Three-fund portfolio for retirees?
Three-fund portfolio for retirees?
My wife and I are happy, healthy old folks, in our 70s...managing to live off SS plus dividends from income-oriented investments -- Vanguard index funds and actively managed American Funds -- without having to withdraw from the principal except for RMD each year. As much as we would like to switch to the three-fund Vanguard portfolio -- an excellent concept -- doing so would reduce monthly income, forcing us to start selling a number of shares each month to compensate for the reduced income. Has anyone in a similar situation figured out some kind of modified, income-oriented version of the three-fund portfolio? Probably looking for the impossible here, but I thought I'd ask.
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Re: Three-fund portfolio for retirees?
The Three-Fund Portfolio works perfectly with the withdrawal methods outlined in our Wiki.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
- bertilak
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Re: Three-fund portfolio for retirees?
My first thought is "Don't rock the boat."
It's hard to answer your question without knowing the following:
It's hard to answer your question without knowing the following:
- Are all investments in tax advantaged accounts? Any Roth?
- When you take an RMD where does the money go?
- What exactly are those income-oriented investments?
- What are hose American funds and their expense ratios?
- IF you have individual stocks I would say dump 'em.
IF any funds have expense ratios above about 0.20% I'd look to swap those out.
The equity fund in your three-fund portfolio can be a fund that pays higher than normal dividends. Vanguard has several.
Don't generate any big taxable events doing any of the above.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Three-fund portfolio for retirees?
I'm not sure you should rock the boat either. But I do think it is wise to look at this.
There are a couple of things that come to mind.
1) Realize that there really is no harm in selling shares of a 3 fund portfolio. Remember that investments grow and pay out in different ways. Some pay dividends (which reduces the price per share) and some let the price per share grow instead of paying dividends. Many do a little of both.
When taking from a portfolio, it does not matter if you take from dividends or sell shares. Both of theses are just types of growth. Either way, you are taking from the portfolio and it is the amount you take not where you get it from that is critical. The idea that taking only the dividends is different or less harmful is an illusion.
Of course people then point out that dividend paying stocks just kept on ticking throughout the Great Recession of 2008. And I can't argue against that other than to say that depending on this may not work. At some point, the camel's back will be broken and if you are depending on that camel, you could be in a pickle.
2) The stocks in the 3 fund portfolio, by their nature, do not pay a great deal of dividends (income). If you want to harvest the growth of the total stock market and total international index you probably need to sell something.
The bonds in the 3 fund portfolio are not paying much these days. You might increase the income from the bonds by getting riskier (such as using junk bonds or longer term bonds) or by increasing the amount of bonds you have. Neither of these are very smart in my opinion.
I think it would be good to take a look at what you have to see what you are doing to produce the income that you have.
https://personal.vanguard.com/pdf/s557.pdf
There are a couple of things that come to mind.
1) Realize that there really is no harm in selling shares of a 3 fund portfolio. Remember that investments grow and pay out in different ways. Some pay dividends (which reduces the price per share) and some let the price per share grow instead of paying dividends. Many do a little of both.
When taking from a portfolio, it does not matter if you take from dividends or sell shares. Both of theses are just types of growth. Either way, you are taking from the portfolio and it is the amount you take not where you get it from that is critical. The idea that taking only the dividends is different or less harmful is an illusion.
Of course people then point out that dividend paying stocks just kept on ticking throughout the Great Recession of 2008. And I can't argue against that other than to say that depending on this may not work. At some point, the camel's back will be broken and if you are depending on that camel, you could be in a pickle.
2) The stocks in the 3 fund portfolio, by their nature, do not pay a great deal of dividends (income). If you want to harvest the growth of the total stock market and total international index you probably need to sell something.
The bonds in the 3 fund portfolio are not paying much these days. You might increase the income from the bonds by getting riskier (such as using junk bonds or longer term bonds) or by increasing the amount of bonds you have. Neither of these are very smart in my opinion.
I think it would be good to take a look at what you have to see what you are doing to produce the income that you have.
- Does your portfolio have too much in bonds? If so, you may not have enough in stocks to sustain your withdrawal rate.
Does your portfolio have risky bonds to produce the income? Might not be a good idea.
Does your portfolio have a large allocation to income producing REIT stocks? Some allocation is fine, but a large one would weaken the portfolio.
Does your portfolio have too large an allocation to dividend producing value stocks? Again, some allocation is fine, but a very large one might weaken the overall portfolio.
https://personal.vanguard.com/pdf/s557.pdf
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- bertilak
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Re: Three-fund portfolio for retirees?
retiredjg is right: earnings of a company can be handed out as dividends or folded back into the company to increase its NAV. Kind of a wash there as can be seen by the chart below which compares three broad equity index funds, each paying a different level of dividends.
The chart shows total return (growth plus re-invested dividends) for three funds:
This chart shows growth of the fund if no money is being added or withdrawn. If money is being added, volatility plays in your favor; more shares are bought at lower prices. If (as in your case) money is being withdrawn volatility plays against you; more shares are sold at lower prices. Some people would say that since dividends have lower volatility than stock prices it is a good idea to use high-dividend stocks when all else is equal. "All else" is never equal, but you can understand the general influence.
I don't know if that effect is large enough to be significant. If it does have a significant effect I suspect it is completely wiped out (and maybe more) in a taxable account. It DOES have a convenience factor but since you are taking RMDs that may not be important either.
