UPDATE: Shift from Accumulating to Income Generation for Ret

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53timr
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UPDATE: Shift from Accumulating to Income Generation for Ret

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stlutz
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Re: Shift from Accumulating to Income Generation for Retirem

Post by stlutz »

Wecome to the forum! Thanks for your post.

A few thoughts:

--First, nobody needs 14 different mutual funds/ETFs and there really isn't any value in having 5 different high dividend funds, 2 overlapping REIT funds and 2 preferred stock funds.
--Second, I personally do not voluntarily invest in any fund with an ER > .2%. Some 401Ks pretty much require it, but there are so many great choices available at a low cost nowadays that using ETFs with ERs of .5% or greater just doesn't make sense.
--Third, I would just focus on the risk and return of the portfolio and worry less about whether returns come from diviends or capital appreciation. At the end of the day, $100 = $100. Keep in mind that any Total Market stock index fund that we tend to like around here will grow its dividend over time. So, for example, Vanguard Total Market yields 1.78% now, and the dividends paid on your original investment will go up over time (most likely). This isn't some unique characteristic of "dividend funds". If you must have a dividend stock fund, just pick one and use it for a portion of your overall equity allocation.
--Fourth, you need to take risk to generate 3% in dividend/interst incomes nowadays. That's just the result of of being in a low-interest-rate world.
--Fifth, it generally makes sense to think in term of risky and non-risky investments. Stocks and high-yield bonds are risky investments. Investment grade bonds of a short-to-intermediate term duration are lower risk investments. Your suggested portfolio looks like you are trying to select stock-like bonds and bond-like stocks. By suggesting a 50/50 stock/bond mix, it sounds like you want a relatively-but-not-overly conservative portfolio. That makes sense. I think you have more risk built into your choiced than you think however. If you want more risk, I would go with 60% equities and use the 40% bonds in lower-risk bond funds/ETFs than what you have below. That type of approach generally works better.

Others will have more specific suggestions--I was just hoping to stimulate some thought and questions.

Best regards,
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Laura »

Income is income. Vanguard wrote a paper entitled Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors a few years ago. You might find it helpful. You need to google "Vanguard Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors" and you will find the report.

Laura
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Sidney »

stlutz wrote:--Second, I personally do not voluntarily invest in any fund with an ER > .2%. Some 401Ks pretty much require it, but there are so many great choices available at a low cost nowadays that using ETFs with ERs of .5% or greater just doesn't make sense.
Absolutely. Should be able to get ER into the low teens without trying hard.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by livesoft »

I love ETFs, but still try to keep things simple. I see no point in using dividend ETFs. How about just 5 funds:
25% VTI Total US
12% VBR Small Cap value
12% VXUS Total Int'l
11% VSS Small cap foreign
40% BND Total US

add another if you like: VNQ REIT index.

A 60/40 stocks/bonds will generate about 4% of income a year in the form of distributions, but selling a few shares every now and then should be no problem for you. Expense ratio could be about 0.09% with these ETFs.

I threw up some percentages to make the suggested portfolio more concrete. Check the Morningstar analysis of my suggested portfolio. Looks great! And simple.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Grt2bOutdoors »

I'd like an 8% return too, not sure if you're going to get that and anyone who promises you will get that - RUN AWAY from as fast as you can! Otherwise, the advice provided above is spot on.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by livesoft »

I am truly curious about the 14-fund portfolio and how it was created, where it came from, and how long it took to develop?? And, If it was implemented, what would it look like in a year or 3 years? Would your spouse know what to do with it if you passed away?

