3 funds and 3% withdraw rate

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Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 12:33 am

After following this forum for a few months, I am completely sold by the simple retirement strategy that has been practiced by a lot of people here. Specifically, I like the 3 funds portfolio idea and I am also comfortable with the 3% SWR. I am planing to retire next year at age 55. Already have 12 years' of essential expenses saved in company deferred income. House is already paid for and no other debt. For discretionary expense, I plan to put my investment funds (about 2 millions) in the following 3 funds:

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

With the above 3 funds, I am getting exactly 3% yield,I don't have to touch my principal, but will re-balance every 6 months. Since portfolio is for discretionary expense only, so I am OK to spend 30% less when the portfolio drops by 30%. When we reach 67 years old, we will start SS for DW and I and I also have a small pension, that should cover our essential expenses. We can continue with 3% withdraw rate from our investment portfolio for discretionary expenses. If the SS disappears completely, we can probably increase our withdraw rate to 5% at age 67, we should still be OK.

Comments?

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firebirdparts
Posts: 348
Joined: Thu Jun 13, 2019 4:21 pm

Re: 3 funds and 3% withdraw rate

Post by firebirdparts » Fri Nov 15, 2019 4:32 am

You've done well. I am no expert on investing, so take this with a grain of salt. Using SPYD as a core holding is a little offbeat for the posters here. I would do it, and in fact I already hold a dividend specialty fund while I am still working (I have 6 or so funds instead of 3). Most of my money is in tax-deferred, so that would make me immune to any concerns about too much cash rolling in.

BND is investment grade throughout and 63% US government. Pretty safe. The oldsmobile of bond funds.

In another thread there came up the question of what a Tips ladder would do while adding the extra feature of inflation protection, and whether that is for everybody. You could consider that. It might yield close to that.
A fool and your money are soon partners

Yukon
Posts: 257
Joined: Wed Jan 23, 2008 8:10 am

Re: 3 funds and 3% withdraw rate

Post by Yukon » Fri Nov 15, 2019 5:13 am

secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am
After following this forum for a few months, I am completely sold by the simple retirement strategy that has been practiced by a lot of people here. Specifically, I like the 3 funds portfolio idea and I am also comfortable with the 3% SWR. I am planing to retire next year at age 55. Already have 12 years' of essential expenses saved in company deferred income. House is already paid for and no other debt. For discretionary expense, I plan to put my investment funds (about 2 millions) in the following 3 funds:

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

With the above 3 funds, I am getting exactly 3% yield,I don't have to touch my principal, but will re-balance every 6 months. Since portfolio is for discretionary expense only, so I am OK to spend 30% less when the portfolio drops by 30%. When we reach 67 years old, we will start SS for DW and I and I also have a small pension, that should cover our essential expenses. We can continue with 3% withdraw rate from our investment portfolio for discretionary expenses. If the SS disappears completely, we can probably increase our withdraw rate to 5% at age 67, we should still be OK.

Comments?
Looks like you're in fine shape assuming the company's deferred income is reliable. That 12 years of deferred income has a non zero chance of disappearingso I'd look into how those funds can be liquidated to you sooner than over 12 years. I can't help to think of Enron
Don't Work Forever.

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Forester
Posts: 556
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: 3 funds and 3% withdraw rate

Post by Forester » Fri Nov 15, 2019 5:19 am

Only US stocks?

I would go

45% SPY
33% BND
22% EEMV (Emerging Markets Min Vol)

Uncorrelated
Posts: 148
Joined: Sun Oct 13, 2019 3:16 pm

Re: 3 funds and 3% withdraw rate

Post by Uncorrelated » Fri Nov 15, 2019 6:47 am

Even if you have 3% yield, inflation still erodes your capital over time. Even if you have 3% yield + inflation, there is no guarantee that your principal stays stable over time.

You should ignore the yield from your portfolio and focus only on total return. The total return can be higher or lower than the yield. Sounds complicated? Keep it simple, use the usual 3 fund portfolio. SPYD is not a good idea.

balbrec2
Posts: 220
Joined: Mon Nov 13, 2017 3:03 pm

Re: 3 funds and 3% withdraw rate

Post by balbrec2 » Fri Nov 15, 2019 8:30 am

Don't know why people keep insisting SS is likely to go away.
It is a pay as you go system. The only thing that may go away is the
surplus fund, which will still leave you with around 80% of your intended payments.
SS is quite likely to be fixed. the SS crowd is a large block of voters and they do vote.

