How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

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darthvader747
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How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by darthvader747 » Sun Apr 24, 2016 12:01 pm

The goal here is to protect the principal against inflation and then generate some monthly income.
I don't have a target for monthly income. I would like to know what is the maximum income possible without taking too much risk (i.e not loose more than 5%-10% of the principal)

Please specify where the suggested investments can be purchased like with Vanguard / Bank (e.g. Chase etc)

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by navyitaly » Sun Apr 24, 2016 12:26 pm

In today's low interest rate environment, you aren't going to be able to get inflation yield with 5%-10% risk. If I were you, I'd just find an online decent rate CD and have zero chance of loss and take my low interest and move on. Make sure you are FDIC insured appropriately.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by Noobvestor » Sun Apr 24, 2016 12:47 pm

darthvader747 wrote:I would like to know what is the maximum income possible without taking too much risk (i.e not loose more than 5%-10% of the principal)


Approximately zero (maybe slightly less than zero). In terms of how I arrived at that: I'm thinking a TIPS fund would have a 5-10% risk of principle loss, more or less, and it will return you around the inflation rate or slightly less.

So you have to let one or the other goal go - either take more risk or accept less return.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by Christine_NM » Sun Apr 24, 2016 12:49 pm

Loss of 5-10% is a big spread. If we figure a 7.5% loss maximum, then put no more than 15% in an equity fund and use the rest for bonds and cd's. My reasoning is that you should be willing to absorb a 50% loss in your equity allocation. 15% equities * 0.5 loss = 7.5% portfolio loss. Or adjust to fit your actual loss tolerance.

I do not know of any one fund that is only 15% equities. The closest is LifeStrategy Income fund at 20% equities. If you could tolerate an expected temporary loss of 10% this fund might work for you. If not, it would be easy to build a two or three fund portfolio at Vanguard tailored to a specific equity allocation.
10% cash 45% stock 45% bond. Retired, w/d rate 1.5%

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by cutterinnj » Sun Apr 24, 2016 1:15 pm

Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) has a 5 year return of about 5% annually, and is tax exempt.
Seems like a good option.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by aj76er » Sun Apr 24, 2016 1:46 pm

I would do a 3-fund portfolio in a 30/70 (stock/bond) split. See this for more info:

https://portfoliosolutions.com/latest-l ... y-retirees

Although you'd have to accept a possible "worst-case" loss of 13% (instead of 5%-10%), but you'd have more growth opportunity.

As for the bond portion, I'd split evenly between a 5-yr rolling Treasury ladder and a 10-yr rolling TIPS ladder.

viewtopic.php?f=10&t=64912

Alternatively, just buy a intermediate term Treasury fund and TIPS fund (but implementing the ladders yourself will save on costs).

For the stock funds, split 70/30 between VTI/VXUS
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by aj76er » Sun Apr 24, 2016 2:04 pm

Note that a total bond mkt fund (e.g. BND) would be fine instead of a 5yr treasury ladder. But it might increase your stddev a bit. I'd still recommend the TIPS ladder (since those aren't included in BND).
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by triceratop » Sun Apr 24, 2016 2:06 pm

cutterinnj wrote:Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) has a 5 year return of about 5% annually, and is tax exempt.
Seems like a good option.


Careful, the SEC yield is only 1.46% now. How much of that total return do you think came from falling yields?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by David Jay » Sun Apr 24, 2016 2:20 pm

Christine_NM wrote:Loss of 5-10% is a big spread. If we figure a 7.5% loss maximum, then put no more than 15% in an equity fund and use the rest for bonds and cd's. My reasoning is that you should be willing to absorb a 50% loss in your equity allocation. 15% equities * 0.5 loss = 7.5% portfolio loss. Or adjust to fit your actual loss tolerance.

I do not know of any one fund that is only 15% equities. The closest is LifeStrategy Income fund at 20% equities. If you could tolerate an expected temporary loss of 10% this fund might work for you. If not, it would be easy to build a two or three fund portfolio at Vanguard tailored to a specific equity allocation.



+1 on LifeStrategy Income. High likelihood of that volatility will not exceed a 10% loss.

Swedroe would recommend 30% equities as the " sweet spot" for retirees.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by darthvader747 » Sun Apr 24, 2016 3:30 pm

Thanks all! What is the probable risk of loss of principle with a 70% bonds & 30% stocks portfolio. Is it approximately 15% loss overall?

What is the typical yield for this allocation?