I see you wanted stock/bonds of 50:50, but your proposed portfolio has less than 40% bonds if you count those high-yield bonds as equities which you should. And that 10% reserved elsewhere in an S&P500 index fund further increases your stock/bond ratio.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Aptenodytes »

Your most general question is if the strategy makes sense. I agree with those that say it does not. Setting arbitrary dividend constraints just boxes you in unnecessarily. Choose lowest price index funds that meet your stock/bond split.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by Sbashore »

I agree with all the previous great comments. I'm retired and struggled with a good withdrawal scenario for quite some time until I developed what I use now. I use a total return approach, and spend a percentage in nominal terms of the average of the last two years ending portfolio and my current portfolio value. If you allocated say 50/50 stocks/fixed and wanted to withdraw 3% I think it would be a slam dunk. I withdraw more than 3% and my portfolio has still grown.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by livesoft »

While looking up the other Vanguard whitepaper on Total Return vs Income, you may come across their article on portfolio construction. I have it bookmarked, so here it is: https://personal.vanguard.com/pdf/s705.pdf
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Re: Shift from Accumulating to Income Generation for Retirem

Post by BigJohn »

Agree with comments that your proposal contains for too many funds. Since you're near retirement age I'd suggest just going with a simple 3-fund portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio using either VG Index funds or Fidelity Spartan Funds to keep expenses as low as possible. One poster above suggested something similar but kept a tilt to small value. Having a third of your stock in small value can substantially increase volatility and may not be consistent with what appears to your desire for a relatively stead income stream.

Going forward I think a total of 8% return on a 50/50 is totally unrealistic. With high quality intermediate terms bonds no better than 2 - 3% you'd have to get 12 - 14% on stocks which is not a good plan basis. Many of your choices appear to be based on getting a higher yield but there is no free lunch. With that higher yield comes higher risk of principle loss which could be tough to recover from at our age. Don't make the mistake of "reaching" for yield without making sure you understand and accept the increased risk that goes along with that reach. I'm about your age and just retired. My AA is 60/40 and my plan is based on an overall portfolio return of ~5%.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by livesoft »

53timr wrote:The portfolio was created from my own research. […]
Hey, thanks for the explanation of how you constructed that portfolio. I hope that portfolio construction article is helpful.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by dbr »

53timr wrote:reserved elsewhere in an S&P500 index fund further increases your stock/bond ratio.
The portfolio was created from my own research. You see, I have been somewhat enamored of a dividend stock portfolio in my thinking over the past couple of years. The idea of an investment that would grow over time and throw off dividends to live on each year is appealing to me.[/quote]

It is very important to go back to Laura's post and understand that there is no special benefit to the idea of "growing over time and throwing off dividends." There can be harm to the idea if it causes a person to produce a contorted portfolio that is complex and may be missing more fundamental points. It might be that "enamored" is a good term as the choice to invest "for dividends" is behavioral more than anything else. That does not mean that investing to avoid dividends is a strategy either, most of the time.

Completely aside and not directed to the OP, I wonder why people so often use terms such as "throw off dividends" and "park cash." Both seem to convey a kind of casual sophistication about investing that seems strange. It seems strange in particular because there is nothing special about dividend payout or about having cash.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by TomatoTomahto »

dbr wrote:Completely aside and not directed to the OP, I wonder why people so often use terms such as "throw off dividends" and "park cash." Both seem to convey a kind of casual sophistication about investing that seems strange. It seems strange in particular because there is nothing special about dividend payout or about having cash.
Casual sophistication feels good. I sound sophisticated at a hockey game until you talk to me for more than 3 minutes.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by livesoft »

If you "park" your car, then it is not going anywhere. If you park your car in your garage, it may even seem safer. So if you "park" your cash, it can convey the same meaning of it not going anywhere. We also see "put my cash to work", which I guess means it comes out of garage where it was parked.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by dbr »

53timr wrote:
dbr wrote: It is very important to go back to Laura's post and understand that there is no special benefit to the idea of "growing over time and throwing off dividends." There can be harm to the idea if it causes a person to produce a contorted portfolio that is complex and may be missing more fundamental points. It might be that "enamored" is a good term as the choice to invest "for dividends" is behavioral more than anything else.
Maybe now would be a good time for me to go back and read, "The Little Book of Common Sense Investing" again before I move forward.

