Next Year's (2021) Income Dilemma?

[pb4uski]

....Is the distribution auto adjusted for Inflation (~2.3%) ? Since it's a fund I'd think old bonds are expiring and new ones are being bought at current rates so it should be auto adjusted for Inflation. ...

No, fund distributions don't work that way. Most are simply a distribution of income received less expenses to shareholders. You can see this if you look at a fund's annual report. See clip from Vanguard Intermediate-Term Tax-Exempt Fund below and note that distributions approximate interest income.

If distributions increase consistent with inflation it is merely coincidental, not by design.

 

[ERD50]

Then spend some principal.

+1.

I'm not sure what OP is actually trying to figure out. IIRC, he has been vocal about not wanting to take 'risk' with equities. Fine, that's his choice. But by doing that, you are at the mercy of interest rates and bond div rates. If those don't keep up with spending, the only choice is to dig into principal (and/or take SS/pensions earlier). As others have said, that's what it is there for. There's no place to hide, there's no magic solution, there are only choices (and consequences).

An equity investor would face the same thing if total returns were down. Though most likely, with a balanced portfolio they'd be selling bonds if stocks were down. Not really any different from OP's position, except that over the long run, the person with 60% equities would very likely see a nice positive boost from those equities over the long term of a retirement.

It's exactly why FIRECalc shows that historically, a portfolio of 40/60 ~ 100/0 provides more safety than a portfolio of < 35/65.

-ERD50

 

[bluelight]

I like the Muni option that BlueLight highlighted earlier. With rates so low now bonds have no place to go but up in future. What specific funds at Vanguard do you recommend?.

We have VWIUX (intermediate term) VWLUX (long term) and VNYUX (NY long term, which for us is both Federal and NY State tax exempt). We purchased them in 2014 and the value has stayed pretty steady. When interest rates rise, the value will go down. For the last 6 years though we are within 10K of our 550K initial investment and they provide about $1,200 per month in distributions which we take.

 

[daylatedollarshort]

We took our pensions and Social Security early and those cover almost all of our expenses. I'm not too worried about low interest rates as inflation is very low as well. Our conservative portfolio is still growing in retirement, even if our more recent fixed income purchases are at lower rates than previous purchases. The blended real rates are still pretty good with inflation so low. I based my retirement spreadsheet on a zero real return, so it still works.

Interest rates have been declining world wide for decades, which means they are unlikely to suddenly shoot up any time soon.
Related article: The Long Decline of Global Interest Rates - https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/

 

[stephenson]

retired1,

I started another thread - same basic need to get more interest than bond funds or bonds, in general.

I took a look at ACTHX (Invesco High Yield Muni Fund Class A).

High ER of 1.13 as you noted.
4.25% load
NAV dropped around 18% in March
1 Yr -1.15%
3 Yr +3.73%

 

[ShokWaveRider]

I think if there is another big market decline in Mid 2021. I would probably throw a bit at the S&P, but I do not have the courage to get in if it is at an all time high as it is now.

 

[copyright1997reloaded]

+1.

I'm not sure what OP is actually trying to figure out. IIRC, he has been vocal about not wanting to take 'risk' with equities. Fine, that's his choice. But by doing that, you are at the mercy of interest rates and bond div rates. If those don't keep up with spending, the only choice is to dig into principal (and/or take SS/pensions earlier). As others have said, that's what it is there for. There's no place to hide, there's no magic solution, there are only choices (and consequences).

Yep. That's why some of us have repeatedly warned that risk comes in many flavors, not just equity price risk.

We now have an environment where real (nominal minus inflation) 5-year treasuries are negative 1.27% (and even negative 0.33% on the 30 year). This is before taxes on the nominal yield, which makes the return even worse.

Personally, I getting more and more concerned about eventual loss in buying power - both by inflation in terms of fixed assets (like my non-inflation-adjusted pension) and loss because of currency devaluation.

So here we are - asset prices which are "lofty", negative returns on fixed income...no where to run, no where to hide.

