retirement income question

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Topic Author
curveball
Posts: 18
Joined: Sat Feb 01, 2014 2:43 pm

retirement income question

Post by curveball »

I have been reading a lot of posts for the past month and I have a question which I believe has an an obvious answer,but want to make sure.I have read a lot of posts about withdrawal rates,running out of money,Tips ladders,etc.Here is my question and I am very risk averse.To simplify as much as possible....I determine that when I retire I will need roughly 2000 dollars a month beyond my SS.I f I currently have 800,000 in investments and I was to put all of that in the total or intermediate bond fund and reinvest dividend for 5 years before I retire,I should be able to live off the dividends without touching the principal.This money is all in IRA's.Am I missing something or is this the safest,simplest way to achieve this without stocks?My wife wants it as simple as possible in case I go to the Field of Dreams earlier than expected.We are in our mid 60's and I know we should invest in stocks,tips,and all but I need to make this simple,simple simple and my wife is anti stocks for a lot of reasons.
Quickfoot
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Re: retirement income question

Post by Quickfoot »

If you *need* the income you should consider purchasing SPIAs (lots of information available here and from immediteannuities.com) in an amount sufficient to provide the $2,000 a month. Right now that would be about 400K, but it would pay $2,000 for the rest of you and your wife's lives. If you have heirs you can also very cheaply get a guaranteed payment term of 20 years that would insure at least principal was paid back. A SPIA is basically a pension that you purchase and is not directly tied to the stock market, states guarantee various amounts of principal from about 100K to around 300K so you can purchase multiple SPIAS to insure your entire principal is covered.

Due to how they are constructed SPIAS provide more income than bonds can and also help protect you from the market fluctuations. Once you have your base income requirements met you could look at investing the rest in a 60% bonds, 40% equities or 70% bonds, 30% equities single mutual fund. 100% bonds will not provide long term inflation protection and actually performs worse than having 30% to 40% equities. Vanguard has several asset allocation mutual funds in their life strategy line that would work.

By doing a SPIA and a single mutual fund that handles the asset allocation you almost eliminate the actions your wife would have to take after your death.
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midareff
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Re: retirement income question

Post by midareff »

Curveball... I think you may have overlooked a couple of things. The first being the impact of rising interest rates on the dollar value of a bond fund, the second being the longer term impact of inflation. Three percent inflation over 15 years will erode roughly 45% of your purchasing power. The only thing I know of worse than being old is old and waaay too tight on money.

For a fast example let's take an intermediate term bond fund paying 2.75% annualized yield from monthly dividends. Let's further say this bond fund has a duration of 5 years. Let's go on to say the Fed goes on to raise interest rates 1/4% each quarter for the next 5 years. Each 1% increase in interest rates drops the funds $$ value 5% (duration X interest rate change), and the yield would go up 1% (generally). At the end of 5 years the yield should be in the neighborhood of 7.75% but the $$ in the fund will have dropped significantly making the $2000 monthly withdrawal much larger in relative terms.

I've looked at lots of withdrawal rate studies (I'm 66 and retired) and have never seen anything that suggested 100% bonds would be the way to go in retirement. Ben Graham's position was 75-25% to 25-75%..... not to be outside those boundaries. Standard BH ranges from age in bonds to age - 10 or so. That would tend to indicate a 65 year old should be in the 35% equities range as a conservative investor, and is a recommendation made by Jack Bogle (age in bonds).

Good luck with whatever your decision is......
nickfrank
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Re: retirement income question

Post by nickfrank »

Currently Total Bnd. is paying about 2% . If your invest the 800K @2% for 5 years it will grow to about 880K ignoring capital appreciation. If you then invest in Total Bnd. the dividends may not provide 2K per month which translates to 2.7% of the 880K .
So it depends on the yield at that time and don't forget inflation. I'd say it's too close to call.
Topic Author
curveball
Posts: 18
Joined: Sat Feb 01, 2014 2:43 pm

Re: retirement income question

Post by curveball »

Thank you.I will show replies to my wife.I did look into SPIA's and the main drawback was the heir issue.I realize returns are determined by risk and I think the SPIA would be a good solution for us but maybe not so much for our two sons.Of course if we run out of money that will not be so great for them or us.
Grt2bOutdoors
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Re: retirement income question

Post by Grt2bOutdoors »

Consider the Target Retirement Income Fund. Low cost, 30% equity, 70% fixed income - total bond, total stock, inflation protection, international bonds, international equities - indexed.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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jimb_fromATL
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Re: retirement income question

