has anyone here tried to engineer a low-income-generating portfolio?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
fredflinstone
Posts: 2096
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

has anyone here tried to engineer a low-income-generating portfolio?

Post by fredflinstone » Sat Feb 10, 2018 12:44 pm

When Wilma retires a few years from now, I am thinking about reconfiguring our portfolio to dramatically reduce our unearned income.

Assume annual earnings of 0.0 percent from a money market fund and 0.3 percent from a growth equity index fund. If we have a $5 million portfolio and a 50-50 split between the two funds, this portfolio would earn $7,500 per year in dividends. This is low enough to make us eligible for large Obamacare subsidies, potentially saving us more than $20,000 per year in health insurance expenses.

I see that I am not the first person to come up with this idea:
https://www.cnbc.com/2016/01/27/theyre- ... idies.html

Has anyone here ever done this? Are there any glitches I should be aware of? Is it evil to be even be considering this?

KlangFool
Posts: 8918
Joined: Sat Oct 11, 2008 12:35 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by KlangFool » Sat Feb 10, 2018 12:51 pm

OP,

If you have a choice of earning 100K versus spending 20K, what would you choose?

When you asked the wrong question, you will never get the right answer!!

If you have a portfolio of 5 million, paying 20K in medical care is the least of your problem. If you reconfigured your portfolio that way and lose a few hundred thousands of earning every year, is it worth it?

1) Maximize the risk-adjusted return of your portfolio

2) Minimize the tax that you pay.

With a portfolio of 5 million, both (1) and (2) should be greater than 20K.

KlangFool

User avatar
MP123
Posts: 660
Joined: Thu Feb 16, 2017 3:32 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by MP123 » Sat Feb 10, 2018 12:58 pm

Note that $7,500 a year would be too low for ACA, in most states you'd end up on Medicaid expansion.

Presumably you could generate some capital gains to keep your income high enough though. Also note that muni bond interest counts towards ACA eligibility even if it's not taxed so that's not a help. I'm curious about this too though, maybe someone here has figured it out.

User avatar
fredflinstone
Posts: 2096
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by fredflinstone » Sat Feb 10, 2018 1:14 pm

MP123 wrote:
Sat Feb 10, 2018 12:58 pm
Note that $7,500 a year would be too low for ACA, in most states you'd end up on Medicaid expansion.

Presumably you could generate some capital gains to keep your income high enough though. Also note that muni bond interest counts towards ACA eligibility even if it's not taxed so that's not a help. I'm curious about this too though, maybe someone here has figured it out.
You are correct. Thank you. It would be simple to increase unearned income, as you point out.

User avatar
fredflinstone
Posts: 2096
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by fredflinstone » Sat Feb 10, 2018 1:20 pm

KlangFool wrote:
Sat Feb 10, 2018 12:51 pm
OP,

If you have a choice of earning 100K versus spending 20K, what would you choose?

When you asked the wrong question, you will never get the right answer!!

If you have a portfolio of 5 million, paying 20K in medical care is the least of your problem. If you reconfigured your portfolio that way and lose a few hundred thousands of earning every year, is it worth it?

1) Maximize the risk-adjusted return of your portfolio

2) Minimize the tax that you pay.

With a portfolio of 5 million, both (1) and (2) should be greater than 20K.

KlangFool
I disagree. Even with a perfectly designed $5 million portfolio, I believe $20,000 per year in health insurance expenses would likely consume a significant portion of my unearned income (perhaps all of it). Also, I said I expect premiums of "more than $20,000." Given the rate of growth in premiums, it's quite possible that by the time Wilma retires, I could be looking at premiums $30,000/year, $40,000/year, or even more.

Wagnerjb
Posts: 7194
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by Wagnerjb » Sat Feb 10, 2018 1:46 pm

Fred: a few questions for clarification of your situation.

Should we assume the $5MM portfolio is entirely in after-tax accounts?

Should we assume you and Wilma won't be drawing Social Security during this strategy?

Should we assume that you and Wilma are not subject to RMD's from any IRA or 401k during the time of this strategy?

Can you share some information about this Growth equity fund that has a 0.3% yield? That is mighty low and if that is your sole equity investment I might be concerned about diversification.

