax bracket. Put the cash in an FDIC insured online savings account and earn ~1% As others have suggested, simplify your holdings and pay attention to expenses.

Finally and most importantly, do not focus on income... total return is the way to go.

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[RetireAge50]

You probably have it all figured but If it were me I would jam it all into Wellington, take out 35k or so each year. Adjust the 35k going forward based on market fluctuations. Arrange the income to keep taxable about the same each year.

 

[daylatedollarshort]

We use a matching strategy, outlined in general here at the Bogleheads wiki:
https://www.bogleheads.org/wiki/Matching_strategy

 

[nun]

We use a matching strategy, outlined in general here at the Bogleheads wiki:
https://www.bogleheads.org/wiki/Matching_strategy

What is your strategy....what do you use to match your liabilities? The worry for the OP is that using TIPS, I-Bonds etc won't provide enough income, an SPIA would, but what about inflation and all the usual negatives of annuitization. The thing is the OP only has just enough to produce the needed income using a 60/40 AA and there are lots of factors making that a risky proposition. Without knowing the OP's tolerance for risk it's hard to give advice.

Liability matching might decrease the BP by a few points, but it is expensive to implement as guaranteed income is usually expensive to generate without something like a DB pension.

This Bernstein video might be interesting, particularly the comments after 2:26. He's very risk averse.

http://www.morningstar.com/cover/videocenter.aspx?id=557820

 

[daylatedollarshort]

What is your strategy....what do you use to match your liabilities? The worry for the OP is that using TIPS, I-Bonds etc won't provide enough income, an SPIA would, but what about inflation and all the usual negatives of annuitization. The thing is the OP only has just enough to produce the needed income using a 60/40 AA and there are lots of factors making that a risky proposition. Without knowing the OP's tolerance for risk it's hard to give advice.

This Bernstein video might be interesting, particularly the comments after 2:26.

What's the Purpose of Your Fixed-Income Holdings?

Safe returns are what they are. Wanting higher returns isn't always realistic, especially if those returns are needed to cover essential expenses. If a retiree takes on more risk, he might make more, or might make less than he needs for the basics. Bond yields are low globally and have been trending low for several decades, stocks for the long run may mean 40+ years. This was the Zvi Bodie issue with the majority of the online planning tools in the Jermey Seigel Vs Zvi Bodie link you posted recently.

Bogle's forecast for a mutual fund type portfolio for the next decade doesn't seem to be much more than a matching strategy would provide only with more risk.

 

[nun]

Safe returns are what they are. Wanting higher returns isn't always realistic, especially if those returns are needed to cover essential expenses. If a retiree takes on more risk, he might make more, or might make less than he needs for the basics. This was the Zvi Bodie issue with the majority of the online planning tools in the Seigel vs. Bodie discussion link you posted recently.

Bogle's forecast for a mutual fund type portfolio for the next decade doesn't seem to be much more than a matching strategy would provide only with more risk.

So what is your matching strategy?

The OP has stated a need for $40k to $35k with $11k coming from SS. With $900k he can do that with some risk with a 60/40 AA and a 4% return....that 4% might be optimistic and increasing the bond allocation will only reduce the chances of generating enough income. The only liability matching strategy that will work is annuities, but principal is lost and inflation and large one time expenditures become issues. It really is all about risk tolerance.

 

[daylatedollarshort]

So what is your matching strategy?

I am not sure how my personal matching strategy would help the OP and do anything but side track this thread. The general guidelines of how to implement a matching strategy are in the wiki link, with much more information in the BH forum themselves. The OP can read it or not. It is a strategy to consider outside the mutual fund box.

 

[petestan]

I wanted to thank everyone for responding. The expenses I mentioned do include healthcare, taxes, etc. My risk tolerance on a scale of 1-10 is about a 5. I will look into what you all have suggested and really appreciate your feedback.

 

[nun]

I am not sure how my personal matching strategy would help the OP and do anything but side track this thread. The general guidelines of how to implement a matching strategy are in the wiki link, with much more information in the BH forum themselves. The OP can read it or not. It is a strategy to consider outside the mutual fund box.

Well you brought up the matching strategy in the first place so it seems strange not to share how you think the OP might implement one and how you've done it yourself. IMHO the OP doesn't have enough money to use many of the low return assets used in liability matching. An annuity would provide more than enough income initially, but with all the usual issues and drawbacks, so maybe using just a portion of the $900k to build an annuity ladder might be interesting, or just use a 60/40 total return approach and hope for 4% withdrawals. It all depends on risk/volatility tolerance.

I'm in a very similar situation to the OP, needing about $35k a year in income and having a $1M portfolio. However, I have a COLA'ed pension and own a rental property that together produce $34k. My $1M is split 70/30 between stocks and TIAA-Traditional. So that's how I do liability matching.

 

[photoguy]

If the OP puts everything into TIPS or inflation protected bonds (i-bonds or short term) and his 11k SS is at 62, he can basically get to late 80s early 90s without any equity risk or (CPI) inflation risk.

However he would be in bad spot if he mis-estimated expenses or lived longer. But he owns his home and can tap equity there if necessary so I don't think this is terrible although I wouldn't choose this approach for myself.

 

[retire2020]

I just read "Random Walk down the Wall Street" by Burt Malkeil. He's suggesting to hold VDIG and increase your REIT holding for higher income. His argument is that since Bond returns are so low that one should hold VDIG in their bond allocation(or some high yield large cap like ATT) part of AA. VDIG is all stocks though and was down considerably in 2008-2009 down market.

 

[nun]

If the OP puts everything into TIPS or inflation protected bonds (i-bonds or short term) and his 11k SS is at 62, he can basically get to late 80s early 90s without any equity risk or (CPI) inflation risk.

