ok... licking the wounds, you've collectively beat me to a pulp. But, I hear you on the inflation side of things. I should explain more. I am building a financial retirement model that assumes the following -
1) retire now with X amount of cash (say, $1M in todays dollars) and based on that,needing to earn approx 6% before tax (approx 4.8% after tax) to generate 48K/year. This would include living expenses and some level of "outside the portfolio" savings for emergencies, big ticket items, etc.
i see muni's paying 4.1 to 4.3% in my state, which are free of fed and state taxes, so i am in the ballpark of the desired return... Certainly they are not risk free...only treasuries are (or are they...) but getting closer.
2) give myself a COLA adjustment of 3% per year to keep up with inflation
3) Reinvesting any income generated that exceeds $48K+COLA from the investment
4) assume an additional $400K in todays dollars tied up in deferred retirement investments - continue to grow from now thur age 59 1/2 but can be tapped only then. From that point, begin drawing that down too.
5) assume evenutal 100% draw-down of all assets (assuming I am lucky to live that long)
Trying to model the amount needed - i think based on $1M today, at 4.8% annual after tax return, and then an additional 400K to 500K in todays dollars locked up in retirement savings that grow at 4.8% per year and become available post age 59 1/2 the money will last for about 37 years.
Keep in mind equtities can remove some of the tax bite.
50k in equites would be taxed differently than 50k in interest from a CD (if long term capital gains, the equity position is taxed at much lower rates).
How much of this is a Roth IRA?
How much of this is in a 401k or other tax deferred plan?
Dividend income is also taxed at lower rates than interest from a bond or CD.
I would suggest you look at the "after tax" return of various asset classes and use this as a portfolio contruction tool, more than you are looking at the "principal loss" factor.
For example:
1 M portfolio now Need 60k in income before taxes.
Put $600k (10 years of income) into cash, bonds and various conservative instruments.
I would have this as
180k into 3 CDs of 60k each. ladder these so one matures year 1, another year 2, another year 3. This is your income "next year".
180k into I-BONDs or TIPs. These need to mature every 3 years. At years end, buy a 3 year CD (this will be income 3 years out).
240k into treausuries or money markets. This is a conservative position designed to maintain principal. Put any interest gained into the I-BOND or TIP position. My math suggests this is $7200/year at 3% interest.
Put 400k into equities. Mostly into dividend paying stocks. My calculations suggest this will generate 12k of income per year. Cash out stock only in up years... meaning if 400k earns a 10% return, use the return to replenish the 60k position in the I-BONDs/ TIPs portion.
In a down year, don't sell the equities.
Not sure how many years until age 59.5. You have a 10 year cash buffer in this plan, so if you are older than 49.5, this plan should work.
Add in the additional 400k to the equity portion at age 59.5 (so this might have 800k in equities. Now only a 7.5% return is needed from equities to replace the 60 converted from TIPS/Ibonds to CDs each year.
Only convert in an up year, there is a 10 year cash cushion to ride out a down year.
Best of luck. It's gonna be hard to accomplish a totally risk free plan that keeps pace with inflation.
