Need 3% from $657K annually. What AA is best?

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Chitowncameraman
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Need 3% from $657K annually. What AA is best?

Post by Chitowncameraman »

We have a pension and social security but need an additional $18K-$20K a year for living expenses. We are retiring and now need for $657000 to get 3% annually ($19700) for income and I’d like some advice as to how to do this. We plan to have them send us a monthly check. Additionally, we have four years of living expenses in cash in laddered CDs.

I was thinking of splitting 50/50 into Wellington & Wellesley, adding some international stocks, but I am cautious as to their average bond duration of 6.5 years, with interest rates about to rise. This I figure pushes me into making my own index AA using short bond funds, correct? We are conservative investors. Or can someone recommend a fund where I can determine the stock to bond ratio and have shorter durations in the bonds?

I subscribe to a Vanguard newsletter and for an Income portfolio but they are 66% stock. I also subscribe to Bob Brinker and his AA for Income is 50/50.

I would prefer to not have to rebalance, I'd like a fund which will do it for me. I considered Vanguard Conservative Life Strategy but their bonds average duration is 6 years. I appreciate your ideas and as to how you produce regular income in retirement.
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David Jay
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Re: Need 3% from $657K annually. What AA is best?

Post by David Jay »

I really like the LS funds, that would be my vote.

May I ask why are you so concerned about duration on funds that you are going to hold for 20-30-40 years? Shorter duration means lower yield.

[edit] I am concerned about funds that I will spend in the next 3 years (living expenses after retirement but before start of SS benefits) - I have that money in Short Term bonds. But I never considered putting all my bonds in shorter duration.
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pkcrafter
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Re: Need 3% from $657K annually. What AA is best?

Post by pkcrafter »

Welcome, what is your age, tax bracket, and is this a tax deferred account?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Chitowncameraman
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Re: Need 3% from $657K annually. What AA is best?

Post by Chitowncameraman »

Thanks David, that's a good point.

Paul, I am 63, my wife is 59. We'll probably be in the 25% tax bracket. This money is in a tax deferred 401K. I am new to this forum and have done some searching but haven't found what techniques the Boggleheads use to withdraw their living expenses from their investments. I need to start in the next few weeks.

Thanks!
aqan
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Re: Need 3% from $657K annually. What AA is best?

Post by aqan »

If you are going to be content with 3%, I'd go with Andrews FCU 84 month CD. The APY is exactly 3% and there's no market risk to your capital with 250K insurance per individual.
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Re: Need 3% from $657K annually. What AA is best?

Post by lazylarry »

A few things
-Lifecycle is a fixed asset allocation - e.g. 60% stocks, 40% bonds. If you're conservative, then sounds like a Target date fund might be a better fund for you, where you could choose an allocation that you like and that rebalances more to bonds over time.
-you want 20k extra per year, but your money is in pre-tax. Thus, you will be taxed. I'm not sure how much SS or pension you will be getting, but this will add to your taxable income along with the withdrawal. Thus, you will need more than 20k in withdrawals.
-a 3% CD is reasonable, however, you are likely being outpaced by inflation unless it's a higher rate CD, and thus your actual return will be much less than 3%. Essentially, in 20 years, your 20k will not buy as much as it does today. Something to keep in mind if you were thinking about just needing extra 20k per year.
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dbr
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Re: Need 3% from $657K annually. What AA is best?

Post by dbr »

A wide range of asset allocations and possible selections of funds will suit your purpose. It is perfectly reasonable to select any form of balanced or life strategy fund around 50/50 asset allocation give or take 10 or 15 or even 20 either side. There is no asset allocation game to play as the largest determinants of outcome are first luck of history and second withdrawal rate.

The things that a person can do to mess this up are big behavioral mistakes or letting someone take away a lot of your income in fees and costs.
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Re: Need 3% from $657K annually. What AA is best?

Post by pkcrafter »

Chitowncameraman wrote:Thanks David, that's a good point.

Paul, I am 63, my wife is 59. We'll probably be in the 25% tax bracket. This money is in a tax deferred 401K. I am new to this forum and have done some searching but haven't found what techniques the Bogleheads use to withdraw their living expenses from their investments. I need to start in the next few weeks.