Thanks.
Andy

SonnyDMB
Posts: 25
Joined: Sun Nov 26, 2017 5:48 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by SonnyDMB » Sat Feb 10, 2018 2:00 pm

Very challenging with a 5M portfolio (all taxable). but my thoughts would be:

$2M for US equity that leans heavy on large growth and small cap. Would probably yield around 27K in income (can use HSA deduction and 3K capital loss to get to around 20K for ACA)
$1M in Berkshire Hathaway (can add other individual non paying dividend stocks as desired)
$2M in Vanguard Variable Annuity for REITS, High yield Bond, and total bond market
Could keep some behind to have spending cash in a 0% money market as you noted. Also, you could potentially buy 40K in i bonds and 40K in EE bonds each year (assuming you and Wilma also each have a trust).

Obviously far from ideal with a few issues. 1) extra cost of the annuity but possibly worth it if opportunity cost of healthcare is high. 2) if market declines, you're likely rebalancing in the annuity which means turning capital gains into ordinary income tax rate via putting stock funds in your annuity. 3) its a lot of money to put into an annuity....but can be withdrawn after 59 1/2.....or a 1035 exchange into SPIA later down road (i think....not for certain on this one). 4) while we can't speculate on future changes, this much in an annuity is a big amount for something where a Law could change (aka, ACA starts factoring in assets). 5) Diversification not as good (Berkshire, no international, value limited). 6) assumes you can live on the 27K dividend income and don't need to generate income elsewhere and/or have enough equity to sell that won't generate a capital gain. 7) no capacity to do roth conversions but i assumed everything was in taxable accounts. 8) probably other issues i haven't thought of.

Thats my thoughts anyway. Has it's issues but hopefully triggers some things to think about. one other potential.....give everything to bam bam's favorite charity except for enough to generate minimum income for ACA credits until medicare.....sorry couldn't resist adding this one.


btw, you mention a growth equity index fund at 0.3% yield. i'm assuming this is a theoretical exercise and/or i'd like to know which fund that is please.

KlangFool
Posts: 8918
Joined: Sat Oct 11, 2008 12:35 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by KlangFool » Sat Feb 10, 2018 2:26 pm

fredflinstone wrote:
Sat Feb 10, 2018 1:20 pm
KlangFool wrote:
Sat Feb 10, 2018 12:51 pm
OP,

If you have a choice of earning 100K versus spending 20K, what would you choose?

When you asked the wrong question, you will never get the right answer!!

If you have a portfolio of 5 million, paying 20K in medical care is the least of your problem. If you reconfigured your portfolio that way and lose a few hundred thousands of earning every year, is it worth it?

1) Maximize the risk-adjusted return of your portfolio

2) Minimize the tax that you pay.

With a portfolio of 5 million, both (1) and (2) should be greater than 20K.

KlangFool
I disagree. Even with a perfectly designed $5 million portfolio, I believe $20,000 per year in health insurance expenses would likely consume a significant portion of my unearned income (perhaps all of it). Also, I said I expect premiums of "more than $20,000." Given the rate of growth in premiums, it's quite possible that by the time Wilma retires, I could be looking at premiums $30,000/year, $40,000/year, or even more.
fredflinstone,

<< Even with a perfectly designed $5 million portfolio, I believe $20,000 per year in health insurance expenses would likely consume a significant portion of my unearned income (perhaps all of it). >>

1) You cannot disagree with me unless and until you know the cost of the design is below 100K.

2) What is the cost of optimizing your portfolio for medical premium versus return?

3) A standard aka normal 3 funds 60/40 portfolio has about 2% of interest income/dividend/distribution. It is about 100K for a 5 million portfolio.

In summary, why do you choose to earn 60K to 80K less in order to save 20K to 40K? It is a lousy deal.

KlangFool
Last edited by KlangFool on Sat Feb 10, 2018 2:28 pm, edited 1 time in total.

User avatar
alpine_boglehead
Posts: 201
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by alpine_boglehead » Sat Feb 10, 2018 3:01 pm

I tend to agree with KlangFool.

Putting your bond side into zero-yielding money marked fund, compared to e.g. 5 year treasuries with a yield of now 2.5% would, only on the 2.5M bond side, give you in a simplistic calculation a yearly loss of 62k.

Putting your stock portion only into growth - which has been the hot thing of this bull market - sounds like playing with fire. At the very least it worsens your portfolios risk profile.