However he would be in bad spot if he mis-estimated expenses or lived longer. But he owns his home and can tap equity there if necessary so I don't think this is terrible although I wouldn't choose this approach for myself.

The OP could generate a $40k inflation adjusted income into their late 80s with a real return of 1% starting with $900k and $11k SS at 62. So I-bonds or a CD ladder might work. I'd be worried about having too much in bond funds just incase there were some negative returns in the next few years. But the OP wanted to generate more income and this approach won't achieve that and as you point out there isn't much room for error.

 

[photoguy]

But the OP wanted to generate more income and this approach won't achieve that and as you point out there isn't much room for error.

It wasn't entirely clear to me, but I just thought the OP wanted to bridge the gap between dividends and yearly expenses.

Also, if the 11k SS amount is at age 62, I would delay it until 70. This greatly increases the payout and cuts longevity risk.

 

[daylatedollarshort]

The way we approached retirement was not here are our expenses, how can we generate enough income to cover them? If you want to use a matching strategy with hedging and insuring, the question to ask is how much money do I have available using matching strategies and safe assets, and make a budget to fit that for essential expenses. Any money left over can be used for riskier assets and the want to haves.

Just some food for thought. There are other approaches to generating retirement income than the 100% mutual fund approach which is popular here. The mutual fund online retirement planners will often tell you if you need more income in retirement invest more in stocks, which may or may not work out. Stocks for the long run may mean 20 - 40 years, which is often not the ideal planning horizon for many retirees. William Bernstein (nun posted a video with his thoughts earlier in this thread) says stocks in retirement can be nuclear-level toxic, except for the non-essential expense part of your portfolio.

 

[photoguy]

Good point that the OP's essential expenses might only be some percentage of the 35-40k desired spending level. And that would certainly make it more feasible.

I think so few people on this board actually use the liability matching approach (except trivially where they have more than enough pensions/SS) it would be helpful to see more detailed examples (with asset allocation, how they moved from an accumulation portfolio, what they used for life expectancy, etc.). You may not care share your details, but I think it would be very illuminating.

 

[nun]

Good point that the OP's essential expenses might only be some percentage of the 35-40k desired spending level. And that would certainly make it more feasible.

I think so few people on this board actually use the liability matching approach (except trivially where they have more than enough pensions/SS) it would be helpful to see more detailed examples (with asset allocation, how they moved from an accumulation portfolio, what they used for life expectancy, etc.). You may not care share your details, but I think it would be very illuminating.

Yes I agree.

The OP is looking at an initial 4.4% withdrawal and with a consistent 0% real return he can survive until 85. With 1% he is golden. So if the OP is risk averse and is happy living on an inflation adjusted $40k then a CD ladder, I-bonds or an annuity will work just fine, just make sure to save all the initial extra income from an SPIA to cover inflation or do something like an annuity ladder.

A 60/40 portfolio like the OP has now (but with fewer funds) might be able to support the 4.4% withdrawal rate for 30 years with all the usual caveats about sequence of return risk, but it's cutting it close IMHO as I think 4% is optimistic.

Of course you could split the difference and guarantee a floor of income and let the rest ride in the stock market.

 

[daylatedollarshort]

You may not care share your details, but I think it would be very illuminating.

It is not very interesting: Our post college, annual retirement expenses < (SS @ 62 + pensions @ 55 + .5% of current portfolio). The mainly non-COLA pensions are taken as annuities and cover the interest on a fixed rate mortgage. I also have hobby income which is not included.

At a zero real return, a 40 year plan would allow for a SWR of 2.5% per year (100/40 = 2.5). With a TIPS ladder with an average .6% yield one could draw down ~3.1% per year and have the portfolio last 40 years, with as much risk as is normally attributed to individual U.S. Treasury bonds.

 

[pb4uski]

For people with a .5% WR (or even a 2 or 2.5% WR) a liability matching strategy is feasible and there is a small subset of retirees who it might make sense for if they are particularly risk adverse.

Regarding Bernstein, as I recall he was whistling a very different tune some years ago so I'm not sure whether I believe him now or then. Actually, probably more then than now.

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[photoguy]

It is not very interesting: Our post college, annual retirement expenses < (SS @ 62 + pensions @ 55 + .5% of current portfolio). The mainly non-COLA pensions are taken as annuities and cover the interest on a fixed rate mortgage. I also have hobby income which is not included.

You are in a really nice position and matching the non cola pension with the mortgage is great. Thanks for posting your details.

At a zero real return, a 40 year plan would allow for a SWR of 2.5% per year (100/40 = 2.5). With a TIPS ladder with an average .6% yield one could draw down ~3.1% per year and have the portfolio last 40 years, with as much risk as is normally attributed to individual U.S. Treasury bonds.

For people with a .5% WR (or even a 2 or 2.5% WR) a liability matching strategy is feasible and there is a small subset of retirees who it might make sense for if they are particularly risk adverse.

At the low end of the OP's expenses, he might be able to get to ~3% with SS at 62 (depending on his returns from 58-62). So I don't think it's infeasible, especially for essential expenses.

Regarding Bernstein, as I recall he was whistling a very different tune some years ago so I'm not sure whether I believe him now or then. Actually, probably more then than now.

I think he changed his opinion due to his clients behavior in the past recession (i.e. selling at the bottom and doing irretrievable damage). However, his clients need to have a minimum of $25M and have clearly "won the game" where an extra million or two (or five) won't make much difference. With my puny stash, I'd be thrilled with extra gains from equities and so I have not seriously considered liability matching.