The chart shows total return (growth plus re-invested dividends) for three funds:
- VTSAX: Total Stock Market (approx dividends just under 2%)
VFIAX: S&P 500 (approx dividends just over 2%)
VHDYX: High Dicidend Yield (approx dividends about 3%)
This chart shows growth of the fund if no money is being added or withdrawn. If money is being added, volatility plays in your favor; more shares are bought at lower prices. If (as in your case) money is being withdrawn volatility plays against you; more shares are sold at lower prices. Some people would say that since dividends have lower volatility than stock prices it is a good idea to use high-dividend stocks when all else is equal. "All else" is never equal, but you can understand the general influence.
I don't know if that effect is large enough to be significant. If it does have a significant effect I suspect it is completely wiped out (and maybe more) in a taxable account. It DOES have a convenience factor but since you are taking RMDs that may not be important either.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Re: Three-fund portfolio for retirees?
Trying to distinguish "withdrawing from principal" as a special kind of withdrawal distinct from simply withdrawing from a portfolio as a whole, whatever the mechanics may, be is a way to handcuff your portfolio design and investment selection that is simply unnecessary whatever the psychological reasons for doing it.
As an aside classifying RMD's as withdrawals falls in the same category of a miss-perception as an RMD is a distribution of assets from one part of the portfolio to another that has nothing directly to do with withdrawing money or "invading" principal. One does have to do something with that distribution as it is a transfer from tax deferred assets to taxable assets where the cash has to be reinvested and there is a tax cost that must be funded somehow.
As an aside classifying RMD's as withdrawals falls in the same category of a miss-perception as an RMD is a distribution of assets from one part of the portfolio to another that has nothing directly to do with withdrawing money or "invading" principal. One does have to do something with that distribution as it is a transfer from tax deferred assets to taxable assets where the cash has to be reinvested and there is a tax cost that must be funded somehow.
Re: Three-fund portfolio for retirees?
baseball,
I agree with the comments that a 3 fund portfolio is a simple solution for most situations. However, you must consider what your current holdings are since selling and incurring capital gains tax to create a "new" 3 fund portfolio may not be worth it depending on the size and cost basis of your holdings.
For the most useful and specific advice, go back and edit your first post above to include all of your holdings like this viewtopic.php?f=1&t=6212
Note % of all holdings should be 100% (excluding your emergency funds) and in your case since you are thinking of making changes, listing the cost basis of your taxable accounts would be helpful.
This will make you take a harder and closer look at your ER's and asset allocation and open up discussion about your specific situation
lafder
I agree with the comments that a 3 fund portfolio is a simple solution for most situations. However, you must consider what your current holdings are since selling and incurring capital gains tax to create a "new" 3 fund portfolio may not be worth it depending on the size and cost basis of your holdings.
For the most useful and specific advice, go back and edit your first post above to include all of your holdings like this viewtopic.php?f=1&t=6212
Note % of all holdings should be 100% (excluding your emergency funds) and in your case since you are thinking of making changes, listing the cost basis of your taxable accounts would be helpful.
This will make you take a harder and closer look at your ER's and asset allocation and open up discussion about your specific situation
lafder
Re: Three-fund portfolio for retirees?
You might try looking at your portfolio in a different way to see if it changes your outlook. If you look at the portfolio from a total return standpoint rather than a dividend (income) standpoint you might see your situation and concern a bit differently.
Bob
- Taylor Larimore
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Order of withdrawals
Baseball:
I am not sure I am answering your question, but I much prefer selling shares in a taxable account than in a tax-advantaged account:
Selling taxable shares:
* Only profitable shares are taxed.
* Profits are taxed at low capital-gain tax rates.
Selling tax-advantaged shares (except Roth which were taxed earlier):
* ALL withdrawals are taxed at high income-tax rates.
Vanguard has published THIS study which concludes:
Taylor
I am not sure I am answering your question, but I much prefer selling shares in a taxable account than in a tax-advantaged account:
Selling taxable shares:
* Only profitable shares are taxed.
* Profits are taxed at low capital-gain tax rates.
Selling tax-advantaged shares (except Roth which were taxed earlier):
* ALL withdrawals are taxed at high income-tax rates.
Vanguard has published THIS study which concludes:
Best wishes.We demonstrate that it is generally advantageous to spend taxable assets first, before tax-deferred or tax-free accounts.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Three-fund portfolio for retirees?
Very informative paper. Thank you for posting it.retiredjg wrote:This is why Vanguard recommends using a "total return" approach rather than an "income approach" when considering withdrawing from your portfolio.
https://personal.vanguard.com/pdf/s557.pdf
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham
Re: Three-fund portfolio for retirees?
My wife and I are happy (not completely healthy) 80+ year olds living on SS plus RMDs from my IRA.
A number of years ago I considered dividends and interest to be important in my approach to funds. Discussions with Taylor convinced me that total return was a better way to look at the fund returns.
A few years ago I switched from a 3 (actually 4 fund portfolio using Inflation Protected Security Fund and Total Bond Market Index Fund instead of just the latter) to Vanguard Target retirement Income Fund. I made the switch for ease of management. Withdrawals are determined by the RMD.
If you have any doubts about the total return concept, ask holders of Berkshire-Hathaway who do not get any interest or dividends-just capital gains.
LarryG
A number of years ago I considered dividends and interest to be important in my approach to funds. Discussions with Taylor convinced me that total return was a better way to look at the fund returns.
A few years ago I switched from a 3 (actually 4 fund portfolio using Inflation Protected Security Fund and Total Bond Market Index Fund instead of just the latter) to Vanguard Target retirement Income Fund. I made the switch for ease of management. Withdrawals are determined by the RMD.
If you have any doubts about the total return concept, ask holders of Berkshire-Hathaway who do not get any interest or dividends-just capital gains.
LarryG