How to turn a Pile of Investment Assets into Income?

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TarHeel100
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How to turn a Pile of Investment Assets into Income?

Post by TarHeel100 » Mon Jan 13, 2020 5:23 pm

Hello!

Like many others on this forum, I have recently seen the light and am looking to imminently move my money away from Edward Jones and ideally to Vanguard. I have already selected the Vanguard funds and Asset Allocation I would like. I'm in my mid 40's, with growing investments at Edwards Jones in Traditional and Roth IRAs that are part of my plan to have me "on track" and with no debt. Here's what is giving me pause:

My fear is getting to retirement age in a couple of decades, having a nice portfolio of low cost Vanguard funds, but then being on my own in trying to figure out how to convert these assets into steady income. One strategy that my father uses which has worked well for him is his EJ advisor has him invested in Muni Bonds and getting a nice 3-4% tax-free return per year is plenty to supplement his income and a similar return would work for me. However, when I spoke to Vanguard, they indicated they didn't offer investments like that because you can't buy specific bonds through them and I would have to settle for finding particular mutual funds.

I'm curious to know what people's strategy is for turning assets into a MONTHLY income return. I don't want to rely on any sort of "4% rule" where I'm making withdrawals (Annuities are part of my plan and a separate topic), but it seems like if my only recourse is to own Vanguard Bond Funds - those don't receive monthly dividends that I could withdraw do they? This is the black box part of the equation which I would love people's input / advice on. I know this Edward Jones advisor could help to set me up with a consistent monthly income like he has done for my father, but I don't want to pay him fees on fees over the years to get to that point. If I could get over this mental hurdle, I feel like I could ditch EJ tonight. My other concern is if I wanted to invest in specific Muni Bonds then I guess I would have to pull X amount out of my IRA's, pay the taxes to be able to invest? What are other Vanguard investors doing?

Any thoughts or advice greatly appreciated!

jebmke
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Re: How to turn a Pile of Investment Assets into Income?

Post by jebmke » Mon Jan 13, 2020 5:49 pm

I would start by trying to think about cash flow instead of "income." Spending is all about having cash to pay bills. The cash can come from "income" or from selling assets. The latter, all other things equal, is often more tax efficient. The key is to not get hung up about "selling principal."

During the first ten years of my retirement I had no source of "income" like a pension or social security. Each month I would use any dividends thrown off by my portfolio and then sell something to make up the difference. I tried to keep my holdings within the range of my asset allocation target which was focused on my desired risk/total return objective.

Some people like to have a large pool of cash sitting around. I am not one of those people but I fully understand their motivation.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: How to turn a Pile of Investment Assets into Income?

Post by KyleAAA » Mon Jan 13, 2020 5:54 pm

Decide on your withdrawal rate. Let's say you decide on 4% and you retire with exactly $1,000,000 to make the math easy. Your first year withdrawal would be $40,000. You'd transfer that money into a savings or money market account at the end of the year and spend 1/12 every month. Alternatively, you could withdraw 1/12 of $40k monthly and leave the rest invested to eliminate cash drag. It's as simple as that.
I don't want to rely on any sort of "4% rule" where I'm making withdrawals
Why not? That's by far the best way to do it.

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Re: How to turn a Pile of Investment Assets into Income?

Post by retired@50 » Mon Jan 13, 2020 5:58 pm

TarHeel100 wrote:
Mon Jan 13, 2020 5:23 pm
Hello!

Like many others on this forum, I have recently seen the light and am looking to imminently move my money away from Edward Jones and ideally to Vanguard. I have already selected the Vanguard funds and Asset Allocation I would like. I'm in my mid 40's, with growing investments at Edwards Jones in Traditional and Roth IRAs that are part of my plan to have me "on track" and with no debt. Here's what is giving me pause:

My fear is getting to retirement age in a couple of decades, having a nice portfolio of low cost Vanguard funds, but then being on my own in trying to figure out how to convert these assets into steady income. One strategy that my father uses which has worked well for him is his EJ advisor has him invested in Muni Bonds and getting a nice 3-4% tax-free return per year is plenty to supplement his income and a similar return would work for me. However, when I spoke to Vanguard, they indicated they didn't offer investments like that because you can't buy specific bonds through them and I would have to settle for finding particular mutual funds.