 

[Dave J]

~45% of our stash is in after Tax IRA (Taxable) moneys that is in high yielding CDs, currently earning ~4%. We live very well off this income and pay taxes on it as required. The rest is in Tax Deferred IRAs earning a similar ~4% but for a much longer term, so I am not concerned about them.

I am similar age as you.SO is also. Not enough info to comment much. I'm confused. 45% after tax IRA(Taxable), rest is Tax Deferred IRA's. Is all your money in IRA's that tax will eventually be owed. Personally, for the last several years I have been converting my Taxable IRA's to ROTH IRA's and paying the tax out of already taxed money up to top of certain Tax brackets. I re-evaluate every year and plan how much to convert based on taxable income outside of my IRA's.Have you done a plan as to how you are going to pay the tax due, minimize your total tax paid, and not drive yourself into a much higher tax bracket later in life and pay much higher rates? This probably isn't worded well , so hopefully you will get my ideas.

 

[RenoJay]

I’m a big fan of hard money lending where you lend after tax money to people, via a broker who specializes in this, and it’s secured against real estate. I’ve done roughly 3 dozen loans over 8 years, including right before and during the pandemic. My worst outcome has been that one borrower requested reduced payments for three months and is now back to full payments and will make up the difference when the loan is paid off. The yields of my recent loans have been 9% to 10% annually, pay monthly, arrive in my account via ACH and require no contact with anyone once the deal is in place. If you went this route, you’d only need to invest a fraction of what you have in 4% CDs in order to maintain the current income.

 

[jazz4cash]

I like this idea also and would like to have muni funds in taxable account in lieu of CDs. Is the distribution auto adjusted for Inflation (~2.3%) ? Since it's a fund I'd think old bonds are expiring and new ones are being bought at current rates so it should be auto adjusted for Inflation. What's been your experience ?

There is no auto adjustment involved. The funds will react similar to a CD ladder I think. I haven’t held the fund very long but basically it will track bond rates but the changes are dampened. Likewise munis get favored treatment which adds a fraction of dividend and another bump for tax free. It remains to be seen how the fund manager will react to dropping rates (e.g. extend maturity or risk?). That’s where the bond vs bond fund discussion comes into play. Rather than reinvest I’ll sit on the sidelines and wait for better terms.

 

[Winemaker]

I think if there is another big market decline in Mid 2021. I would probably throw a bit at the S&P, but I do not have the courage to get in if it is at an all time high as it is now.

I think one has to look at big picture; yes, the market is high. But in 5 years, do you think it will be higher? Do you think it will be higher in 10 years? While we don't know for sure, I think most believe the the markets will be higher. Isn't that the whole reason we are 40/60, 50/50, 60/40 or whatever? Yes, if you are out of the market for a while, it is always tougher to get back in. If you get in and it falls, you feel like a chump and you should have known better, but OTOH, if you don't get in now and it goes higher, you have the same predicament later.

I'm still dancing with the girl that I brought to the dance, I don't do all the fast dances like I used to, and sometimes I stop to get a drink and watch others. But I'm still dancing.

 

[DrRoy]

You might find some BBB rated corporate bonds at 3-4%.

 

[pb4uski]

I've been finding some good yields in investment grade Exchange Traded Debt Securities, like

https://www.marketwatch.com/investing/stock/PRS ..........5.12% market yield, S&P BBB+
https://www.marketwatch.com/investing/stock/TBB ..........5.05% market yield, S&P BBB
https://www.marketwatch.com/investing/stock/AGO.PRB ...6.58% market yield, S&P A

For a listing see https://www.quantumonline.com/debttable.cfm?SortColumn=MoodysCode&Sortorder=ASC

YMMV

 

[RetireBy90]

I think if there is another big market decline in Mid 2021. I would probably throw a bit at the S&P, but I do not have the courage to get in if it is at an all time high as it is now.

I would be careful about market timing. I've always been very poor at it. I have about 8% of our stash in CDs that were paying 3-4% and have been shocked every time one comes up for renewal. Just renewed one for 0.9% at Navy FCU.