Post by jimb_fromATL »

curveball wrote:I have been reading a lot of posts for the past month and I have a question which I believe has an an obvious answer,but want to make sure.I have read a lot of posts about withdrawal rates,running out of money,Tips ladders,etc.Here is my question and I am very risk averse.To simplify as much as possible....I determine that when I retire I will need roughly 2000 dollars a month beyond my SS.I f I currently have 800,000 in investments and I was to put all of that in the total or intermediate bond fund and reinvest dividend for 5 years before I retire,I should be able to live off the dividends without touching the principal.This money is all in IRA's.Am I missing something or is this the safest,simplest way to achieve this without stocks?My wife wants it as simple as possible in case I go to the Field of Dreams earlier than expected.We are in our mid 60's and I know we should invest in stocks,tips,and all but I need to make this simple,simple simple and my wife is anti stocks for a lot of reasons.
Sounds like you must be planning to work until 70 or so. Is that $2000 or so you need allowing for inflation in cost of living as well as your social security benefits in addition to any pension? Don't forget that your needs probably will go up as time goes on.

If you -- and especially your wife... are absolutely averse to risk, I agree with other comments that a SPIA (Single Premium Immediate Annuity) is probably the ticket. In fact, you can't withdraw as much every year from a normal investment account as you can get rom a SPIA without a real risk of running out of money. A SPIA typically gives you in the range of 5% +/- of your principal every year -- guaranteed for life. You can't take out nearly that much in any investment and have a comparable guarantee of never running out of money.

According to http://www.immediateannuities.com , for about $392K for a couple both age 70 you can buy an annuity that will guarantee $2000 per month for the life of both of you ... plus guarantee the payout for a total of 20 years to your heirs if you both die earlier. It's a few thousand less if you don't need or want survivor benefits for your heirs.

This would allow you to keep the other $400K+ in some kind of mix of bonds and laddered CDs where you could withdraw more to keep up with cost-of-living increases as time goes on.

You might also want to consider a smaller SPIA. You'll still have the RMD (Required Minimum Distribution) on the remaining IRA funds starting in the year you reach age 70½. For example, the RMD the first year on perhaps $425,000 would be about 3.65% of the total, which is about $15,511 ($1293 per month).

It could take a bit of "what-if" calculations to determine how much you really need to guarantee with a SPIA so the difference between the SPIA payout and the RMD on the remaining money would give you all you need to keep up with inflation.

The RMD percentage goes up each year according to actuarial tables, so as time goes on your balance will be reduced, but there will always be something left as long as you live. (If you take out a big chunk the RMD becomes less.)

That annual increase would also effectively be keeping up with inflation at today's rates ... along with you social security which also increases with inflation. So chances are as long as you don't have to take too a big chunk out of the IRA, you should be set for life.

jimb
dbr
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Re: retirement income question

Post by dbr »

The above is a pretty good analysis. $2000/month is 3% of $800,000. Trying to have your cake and eat it too in the form of taking income and providing for heirs and doing it with great certainty with a "conservative" plan is probably not in the cards. An all bond approach is not going to be a good plan.

Using part of the money for an annuity helps with the risk of living too long on the income, and placing the rest in a reasonably balanced portfolio provides for heirs. The annuities can have guaranteed payouts in case of early demise. Holding half the assets in a balanced portfolio provides for contingencies including the impact of inflation. It is also possible to stage annuity purchases at older years.
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jeffyscott
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Re: retirement income question

Post by jeffyscott »

curveball wrote:If I currently have 800,000 in investments and I was to put all of that in the total or intermediate bond fund and reinvest dividend for 5 years before I retire,I should be able to live off the dividends without touching the principal.This money is all in IRA's.Am I missing something or is this the safest,simplest way to achieve this without stocks?
If you want to spend only dividends, maybe use a long term bond fund? Also since you will have no stocks, perhaps a corporate fund could be considered. Yields are low, but VWETX still has SEC yield of 4.48%.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
Topic Author
curveball
Posts: 18
Joined: Sat Feb 01, 2014 2:43 pm

Re: retirement income question

Post by curveball »

Thank you so much for your thoughtful responses.They are very helpful.Now to convince my better half.....I think a SPIA and conservative Target Retirement half and half sounds reasonable.I will wait as long as I can before funding the SPIA and will attempt to go half total bond and half target fund until then.
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BL
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Re: retirement income question

Post by BL »

the higher income person should wait until age 70 to start SS.
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