Only half-serious: if you want to *really* save on medical expenses, move to Europe :twisted:

quantAndHold
Posts: 1701
Joined: Thu Sep 17, 2015 10:39 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by quantAndHold » Sat Feb 10, 2018 3:08 pm

I’m in this situation myself, although with a bit less than $5M. But I have a spouse collecting social security and RMD’s, which complicates matters. What you want to do depends less on portfolio construction than on the following...
  • What are your living expenses?
  • How much of your portfolio is in traditional IRA/401k vs Roth vs taxable?
  • What’s the cost basis on the taxable investments? What dividends and interest do the taxable investments kick out?
  • What other income do you have (Social Security, pensions, etc)
In the taxable portfolio, you probably want minimize dividends and interest, and before retirement happens, maximize the cost basis of the investments (within reason, of course).

After retirement, it becomes more about choosing where to take the income from. I’m finding that I need to track my income from various sources throughout the year against the ACA limits, and carefully manage the timing and location of taxable stock sales and IRA distributions to stay just under the limit.

If you have a $5M portfolio, all in taxable, this is probably not possible. The dividends and interest are probably going to kick you over the ACA limit by themselves. Social security, RMD’s, and pensions will just make it worse. But if you in that situation, I’m inclined to agree with the people who say to just suck it up and pay for the insurance. You have a $5M portfolio, and not that many years before Wilma qualifies for Medicare.

balbrec2
Posts: 52
Joined: Mon Nov 13, 2017 3:03 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by balbrec2 » Sat Feb 10, 2018 3:20 pm

KlangFool wrote:
Sat Feb 10, 2018 2:26 pm
fredflinstone wrote:
Sat Feb 10, 2018 1:20 pm
KlangFool wrote:
Sat Feb 10, 2018 12:51 pm
OP,

If you have a choice of earning 100K versus spending 20K, what would you choose?

When you asked the wrong question, you will never get the right answer!!

If you have a portfolio of 5 million, paying 20K in medical care is the least of your problem. If you reconfigured your portfolio that way and lose a few hundred thousands of earning every year, is it worth it?

1) Maximize the risk-adjusted return of your portfolio

2) Minimize the tax that you pay.

With a portfolio of 5 million, both (1) and (2) should be greater than 20K.

KlangFool
I disagree. Even with a perfectly designed $5 million portfolio, I believe $20,000 per year in health insurance expenses would likely consume a significant portion of my unearned income (perhaps all of it). Also, I said I expect premiums of "more than $20,000." Given the rate of growth in premiums, it's quite possible that by the time Wilma retires, I could be looking at premiums $30,000/year, $40,000/year, or even more.
fredflinstone,

<< Even with a perfectly designed $5 million portfolio, I believe $20,000 per year in health insurance expenses would likely consume a significant portion of my unearned income (perhaps all of it). >>

1) You cannot disagree with me unless and until you know the cost of the design is below 100K.

2) What is the cost of optimizing your portfolio for medical premium versus return?

3) A standard aka normal 3 funds 60/40 portfolio has about 2% of interest income/dividend/distribution. It is about 100K for a 5 million portfolio.

In summary, why do you choose to earn 60K to 80K less in order to save 20K to 40K? It is a lousy deal.

KlangFool
Arguing with an opinion that was asked for tells me the inquisitor has already made their mind
up and is looking for someone to tell them they are right. That being said,
For a 5M portfolio, If one used the total return method and used a conservative 3.5% constant w/d
rate with age in bonds, you will generate 175,000 with a very good chance of some small portfolio growth.
As the portfolio grows so will your income. To me this is preferable to making yourself poor to save a substantially
smaller amount.

balbrec2

jjface
Posts: 2492
Joined: Thu Mar 19, 2015 6:18 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by jjface » Sat Feb 10, 2018 3:23 pm

Just enjoy your money and stop worrying about it. $5m congrats! You can always go for a health sharing ministry if you are that desperate to save health costs. And I imagine it won't be that long until medicare.

User avatar
MP123
Posts: 660
Joined: Thu Feb 16, 2017 3:32 pm

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by MP123 » Sat Feb 10, 2018 3:34 pm

I tend to agree with Klangfool on the $5M portfolio too.

It gets more interesting right around the ACA subsidy cutoff. For a couple that's about $65k MAGI. Over that no subsidy at all, under that your premiums are subsidized. ACA subsidies work by capping your premium to a max of 9.5% of your income regardless of what the unsubsidized premium actually is.