I'm curious to know what people's strategy is for turning assets into a MONTHLY income return. I don't want to rely on any sort of "4% rule" where I'm making withdrawals (Annuities are part of my plan and a separate topic), but it seems like if my only recourse is to own Vanguard Bond Funds - those don't receive monthly dividends that I could withdraw do they? This is the black box part of the equation which I would love people's input / advice on. I know this Edward Jones advisor could help to set me up with a consistent monthly income like he has done for my father, but I don't want to pay him fees on fees over the years to get to that point. If I could get over this mental hurdle, I feel like I could ditch EJ tonight. My other concern is if I wanted to invest in specific Muni Bonds then I guess I would have to pull X amount out of my IRA's, pay the taxes to be able to invest? What are other Vanguard investors doing?

Any thoughts or advice greatly appreciated!
The first red statement above about holding individual bonds, as far as I know isn't accurate. I was under the impression that you are allowed to buy and sell individual bonds if you have a Vanguard brokerage account. I think any account type, taxable / IRA / Roth IRA can be set up as a brokerage account.

The second red statement above is inaccurate as well. Vanguard bond funds, both municipal and taxable funds DO pay dividends monthly. For proof, see the "Distributions" tab on any Vanguard fund, like the one linked here: https://investor.vanguard.com/mutual-fu ... ions/vbtlx

If you hold enough bonds, you'll be able to supplement your income as desired in retirement without ever selling anything.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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Tamarind
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Re: How to turn a Pile of Investment Assets into Income?

Post by Tamarind » Mon Jan 13, 2020 6:09 pm

Hi fellow Tarheel, and welcome!

If you know how much income you need per year, you can program Vanguard to sell 1/12 that much each month, taking from your investments in proportion to your AA, and send to your bank. It's set it and forget it. Leave dividend reinvestment on and just rebalance as needed annually.

Some folks like to play with withdrawing in ways that reduce need to rebalance, or take dividends then sell to cover the rest. But if what you want is something so simple you can't mess it up, you can't go wrong with this.

To take it a step further, convert your pile of funds into one of the all-in-one funds and say goodbye to rebalancing by hand.

dbr
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Re: How to turn a Pile of Investment Assets into Income?

Post by dbr » Mon Jan 13, 2020 6:14 pm

You turn a pile of investments into income by selling some of the investments and withdrawing the cash, as much as you want whenever you want, the only consequence being how long the pile of assets lasts. You can effectively "sell" assets by cashing dividend and interest checks (or withdrawing the cash deposited from those) or by actually selling assets. Some brokers will arrange to sell assets and distribute a fixed allocation of cash at regular intervals. I know Fidelity does: https://www.fidelity.com/cash-managemen ... ithdrawals but I am not sure Vanguard does anymore.

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Re: How to turn a Pile of Investment Assets into Income?

Post by willthrill81 » Mon Jan 13, 2020 6:31 pm

You cannot have your cake (i.e. pile of assets) and eat it too.

However, you can have enough assets so that the long-term growth of the assets will at least cover your withdrawals. That's where the idea of the perpetual withdrawal rate comes from. That rate has historically been around 3% of your starting balance. That is, if you withdrew an inflation-adjusted $30k from a $1 million starting portfolio every year, after 20+ years of withdrawals, you would have had at least your inflation-adjusted $1 million still intact and generally far more than that.

If you just don't want to make withdrawals yourself, you can have your broker do it for you and send you a monthly deposit.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How to turn a Pile of Investment Assets into Income?

Post by nisiprius » Mon Jan 13, 2020 9:55 pm

retired@50 wrote:
Mon Jan 13, 2020 5:58 pm
The first red statement above about holding individual bonds, as far as I know isn't accurate. I was under the impression that you are allowed to buy and sell individual bonds if you have a Vanguard brokerage account. I think any account type, taxable / IRA / Roth IRA can be set up as a brokerage account.
I have bought and sold individual bonds in a Vanguard brokerage account, some in a rollover IRA (a form of TIRA) and some in a Roth IRA.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: How to turn a Pile of Investment Assets into Income?

Post by Royal Blue » Mon Jan 13, 2020 11:02 pm

Grow your money with Vanguard. You're talking about decades from today. Who knows what products Vanguard will offer, I am sure that with 20+ years away there will be innovation and products created to meet whatever need you have. On the off-chance they don't, when the time comes, if you want to create a muni-bond ladder, you could always transfer assets to a firm that does. Basically, I wouldn't worry about it until you need to worry about it.

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Re: How to turn a Pile of Investment Assets into Income?

Post by pkcrafter » Mon Jan 13, 2020 11:19 pm

TarHeel100 wrote:
Mon Jan 13, 2020 5:23 pm
Hello!

Welcome,

Like many others on this forum, I have recently seen the light and am looking to imminently move my money away from Edward Jones and ideally to Vanguard.

Very good decision.

I have already selected the Vanguard funds and Asset Allocation I would like.