Thanks!
Good. If you are considering transferring to Vanguard, then I will suggest Lifestrategy Conservative Growth, which contains total market, total international, and bonds. AA is 40/60 and it automatically rebalances. You can set up auto withdrawals with Vanguard.

Lifestrategy Conservative

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

Bonds are AA rated with 6.5 year duration. The durations are the same as W and W, but W and W have lower ratings - A.

Do you have access to Wellington and Wellesley in your 401k, or were you planning to transfer?

Yes, you can build your own portfolio with 3 funds, but then you have to do the rebalancing and auto withdrawing might be a bit of a hassle.

Yes, the bonds will take a hit when rates rise, but they will rebound on their own. In fact the whole market might take a hit, but you still have 25-30 years to go, so I don't see a worry.

I also hold intermediate bonds.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Nick341981
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Re: Need 3% from $657K annually. What AA is best?

Post by Nick341981 »

aqan wrote:If you are going to be content with 3%, I'd go with Andrews FCU 84 month CD. The APY is exactly 3% and there's no market risk to your capital with 250K insurance per individual.

Beside the obvious risk of inflation eating away at your principal over 84 long months.
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Watty
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Re: Need 3% from $657K annually. What AA is best?

Post by Watty »

Chitowncameraman wrote: I am new to this forum and have done some searching but haven't found what techniques the Boggleheads use to withdraw their living expenses from their investments.
This isn't exactly what you are looking for but it might be of interest.

https://www.bogleheads.org/wiki/Withdrawal_methods
Chitowncameraman wrote:I would prefer to not have to rebalance, I'd like a fund which will do it for me.
I retired in 2015 and almost all of my funds are in retirement accounts where taxes are not an issue so I basically just put it all into a target date 2015 fund that will rebalance and change the asset allocation as the years go by.

The main reason for doing this was to make my portfolio simpler to manage if I am less capable 20 years from now or if my wife who knows less about investing has to manage it some day.
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Re: Need 3% from $657K annually. What AA is best?

Post by Bogle_Feet »

Even during the "great recession" you could have taken out 4% per year pegged to inflation and watched your 28/72 portfolio increase in value. http://investingadvicewatchdog.com/imag ... 0-2015.jpg

I'd stick with 50/50 though.
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Re: Need 3% from $657K annually. What AA is best?

Post by lazylarry »

pkcrafter wrote:
Chitowncameraman wrote:Thanks David, that's a good point.

Paul, I am 63, my wife is 59. We'll probably be in the 25% tax bracket. This money is in a tax deferred 401K. I am new to this forum and have done some searching but haven't found what techniques the Bogleheads use to withdraw their living expenses from their investments. I need to start in the next few weeks.

Thanks!
Good. If you are considering transferring to Vanguard, then I will suggest Lifestrategy Conservative Growth, which contains total market, total international, and bonds. AA is 40/60 and it automatically rebalances. You can set up auto withdrawals with Vanguard.


Paul
Why Lifestrategy over a target date fund? Lifestrategy is fixed, right, so at 85, he will continue to be 60% bonds and 40% equities which is more aggressive than *necessary* at that age.
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pkcrafter
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Re: Need 3% from $657K annually. What AA is best?

Post by pkcrafter »

Larry, 40% isn't too aggressive, even at 85, but if Chitown... would like 30% he could use target retirement retirement income. He may like the TR fund a bit better because it contains some TIPS and bond duration is 5.5, AA rated. I suggested the LS fund because I think 40% equity is a good compromise between some growth and associated risk. 30% equity might be on the edge of being enough to sustain the portfolio when inflation is considered.

https://personal.vanguard.com/us/funds/ ... undId=0308

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
bogleenigma
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Re: Need 3% from $657K annually. What AA is best?

Post by bogleenigma »

Personally, in retirement, my portfolio is going to be 50% VWINX (Wellesley Income) and 50% VSCGX (Lifestrategy Conservative Growth).
Chadnudj
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Re: Need 3% from $657K annually. What AA is best?

Post by Chadnudj »

Maybe I'm foolhardy, but I personally am hoping to say in either Vanguard LifeStrategy Growth (80/20) or LifeStrategy Moderate Growth (60/40) forever (probably Moderate, just to be safe, but who knows.....I'm 37 now, and may have entirely different feelings about risk when I'm 47 or 57 or 67)

I get that I could probably do a bit better on expenses by doing it myself with component funds....but the LifeStrategy Funds have a certain low PITA factor that I do find appealing -- no need for me to figure out rebalancing, etc....
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Re: Need 3% from $657K annually. What AA is best?