If it was me, and it isn't, I would start moving some to dividend stocks that pay 3-4%. With a relative low yield I believe you have less risk. I have PFE, CSCO, VZ that haven't seen big run up in prices and pay a modest 3-4% dividend. Just an option. There are other stocks that have similar yield and lower risk. If you were to consider this, I would move a small amount on a regular bases, say once a month or once a quarter to average into the stock.

 

[stephenson]

pb4uski,

Didn't AGO drop about same as dividend stocks in March?

What would be the advantage of holding AGO over a low volatility dividend stock paying the same dividend, except for the near certainty of the bond dividend vs the stock dividend?

 

[ShokWaveRider]

I am similar age as you.SO is also. Not enough info to comment much. I'm confused. 45% after tax IRA(Taxable), rest is Tax Deferred IRA's.

Sorry that was a typo on my behalf. ~45% is NOT Tax deferred.

 

[pb4uski]

pb4uski,

Didn't AGO drop about same as dividend stocks in March?

What would be the advantage of holding AGO over a low volatility dividend stock paying the same dividend, except for the near certainty of the bond dividend vs the stock dividend?

AGO is a stock... this is AGO.PRB.... an exchange traded bond. AGO went down in March and has pretty much stayed there... AGO.PRB, like many preferreds and exchange traded bonds, dipped in March as the SHTF but then recovered.

Everything dropped in March.... see below. Blue is AGO.PRB, black is PRS, green is TBB and orange line is VCIT (Vanguard Intermediate-Term Corporate Bond ETF).. for some reason the colors in the chart are caddywhompus.

 

[mrfeh]

Dividend paying stocks are never a suitable replacement for fixed income.

 

[stephenson]

Would be interesting to see some data. comparing the two categories over three or four scenarios of several years each ...

Maybe dull boring ATT vs mid and long term bonds? Interest/dividend paid and net for multi year?

 

[Dave J]

Sorry that was a typo on my behalf. ~45% is NOT Tax deferred.

So 45% is in what I call regular money, where you pay tax on interest and have already paid tax on principal. The other 55% is in tax deferred IRA's where tax is due on principal and interest when withdrawn. And zero dollars in Roth accounts? Is the above where you are?

 

[pb4uski]

Dividend paying stocks are never a suitable replacement for fixed income.

+1

 

[ShokWaveRider]

So 45% is in what I call regular money, where you pay tax on interest and have already paid tax on principal. The other 55% is in tax deferred IRA's where tax is due on principal and interest when withdrawn. And zero dollars in Roth accounts? Is the above where you are?

Yup

 

[Dave J]

Yup

So, depending on the level of your assets in IRA's, You might be able to withdraw some of those at a lower tax rate before you start drawing Social Security, so that may help steer you as to when to start SS. If you have no real immediate need to the money, transferring them to Roth's will lower your taxable income in the future. I Had about 45-50% of my assets in IRA's a few years ago, and over several years have been able to transfer to about 35-40% in Roth's. I have the other 10-15% still in Taxable IRA's and recalculate every Jan. what I should do that year. I'm sure if you can withdraw at 12-22% tax rate that would be preferable to you than 24-32-35%. And with the new IRA rules, if you are leaving it to non-spouse, they will have to pay taxes within 10 years of your passing.

 

[ShokWaveRider]

I had a chat to my BIL today, he has been retired for over 25 years and says the hardest thing was realizing he had to draw down on his savings to maintain his SOL after stopping W%#K. He was so used to maintaining or adding to his stash that it potentially going down was heartbreaking. He is used to it now at 83!

We have been retired for over 10 years and that is my problem. Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

 

[Dave J]

We have been retired for over 10 years and that is my problem. Our stash has always gone up in retirement. In this era of low interest rates it will no doubt go down.

I have been retired a while longer than you, and am in the same boat. Always has gone up. But, if in a couple years due to rates, it has to go down a little, no sweat. I just divide my assets by number of years until in my mid 90's, and know I need to up my spending, not worry about principal.