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:17 am

firebirdparts wrote:
Fri Nov 15, 2019 4:32 am
You've done well. I am no expert on investing, so take this with a grain of salt. Using SPYD as a core holding is a little offbeat for the posters here. I would do it, and in fact I already hold a dividend specialty fund while I am still working (I have 6 or so funds instead of 3). Most of my money is in tax-deferred, so that would make me immune to any concerns about too much cash rolling in.

BND is investment grade throughout and 63% US government. Pretty safe. The oldsmobile of bond funds.

In another thread there came up the question of what a Tips ladder would do while adding the extra feature of inflation protection, and whether that is for everybody. You could consider that. It might yield close to that.
Thanks for your comments and I will look into Tips. I realized that by holding both SPY and SPYD, I am essentially just holding weighed SPY with overweight on high dividend companies. So it's more like two fund portfolio. As for Bond, some recommend BSV instead of BND to reduce the duration risk. What's the opinion from Bond experts here?

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:22 am

Yukon wrote:
Fri Nov 15, 2019 5:13 am
Looks like you're in fine shape assuming the company's deferred income is reliable. That 12 years of deferred income has a non zero chance of disappearingso I'd look into how those funds can be liquidated to you sooner than over 12 years. I can't help to think of Enron
[/quote]

Yes, I am aware of that risk even though it's a fortune 20 company. Maybe I need to work a few more years and not defer any income :D

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: 3 funds and 3% withdraw rate

Post by dbr » Fri Nov 15, 2019 9:26 am

secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

While that is a portfolio comprising three funds, it is not a three fund portfolio. What is missing is diversification across the entire domestic and international stock markets. Wide diversification is an important concept behind the three fund portfolio.

It is totally unnecessary to engineer your portfolio to take withdrawals in the form of dividends. Withdrawals can be by any combination of dividends, interest, and sales of shares. It all comes out the same. The only issue is how does the rate of withdrawal compare to the returns delivered over a sequence of years, and it is very difficult to prove that your proposed asset allocation would be a better choice than a portfolio of total market funds. In any case that problem is dominated first of all by the luck of when you retire and secondly by the withdrawal rate.

It is also unlikely that your portfolio will not work at 3% rate of withdrawal, so if a person likes taking dividends or finds it convenient then that is fine. Another question to ask is whether or not one will be comfortable with the volatility of 66% stocks. The three fund concept is not specific as to what the proportion between stocks and bonds should be. That question depends on a person's need, ability, and willingness to take risk. That said 66% stocks is not out of line for most retirees, especially for a longer retirement.

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:27 am

Forester wrote:
Fri Nov 15, 2019 5:19 am
Only US stocks?

I would go

45% SPY
33% BND
22% EEMV (Emerging Markets Min Vol)
Good point. Some people have argued that S&P 500 has covered global components already, but adding emerging market into my portfolio may not be a bad idea!

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: 3 funds and 3% withdraw rate

Post by dbr » Fri Nov 15, 2019 9:32 am

secondlife2020 wrote:
Fri Nov 15, 2019 9:17 am
firebirdparts wrote:
Fri Nov 15, 2019 4:32 am
You've done well. I am no expert on investing, so take this with a grain of salt. Using SPYD as a core holding is a little offbeat for the posters here. I would do it, and in fact I already hold a dividend specialty fund while I am still working (I have 6 or so funds instead of 3). Most of my money is in tax-deferred, so that would make me immune to any concerns about too much cash rolling in.

BND is investment grade throughout and 63% US government. Pretty safe. The oldsmobile of bond funds.