Post by dbr »

Bogle_Feet wrote:Even during the "great recession" you could have taken out 4% per year pegged to inflation and watched your 28/72 portfolio increase in value. http://investingadvicewatchdog.com/imag ... 0-2015.jpg

I'd stick with 50/50 though.
The depression years are not the years that fail. The years that fail at 4% and 100% stocks are 1961 1965-1968 and 1973 then 1929 and 1906. There is more to failed retirement withdrawals than stock market crashes. Adding 25% bonds takes 1929 out of the picture but the top six are still there no matter what you do. At 100% bonds the years that fail in order of severity are

1941 1940 1939 1942 1946 1945 1938 1944 1943 1937 1936 1935 1934 1933 1899 1897 1898 1966 1965 1967 1896 1947 1964 1895 1963 1901 1912 1932 1950 1902 1968 1962 1908 1956 1906 1915 1909 1904 1916 1911 1905 1900 1914 1955 1913 1969 1961 1957 1907 1949 1894 1948 1960 1951 1954 1903 1953 1958 1959 1931 1917 1910 1952 1972 1970 1973 1971

So you escape 1929 and end up in things that are way, way worse.
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Chitowncameraman
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Re: Need 3% from $657K annually. What AA is best?

Post by Chitowncameraman »

Thanks everyone! Good thoughts. I am leaning towards Lifestyle Conservative plus W & W. I need to get over my fear of longer duration bonds, I listen weekly to Bob Brinker and his mantra is to stay short.

I will put in an even $700K, so it will throw off $21K at 3%, after tax that will give me my $18K that I need.

Thanks
AndThen
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Re: Need 3% from $657K annually. What AA is best?

Post by AndThen »

Chitowncameraman wrote:
I subscribe to a Vanguard newsletter and for an Income portfolio but they are 66% stock. I also subscribe to Bob Brinker and his AA for Income is 50/50.
Don't mean to move off the topic, but what are these newsletters?
Da5id
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Re: Need 3% from $657K annually. What AA is best?

Post by Da5id »

I'm wondering what "need 3%" actually means. If that is an actual hard floor you need to comfortably survive, maybe looking into an SPIA for part of it is the right thing? Just a thought, I'm not much into such products myself

If it isn't a hard floor, what is said in this thread sounds sensible (balanced fund, you pick it somewhere between 40 and 60% stocks).
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Kevin M
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Re: Need 3% from $657K annually. What AA is best?

Post by Kevin M »

Keep in mind that you don't need a 3% return to withdraw 3% from you portfolio, since you can also slowly consume the capital. With a return of 2% on $657,000 and withdrawing $20,000/year, your portfolio would last 54 years. Of course you would need 2% real, not nominal, if you want to be able to increase the annual spending with inflation, which I'm sure you would. I'll come back to inflation in a bit, but first will discuss CDs a bit more.

As others have mentioned, you can get a 7-year CD at 3%. However, since your money is in a 401k, you'd have to roll that over to an IRA to buy CDs like this, but you'd have to do that anyway to invest in a Vanguard LifeStrategy fund, unless your 401k offers the fund you want. So let's assume you're going to roll the 401k into an IRA.

In an IRA, you can only get federal deposit insurance (NCUA for credit unions, FDIC for banks) up to $250K. Since you want to withdraw the interest, which you can do with the 3% CD mentioned, you don't have to worry about reinvested interest exceeding the NCUA limit, so you could put the full $250K into the 3% CD to be fully insured. That leaves a little over $400K, which means you'd have to buy two more IRA CDs at two different banks or credit unions.

I see another IRA CD at 2.75% and one at 2.42% at DepositAccounts.com - Compare 5 year IRA rates. Assuming you put $250K each into the 3% and 2.75% CDs, that would leave $157K for the 2.42% CD, and your blended rate would be 2.77%. On $657K, that would get you $18,174 of income before taxes and inflation. Of course this is a little short of the $19.7K you mentioned originally, since 2.77% is a bit less than 3%.