See if you think that paper Laura referenced is helpful and on the subject of investing for dividends specifically you might be interested in this one:

https://personal.vanguard.com/pdf/s352.pdf

If these papers seem too technical, then you can prepare by reading more beforehand. I like Larry Swedroe's books myself.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by TomatoTomahto »

General comment re complicated portfolios. Our tax-advantaged accounts are in 3 funds (the exact funds varying slightly depending on who houses the funds).

But, I just looked, and our taxable accounts hold 12 funds and one stock. They grew to that over the years, and by now it would be painful to pay the capital gains. Quicken X-Ray shows me how we're doing AA wise, so no big harm I guess. I would encourage using some kind of tool to keep track of whether you've inadvertently strayed from your AA; the fund name is not always reflective of what's in there. For example, as Livesoft pointed out, high yield bonds should probably be counted as equities.

And, as a side note, the one stock we own is in part because it does not pay dividends. :D
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by BigJohn »

53timr wrote: "For those investors who are not comfortable spending from their portfolio’s balance and/or whose portfolio cash flow is insufficient for their needs, there are three primary ways to increase income: increase their overall allocation to bonds; keep their existing bond allocation but tilt it toward high-yield bonds; or tilt their existing equity allocation toward higher-dividend-
paying stocks. None of these are preferred strategies for maintaining inflation-adjusted spending over long periods"
Not sure about the date on that paper as the first way is not going to increase income very much (SEC yield on VG TSM is ~1.8% and on VG TBM is ~2.1%). The second option can give you a significant increase in income (SEC yield on VG High Yield Corp is ~5.1%) but.... essentially all the holdings are junk bonds whose price will behave more like stocks than bonds in a major downturn. This greatly increases your sequence of return risk should this happens early in retirement. The third option is some help but not a lot (SEC yield of VG High Dividend Yield is ~2.8%) and does increase your risk a bit as you're invested in essentially all large cap value stocks.

The key for me is the last sentence "None of these are preferred strategies for maintaining inflation-adjusted spending over long periods"

Edited to add - 53timr, I just ran across this a few minutes ago. Note John Bogle's prediction for future returns http://www.marketwatch.com/story/bogles ... 2014-10-09
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Re: Shift from Accumulating to Income Generation for Retirem

Post by travellight »

I'm having fun just reading all the great advice, and a chuckle out of the etymology discussion.... sounds like it could be a show on NPR. Fund talk.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by TomatoTomahto »

53timr wrote:
TomatoTomahto wrote:Quicken X-Ray shows me how we're doing AA wise, so no big harm I guess. I would encourage using some kind of tool to keep track of whether you've inadvertently strayed from your AA; the fund name is not always reflective of what's in there. For example, as Livesoft pointed out, high yield bonds should probably be counted as equities.
I don't see a portfolio X-ray too in Quicken 2014...is that something new in the 2015 version?
Yes. I'm not sure if it's worth the upgrade cost, as the older version did a passable job of figuring out the AA. But, it's interesting.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by tibbitts »

53timr wrote: A 50:50 split is not necessarily set in stone...my wife and I are both comfortable with up to 60:40 because we both have longevity in our families and could very easily live into our 90s. I can see we have a lot more thinking to do! Thanks for the input.
You're not comfortable with 60/40. You're only saying that because you can't get 3+% real from extremely low-risk investments the way you could have not that long ago. So like many of us you're trying to justify doing something - anything - to overcome the reality of the current situation. But remember that when you add something like your proposed Fidelity High Yield, you can count that entirely as a bond. So you might already be looking at closer to 60/40 than you think.