What income can I expect from an investment of $500k in a 70% bond & 30% stock allocation. I would like to generate some monthly income.
Which vanguard investment fund would you recommend?

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by jjface » Sun Apr 24, 2016 3:36 pm

Vanguard Wellesley is a bit riskier but still quite good with a decent payout each year. I'd consider it.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by trueblueky » Sun Apr 24, 2016 4:32 pm

darthvader747 wrote:What income can I expect from an investment of $500k in a 70% bond & 30% stock allocation. I would like to generate some monthly income.
Which vanguard investment fund would you recommend?

VG LifeStrategy Income Fund (VASIX) is about 20/80 with a current SEC yield of 2.06%, so that's $10,300 annually or $858.33 / month.

VG LifeStrategy Conservative Growth (VSCGX) is 40/60 with a current SEC yield of
2.10% that's $10,500 annually or $875/month. Basically a wash with the 20/80 as far as income, this fund has better potential for growth but more downside risk.

You could create a simple 30/70 from 30% VG Total Stock Market Index Admiral (VTSAX) with a current SEC yield of 2.02% and 70% VG Total Bond Market Admiral (VBTLX) with a current SEC yield of 2.09%. That's $10,345 annually or $862.08 / month. Still a wash. This version has no international stocks and bonds, while the other two do.

All three of these will have fluctuations in principal and returns.

Https://www.immediateannuities.com/shows a 65-year-old male could get $2744 / month on a single premium immediate annuity. That's $32,928 annually. Some of this is return of principal, so it's not directly comparable. You can try various scenarios at the site.

The best strategy may be a combination. Use some of the money to purchase an SPIA that creates an income floor (not inflation-adjusted). Then invest the remainder.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by FRANK2009 » Sun Apr 24, 2016 5:41 pm

You may want to consider Vanguard Retirement Income Fund. The fund is NOT without risk though it lost only about 11% in the 2008 downturn.
The fund rates a 2 out of 5 on Vanguards risk scale. It is comprised of 30% equities/70% fixed income so there is a pretty good chance the fund will keep up with inflation. It averages about a 5% return. The dividend yield is just under 2%.

If it were me, I'd put the $500k in this fund, withdraw about 3% a year and hope for the best.

https://personal.vanguard.com/us/funds/ ... 0308#tab=0

Frank

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by selters » Sun Apr 24, 2016 5:56 pm

cutterinnj wrote:Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) has a 5 year return of about 5% annually, and is tax exempt.
Seems like a good option.


What is the likelihood of that fund returning 5% a year in the near future?

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by abuss368 » Sun Apr 24, 2016 6:05 pm

darthvader747 wrote:Thanks all! What is the probable risk of loss of principle with a 70% bonds & 30% stocks portfolio. Is it approximately 15% loss overall?

What is the typical yield for this allocation?

What income can I expect from an investment of $500k in a 70% bond & 30% stock allocation. I would like to generate some monthly income.
Which vanguard investment fund would you recommend?


Hi darthvader747,

I would expect in the next financial crisis or downturn that equities could lose one half of their value or even more.

Asset allocation is the most important decision an investor will make. This should be decided based on each investor's ability and willingness to take risk.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by abuss368 » Sun Apr 24, 2016 6:06 pm

Based on the information provided, I was unsure if this was in an IRA or Tax Advantaged account or a taxable account. If a Tax Advantage account, I would consider a Target or LifeStrategy fund with Vanguard. These all in one funds are designed by Vanguard experts and are difficult to beat.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by dratkinson » Sun Apr 24, 2016 6:34 pm

SPIA. An SPIA sounds good for generating monthly income during your lifetime, but the insurance company keeps the principle after payments stop. Do you want to turn the principle over to an insurance company, or do you prefer to pass it on to your heirs/charity?

On the other hand, as mentioned above, a small SPIA could be used to create a floor of monthly income.


LifeStrategy funds. The LifeStrategy funds uses taxable bonds. May not be best solution in your tax bracket.


Taxes. I believe you should consider your tax bracket. Assuming you are in a higher tax bracket, then I prefer muni bonds. Specifically VWLUX (long-term national muni fund). (Unless you can benefit from a 50% allocation to a good single-state muni fund.)

VTSAX (total stock market index fund) is tax efficient. In most years it returns 100% QDI (qualified dividend income), taxed at 15% in your assumed higher tax bracket. (If your income is high enough, 3.8% ACA tax may also apply.)