Later you mentioned "putting in" $700K to get $21K before taxes with would give you $18K after taxes, so your numbers seem to have changed since your original post.

With $700K you'd need to put $200K into the 2.42% CD, your blended rate would be 2.75%, and your pre-tax, pre-inflation income would be $19,215, which of course is less than $21K because 2.75% is less than 3%.

I'm not sure what your actual goal is, and how much money you actually have to invest, but at least we've covered what you could do with a CD-only solution, which would have no credit risk and limited interest rate risk (which you are concerned about), and of course no stock risk, but would have some inflation risk.

Others have criticized the 3% CD because the 3% doesn't factor in inflation; i.e., it's not a real rate of return. These folks seem to neglect the fact that the same criticism applies to a nominal bond or bond fund, like the total bond market fund used in the LifeStrategy funds.

The total bond fund used in the LifeStrategy funds has an SEC yield of 2.46%. Not only is this less than the 2.75% rate you could get from the CD solution, but it is subject to more of the interest rate risk you are concerned about, as well as some credit risk. In other words, the CDs provide a guaranteed 2.75% over the term of the CDs, while the bond fund provides an uncertain 2.46% expected return over about the same period.

A major factor the CD criticisms don't consider is that these CDs allow you to pay an early withdrawal penalty (EWP) to do an early withdrawal and reinvest at a higher rate if interest rates increase. This limits your interest rate risk to the EWP, while providing a decent hedge against inflation.

For example, if yields increase across the board by 1% (one percentage point), the total bond market fund would lose about 6%. The EWP on the 3% CD is six months of interest, so you would lose only 1.5% by doing an early withdrawal and reinvesting at the higher rate. If interest rates were to increase by 2%, you'd lose about 12% on the bond fund, but still only lose 1.5% on the CD to reinvest at the higher rate.

Now let's talk about inflation.

The current spread between 7-year nominal Treasuries and 7-year TIPS is about 1.9%, which we can take as an approximation of the market's 7-year inflation expectations, and is in the ballpark of the Fed's target of 2% inflation. At 2% inflation, your real return on the CD solution is 0.75%, and with total bond fund the expected real return is about 0.5%. Remember that the CD has a better hedge against unexpected inflation due to the early withdrawal option, assuming that nominal rates increase with inflation, which they typically do, but your expected real rate still is only about 0.75%.

If you really want to eliminate risk due to unexpected inflation, you could go with TIPS. With the 7-year TIPS yield at 0.5% and the 30-year at about 1.1%, let's assume you could build a TIPS ladder with a real yield of about 0.75%, so pretty close to the expected real return of the 3% CD. Since unexpected inflation is really a bigger concern for longer time periods, and expected inflation currently is low, you could use CDs out to 7 years and use a TIPS ladder beyond that.

At a 0.75% real return on $700K, and withdrawing $20K per year adjusted for inflation each year, your CD+TIPS portfolio would last about 41 years, which is well beyond your expected lifetimes.

The point of all of this is that you could get pretty close to meeting your needs without taking any stock risk.

If you want to go with the probabilistic approach, and assume that the next 30-40 years won't fall too far outside the bounds of historical results for US stocks (or even global stocks), then one of the LifeStrategy funds is a fine solution, especially if you want to keep things simple. I personally don't want to bet my retirement security on this assumption, so I go with 30% in stocks, about 55% in the types of CDs discussed here, and about 15% in bond funds.

Kevin
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Topic Author
Chitowncameraman
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Re: Need 3% from $657K annually. What AA is best?

Post by Chitowncameraman »

AndThen wrote:
Chitowncameraman wrote:
I subscribe to a Vanguard newsletter and for an Income portfolio but they are 66% stock. I also subscribe to Bob Brinker and his AA for Income is 50/50.
Don't mean to move off the topic, but what are these newsletters?
Here's Bob, I have listened to him for 25 years on the radio, now I get his podcast at $5 a month so I can time shift:

http://www.bobbrinker.com/order.asp

And this is Dan Wiener's Vanguard newsletter:

http://adviseronline.investorplace.com
Topic Author
Chitowncameraman
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Re: Need 3% from $657K annually. What AA is best?

Post by Chitowncameraman »

Thanks everyone! I will digest this all over the weekend.
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