Please post your desired new holdings and AA (asset allocation).

I'm in my mid 40's, with growing investments at Edwards Jones in Traditional and Roth IRAs that are part of my plan to have me "on track" and with no debt.

Be sure to contact Vanguard or Fidelity and tell them you want a custodian to custodian transfer of IRAs/Roths. Fidelity may pay for transfer costs, Vanguard will not.

Here's what is giving me pause:

My fear is getting to retirement age in a couple of decades, having a nice portfolio of low cost Vanguard funds, but then being on my own in trying to figure out how to convert these assets into steady income.

I think this has been adequately explained above.

I don't want to rely on any sort of "4% rule" where I'm making withdrawals

You cannot dismiss a withdrawal rate as it is vital to portfolio longevity. 4% is considered the "safe" withdrawal rate.

One strategy that my father uses which has worked well for him is his EJ advisor has him invested in Muni Bonds and getting a nice 3-4% tax-free return per year is plenty to supplement his income and a similar return would work for me. However, when I spoke to Vanguard, they indicated they didn't offer investments like that because you can't buy specific bonds through them and I would have to settle for finding particular mutual funds.

I'm curious to know what people's strategy is for turning assets into a MONTHLY income return. I don't want to rely on any sort of "4% rule" where I'm making withdrawals (Annuities are part of my plan and a separate topic), but it seems like if my only recourse is to own Vanguard Bond Funds - those don't receive monthly dividends that I could withdraw do they? This is the black box part of the equation which I would love people's input / advice on.

I think you're getting stuck on the monthly income idea (dividends and interest), but that's not the way to go. Total return is what matters. Pulling interest or divy's is pulling money from total return. When you do that you lose the choice of when and from where to make withdrawals.

Annuities. Yes a separate topic, but these things are not recommended because they are very expensive (big commission) and limit your options.


I know this Edward Jones advisor could help to set me up with a consistent monthly income like he has done for my father, but I don't want to pay him fees on fees over the years to get to that point. If I could get over this mental hurdle, I feel like I could ditch EJ tonight. My other concern is if I wanted to invest in specific Muni Bonds then I guess I would have to pull X amount out of my IRA's, pay the taxes to be able to invest?

No.

Read this article on overpaying brokers for bonds. Your father probably paid 5% commish on each bond.

https://www.municipalbonds.com/educatio ... uni-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.

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Re: How to turn a Pile of Investment Assets into Income?

Post by teelainen » Tue Jan 14, 2020 1:10 am

TarHeel100 wrote:
Mon Jan 13, 2020 5:23 pm
One strategy that my father uses which has worked well for him is his EJ advisor has him invested in Muni Bonds and getting a nice 3-4% tax-free return per year is plenty to supplement his income and a similar return would work for me.
What Muni Bonds are providing a 3-4% tax-free return per year? Would you be kind enough to share?

Thanks.

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TarHeel100
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Re: How to turn a Pile of Investment Assets into Income?

Post by TarHeel100 » Tue Jan 14, 2020 1:53 pm

nisiprius wrote:
Mon Jan 13, 2020 9:55 pm
retired@50 wrote:
Mon Jan 13, 2020 5:58 pm
The first red statement above about holding individual bonds, as far as I know isn't accurate. I was under the impression that you are allowed to buy and sell individual bonds if you have a Vanguard brokerage account. I think any account type, taxable / IRA / Roth IRA can be set up as a brokerage account.
I have bought and sold individual bonds in a Vanguard brokerage account, some in a rollover IRA (a form of TIRA) and some in a Roth IRA.
Perhaps I am looking in the wrong place then, but that's what the Vanguard rep I spoke to advised me. When I tried to re-visit the site today and search for individual Bonds or Muni bonds the only thing that came up in the search were index funds and ETFs. Perhaps there is another Vanguard site or a different division that allows this?

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Re: How to turn a Pile of Investment Assets into Income?

Post by jubby288 » Tue Jan 14, 2020 2:25 pm

willthrill81 wrote:
Mon Jan 13, 2020 6:31 pm
You cannot have your cake (i.e. pile of assets) and eat it too.

However, you can have enough assets so that the long-term growth of the assets will at least cover your withdrawals. That's where the idea of the perpetual withdrawal rate comes from. That rate has historically been around 3% of your starting balance. That is, if you withdrew an inflation-adjusted $30k from a $1 million starting portfolio every year, after 20+ years of withdrawals, you would have had at least your inflation-adjusted $1 million still intact and generally far more than that.

If you just don't want to make withdrawals yourself, you can have your broker do it for you and send you a monthly deposit.
Building on this, you can see the perpetual withdrawal rate for a number of portfolios at PortfolioCharts.com

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Re: How to turn a Pile of Investment Assets into Income?