So a portfolio that generated $66k income would also expose you to full ACA premiums which could be $15k, $20K, whatever... If you could keep the income to under $65k then you'd be subsidized and you'd never have to pay more than 9.5% of your income (lets say $6000 or so). You'd be essentially immune to premium increases.

This could be quite relevant for portfolios in the $2-3M range I would guess.

Wagnerjb
Posts: 7194
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by Wagnerjb » Sat Feb 10, 2018 3:54 pm

Fred: first of all, the strategy makes sense in general and I see nothing wrong with “managing” one’s income to optimize government benefits. We all do this. As a matter of fact, I am “managing” my 26-year old college student’s income to get the same full ACA subsidy that you are focused on.

However, given the size of your taxable portfolio I am afraid you are paying a pretty substantial price to contort your portfolio such that it will spin off little taxable income. Your money market fund may generate essentially zero income but that is leaving an awful lot of money on the table. The Federal Money Market fund at 1.3% yield will generate $33k of income on the $2.5MM fixed income portion of your portfolio. If you truly earn an exceedingly low rate on this investment then you are leaving more money on the table than you are saving via ACA benefits.

Maybe more important is to focus on the tax benefits that you can capture with a more passive strategy. Let’s say your Money Market fund is extremely safe and conservative and generates only 1%. That gives you $25k of interest. Then with a well diversified portfolio you might earn 2% in dividends, for $50k in qualified dividends. Then you sell shares for long term capital gains of $25k. That leaves you with an AGI of $100k, and taxable income of $75k. For a married couple, you pay ZERO in Federal income tax in that situation.

You will respond that your suggested strategy also results in zero Federal tax. Correct. However, the income that you don’t take now will manifest itself later in the form of capital gains. However, when “later” comes you will have social security and RMDs and your capital gains will be taxed at 15% or 18.8% or 23.8%. It will be better in the long run to take those dividends and capital gains each year (now) at 0% tax.

The ability to get $20k or more of ACA benefits is certainly appealing. However, the cost of inferior investments and poor diversification - plus the zero tax bracket that you leave on the table - may be enough to overwhelm the benefits of the ACA strategy.

Note that the linked article mentions several retired couples that are taking advantage of this strategy. However, their net worth is considerably less than yours…and that is the big difference between their ability to get the ACA subsidies (without much “cost”) and yours.

Best wishes.
Andy

Hockey10
Posts: 231
Joined: Wed Aug 24, 2016 12:20 pm
Location: Philadelphia suburbs

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by Hockey10 » Sat Feb 10, 2018 5:57 pm

Fred - how old is Pebbles, and is she married to Bamm-Bamm yet?

Grt2bOutdoors
Posts: 18448
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by Grt2bOutdoors » Sat Feb 10, 2018 6:07 pm

It's threads like these that turn people off from the forum. If you have $5MM you should pay your fair share, I find it distasteful to assume that society should subsidize someone with such wealth.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

staythecourse
Posts: 5691
Joined: Mon Jan 03, 2011 9:40 am

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by staythecourse » Sat Feb 10, 2018 6:16 pm

Interesting approach.

I am not even going to crunch the numbers, but I am assuming in most cases with that large of a portfolio and likely still a long time horizon I would think it is a better move to INCREASE one's return as much as possible vs. trying to skimp just to get better government subsidies on a financial sense.

Heck, if you are going to crunch numbers my guess is INCREASING your stock allocation by 10-20% is going to give you the best overall numbers then trying to do what you suggest. Play the numbers and see what happens with that.

BTW, interest rates are low now and likely to only increase which will throw another wrench into the equation if that does occur.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
fredflinstone
Posts: 2096
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by fredflinstone » Sat Feb 10, 2018 7:13 pm

Grt2bOutdoors wrote:
Sat Feb 10, 2018 6:07 pm
It's threads like these that turn people off from the forum. If you have $5MM you should pay your fair share, I find it distasteful to assume that society should subsidize someone with such wealth.
I didn't make the rules.

User avatar
fredflinstone
Posts: 2096
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: has anyone here tried to engineer a low-income-generating portfolio?

Post by fredflinstone » Sat Feb 10, 2018 7:14 pm

Thanks everyone for your valuable feedback. I'll have to look at the numbers more closely (obviously my hypothetical portfolio was a simplified version of reality), but I do see where everyone is coming from.

Post Reply