I'm guessing your return expectations are wildly optimistic, but nobody knows the future.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

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Re: Shift from Accumulating to Income Generation for Retirem

Post by TomatoTomahto »

53timr wrote:
TomatoTomahto wrote:Yes. I'm not sure if it's worth the upgrade cost, as the older version did a passable job of figuring out the AA. But, it's interesting.
Each year I sit down and look up all my investments on Morningstar, and plug all the asset allocation figures into a spreadsheet. It takes some work, but it seems to give me a more accurate representation that what the older version of Quicken's AA report gave me.
Well, if you're going to take the time to do that, then it might well be worth the cost. In my case, the upgrade was quick and painless. Ymmv. Do a backup first :D
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Re: Shift from Accumulating to Income Generation for Retirem

Post by stlutz »

sounds like it could be a show on NPR. Fund talk.
I nominate livesoft and sscritic to host.
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Mort »

Wow!
My highest regards to all participants especially the initiator of the thread, 53tmr.

Such a high level of informative , yet differing input from the initiator's original post.
And such gracious, open responses from 53tmr - amazing and rare.

It's unusual to hear such candid information exchange and an equally high level of openness, hearing of each other.

Holding two contradictory thoughts in mind at one time is one test of intelligence. You are an intelligent, generous, group.
Thanks
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Re: Shift from Accumulating to Income Generation for Retirem

Post by Watty »

53timr wrote:Contributions

State of Residence: GA

......
New annual Contributions
$17,000 his 401k (no match)current contributions are pre-tax
$720 his 401a (employer matches 100% up to $720 max)
$1300 her 403b (no match)
$600 her Roth IRA
$500 taxable (for retirement, not short term goals)
I'm also in Georgia.

It is one of the few states that allow you to deduct your retirement account contributions on your state taxes while you are working but most people will not need to pay state taxes on the retirement account withdraws since there is a retirement income exemption starting at the age of 62 and increasing after you are 65. After 65 it is $65K per person or $130K per couple.

If you will likely retire in Georgia then it would probably be best to not contribute more to the Roth if you have not maxed out all your deductible retirement accounts since you will likely not save on your state income tax with the Roth in Georgia.

http://dor.georgia.gov/retirement-income-exclusion

I am not there yet so I have not looked into all the details but I suspect that Roth conversions after you qualify for the retirement income exclusion might be favorable in many situations.
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Re: Shift from Accumulating to Income Generation for Retirem

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Re: UPDATE: Shift from Accumulating to Income Generation for

Post by BigJohn »

53timr, your new plan is much more simple and straight forward. Your plan to collapse accounts into respective IRAs will further simplify things which is a good objective as you enter retirement. My only comments would be a couple of questions about opportunities for additional simplification and lower cost.

1) Why keep his Roth IRA at T Rowe PrIce? You might consider moving it to Fidelity so he eventually has one-stop-shopping there for all his assets and can invest in the same funds in both accounts.

2) Why use VG STAR in her IRA, especially since this is one of the "permanent" accounts? I took a quick look and while not a bad choice it's a pretty complicated mix of actively managed funds. Additional simplification possible by moving to VG Target Retirement 2020 so the same as her Roth IRA.

Best of luck implementing the changes and in retirement!
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Re: UPDATE: Shift from Accumulating to Income Generation for

Post by 53timr »

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Last edited by 53timr on Fri Jan 16, 2015 9:20 pm, edited 1 time in total.
“I take my investment advice from my dentist, because he’s just as likely to lose me money as a financial advisor.” | ― Jarod Kintz, This Book Title is Invisible
stlutz
Posts: 5585
Joined: Fri Jan 02, 2009 12:08 am

Re: UPDATE: Shift from Accumulating to Income Generation for

Post by stlutz »

53timr--thanks for the update! It's always nice to hear what the actual outcome ended up being on these threads. :sharebeer
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: UPDATE: Shift from Accumulating to Income Generation for

Post by mhalley »

Just thought I would post the link of the recommended vanguard PDF of "Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors" for those too lazy to do a google search.
https://personal.vanguard.com/pdf/s557.pdf
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