Following Christine's use of Adrian's rule*: set equity% = 2x maximum tolerable portfolio loss% (5-10% in your case):
20% VTSAX (annual yield slightly under 2%)
80% VWLUX (SEC yield slightly over 2%)

* Assumes stocks can lose 50-90% during a crash: lost 40% in 2008, 90% in great depression. Recovery date unknown.
Assumes bonds can lose 5-15% during a crash. (Greater than your desire, but offset by equity allocation, and recovery date known.)
Assumes (use of good bonds so) stock/bond crashes are not coincident.
Assumes a bond crash will recover within its duration. VWLUX's average duration is 6-10 years.


So $500K should return ~$10K/yr in mostly low-taxed dividends. The most likely crash scenarios (50% stock, 5% bond) are handled. And the principle remains yours to pass on. Beyond this I'm not qualified to guess.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by abuss368 » Sun Apr 24, 2016 6:35 pm

If you are younger and have along horizon in front of you I would avoid TIPS. You could invest the proceeds in a few Total Market funds or an all in one fund and stay the course.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by cutterinnj » Sun Apr 24, 2016 8:15 pm

triceratop wrote:
cutterinnj wrote:Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) has a 5 year return of about 5% annually, and is tax exempt.
Seems like a good option.


Careful, the SEC yield is only 1.46% now. How much of that total return do you think came from falling yields?



I will admit some ignorance on this topic. From what I could tell, there doesn't seem to be significant risk with the Vanguard Muni funds (intermediate term, short term, or even long term.) 1.46% is still a lot more than one would get from a typical savings account or even CD, and based on the past, it could be as high as 5% (yes, I know the past is not a good predictor of the future.) Are you saying that there's a significant level of risk I'm not accounting for? I'm curious, as I'm thinking of using the intermediate-term and the long-term funds (tax exempt) to buffer risk from my total stock market fund.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by basspond » Sun Apr 24, 2016 8:49 pm

You don't loose principal unless you sell. Determine what you need in a year, put 4-5 years of that in bonds and invest the rest in equities. Chances are low, but they exist, of a 5 or more year bear market.

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by Lafder » Sun Apr 24, 2016 8:54 pm

Do you have any debt you can use it to pay off ? That is a sure gain without any loss in the principle used to cancel the debt.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by Toons » Sun Apr 24, 2016 9:04 pm

Vanguard Wellesley Income
Divide the 3 quarterly payments by 12
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by triceratop » Sun Apr 24, 2016 9:39 pm

basspond wrote:You don't loose principal unless you sell. Determine what you need in a year, put 4-5 years of that in bonds and invest the rest in equities. Chances are low, but they exist, of a 5 or more year bear market.


What about a double-dip 15-year depression? That happened in the last 100 years.
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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by triceratop » Sun Apr 24, 2016 9:46 pm

cutterinnj wrote:
triceratop wrote:
cutterinnj wrote:Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) has a 5 year return of about 5% annually, and is tax exempt.
Seems like a good option.


Careful, the SEC yield is only 1.46% now. How much of that total return do you think came from falling yields?



I will admit some ignorance on this topic. From what I could tell, there doesn't seem to be significant risk with the Vanguard Muni funds (intermediate term, short term, or even long term.) 1.46% is still a lot more than one would get from a typical savings account or even CD, and based on the past, it could be as high as 5% (yes, I know the past is not a good predictor of the future.) Are you saying that there's a significant level of risk I'm not accounting for? I'm curious, as I'm thinking of using the intermediate-term and the long-term funds (tax exempt) to buffer risk from my total stock market fund.


You can achieve a pre-tax return with a CD of 2.10% or perhaps even 2.15%. How that compares to 1.46% tax-exempt depends on your tax rate. CDs can and do beat intermediate-term bonds at times. The 1.46% tax-exempt rate is determined by the market, which is high-income earners. It doesn't often make sense until you get to more than 3x% tax rates.

The reason the prior return cannot necessarily be extrapolated forward is because an existing bond rises in value as rates in the rest of the bond market fall. See Bond Basics on the Bogleheads wiki.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: How would you recommend I invest $500k to generate maximum monthly income with relatively low risk?

Post by basspond » Mon Apr 25, 2016 8:44 pm

triceratop wrote:
basspond wrote:You don't loose principal unless you sell. Determine what you need in a year, put 4-5 years of that in bonds and invest the rest in equities. Chances are low, but they exist, of a 5 or more year bear market.


What about a double-dip 15-year depression? That happened in the last 100 years.


Like I said there is a chance. Take a look at all the 15 year periods in the past and how many times have this happened. I don't have time to research but my guess is under 5%.

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