Post by KyleAAA » Tue Jan 14, 2020 2:29 pm

TarHeel100 wrote:
Tue Jan 14, 2020 1:53 pm
nisiprius wrote:
Mon Jan 13, 2020 9:55 pm
retired@50 wrote:
Mon Jan 13, 2020 5:58 pm
The first red statement above about holding individual bonds, as far as I know isn't accurate. I was under the impression that you are allowed to buy and sell individual bonds if you have a Vanguard brokerage account. I think any account type, taxable / IRA / Roth IRA can be set up as a brokerage account.
I have bought and sold individual bonds in a Vanguard brokerage account, some in a rollover IRA (a form of TIRA) and some in a Roth IRA.
Perhaps I am looking in the wrong place then, but that's what the Vanguard rep I spoke to advised me. When I tried to re-visit the site today and search for individual Bonds or Muni bonds the only thing that came up in the search were index funds and ETFs. Perhaps there is another Vanguard site or a different division that allows this?
You just have to use the brokerage window. There isn't a separate site or anything. You enter the ticket of whatever it is you want to buy/sell and place an order. You probably wouldn't search for it on the Vanguard site, you'd need to already know what you wanted to buy.

retired@50
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Re: How to turn a Pile of Investment Assets into Income?

Post by retired@50 » Tue Jan 14, 2020 3:07 pm

KyleAAA wrote:
Tue Jan 14, 2020 2:29 pm
TarHeel100 wrote:
Tue Jan 14, 2020 1:53 pm
nisiprius wrote:
Mon Jan 13, 2020 9:55 pm
retired@50 wrote:
Mon Jan 13, 2020 5:58 pm
The first red statement above about holding individual bonds, as far as I know isn't accurate. I was under the impression that you are allowed to buy and sell individual bonds if you have a Vanguard brokerage account. I think any account type, taxable / IRA / Roth IRA can be set up as a brokerage account.
I have bought and sold individual bonds in a Vanguard brokerage account, some in a rollover IRA (a form of TIRA) and some in a Roth IRA.
Perhaps I am looking in the wrong place then, but that's what the Vanguard rep I spoke to advised me. When I tried to re-visit the site today and search for individual Bonds or Muni bonds the only thing that came up in the search were index funds and ETFs. Perhaps there is another Vanguard site or a different division that allows this?
You just have to use the brokerage window. There isn't a separate site or anything. You enter the ticket of whatever it is you want to buy/sell and place an order. You probably wouldn't search for it on the Vanguard site, you'd need to already know what you wanted to buy.
You also need to attempt to purchase individual bonds during market hours. Once the market closes each day, you're not really allowed to "shop around" for individual bonds.

Incidentally, holding individual bonds isn't typically the best move for small investors. The muni market is somewhat opaque and you will generally get better results by using a bond fund.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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Re: How to turn a Pile of Investment Assets into Income?

Post by sycamore » Tue Jan 14, 2020 4:02 pm

TarHeel100,

Vanguard produced a research report about turning assets into income. I haven't read the whole thing (sorry, flame away) but here are a couple things I noticed:

1) they do talk a lot about "total return" versus "income-focused" investing
2) given various complexities (taxes, where to withdraw from, etc.), for some clients they would recommend having an advisor. They don't specifically promote their PAS service in the report but they do advertise it a lot elsewhere. FWIW, I think a DIY approach can work fine, as evidenced by the many bogleheads doing so.

Anyway, that report might be helpful to you. Good luck!

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Re: How to turn a Pile of Investment Assets into Income?

Post by Rowan Oak » Tue Jan 14, 2020 8:14 pm

TarHeel100 wrote:
Mon Jan 13, 2020 5:23 pm
One strategy that my father uses which has worked well for him is his EJ advisor has him invested in Muni Bonds and getting a nice 3-4% tax-free return per year is plenty to supplement his income and a similar return would work for me.
Is the EJ advisor telling him that he's getting "3-4% tax-free return per year"? Probably not accurate especially after EJ takes their high fees out of that return.

Vanguard High-Yield Tax-Exempt Fund Admiral Shares (VWALX)
Vanguard's highest yield (highest risk too) municipal bond fund is paying 2.28% with an expense ratio of 0.09% (this is the total cost). I would compare this to what EJ has your father invested in. When you factor in the fees EJ is taking you will probably find this low-cost Vanguard fund has a higher return. Additionally, it is much more diversified: as of as of 11/30/2019 it holds 2655 bonds with an average duration of 6.1 years.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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