In another thread there came up the question of what a Tips ladder would do while adding the extra feature of inflation protection, and whether that is for everybody. You could consider that. It might yield close to that.
Thanks for your comments and I will look into Tips. I realized that by holding both SPY and SPYD, I am essentially just holding weighed SPY with overweight on high dividend companies. So it's more like two fund portfolio. As for Bond, some recommend BSV instead of BND to reduce the duration risk. What's the opinion from Bond experts here?
I am not a bond expert and therefore can't comment on what duration is most advantageous other than I am not impressed that it matters a lot, at least in a portfolio that is already 66% stocks. As to TIPS, holding in intermediate duration TIPS fund rather than a total bond fund might be justified but probably isn't necessary. I see no reason to go out and build a TIPS ladder in this portfolio. That concept starts with a completely different idea regarding how one finances a retirement and would be difficult to implement for an earlier retiree.

lostdog
Posts: 2044
Joined: Thu Feb 04, 2016 2:15 pm

Re: 3 funds and 3% withdraw rate

Post by lostdog » Fri Nov 15, 2019 9:35 am

secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am
After following this forum for a few months, I am completely sold by the simple retirement strategy that has been practiced by a lot of people here. Specifically, I like the 3 funds portfolio idea and I am also comfortable with the 3% SWR. I am planing to retire next year at age 55. Already have 12 years' of essential expenses saved in company deferred income. House is already paid for and no other debt. For discretionary expense, I plan to put my investment funds (about 2 millions) in the following 3 funds:

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

With the above 3 funds, I am getting exactly 3% yield,I don't have to touch my principal, but will re-balance every 6 months. Since portfolio is for discretionary expense only, so I am OK to spend 30% less when the portfolio drops by 30%. When we reach 67 years old, we will start SS for DW and I and I also have a small pension, that should cover our essential expenses. We can continue with 3% withdraw rate from our investment portfolio for discretionary expenses. If the SS disappears completely, we can probably increase our withdraw rate to 5% at age 67, we should still be OK.

Comments?
If you want a diversified dividend portfolio you could go:

33% VYM (3.3% yield) U.S. Stock
33% VYMI (4.29% yield) International Stock
34% BND (2.74% yield)

https://investor.vanguard.com/etf/profile/VYM

https://investor.vanguard.com/etf/profile/VYMI
Last edited by lostdog on Fri Nov 15, 2019 9:37 am, edited 1 time in total.
Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:36 am

Uncorrelated wrote:
Fri Nov 15, 2019 6:47 am
Even if you have 3% yield, inflation still erodes your capital over time. Even if you have 3% yield + inflation, there is no guarantee that your principal stays stable over time.

You should ignore the yield from your portfolio and focus only on total return. The total return can be higher or lower than the yield. Sounds complicated? Keep it simple, use the usual 3 fund portfolio. SPYD is not a good idea.
I was hoping by holding 75% in stocks, my portfolio can beat inflation over long run even though the portfolio can go up and down. Can you elaborate why SPYD is not a good idea? If this has been discussed before, could you point me to the relevant threads? Thanks much!

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:42 am

balbrec2 wrote:
Fri Nov 15, 2019 8:30 am
Don't know why people keep insisting SS is likely to go away.
It is a pay as you go system. The only thing that may go away is the
surplus fund, which will still leave you with around 80% of your intended payments.
SS is quite likely to be fixed. the SS crowd is a large block of voters and they do vote.
I should say that's a big if. It's comforting to know SS is 80% guaranteed :P

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: 3 funds and 3% withdraw rate

Post by dbr » Fri Nov 15, 2019 9:52 am

secondlife2020 wrote:
Fri Nov 15, 2019 9:36 am
Uncorrelated wrote:
Fri Nov 15, 2019 6:47 am
Even if you have 3% yield, inflation still erodes your capital over time. Even if you have 3% yield + inflation, there is no guarantee that your principal stays stable over time.

You should ignore the yield from your portfolio and focus only on total return. The total return can be higher or lower than the yield. Sounds complicated? Keep it simple, use the usual 3 fund portfolio. SPYD is not a good idea.
I was hoping by holding 75% in stocks, my portfolio can beat inflation over long run even though the portfolio can go up and down. Can you elaborate why SPYD is not a good idea? If this has been discussed before, could you point me to the relevant threads? Thanks much!
There are a jillion threads on dividend investing: https://www.google.com/search?sitesearc ... +investing

The point is not that dividend investing does not work but rather that it accomplishes nothing special while being less diversified and potentially being less tax efficient, depending on where the assets are held. Some people like the idea and find it convenient to take dividends; other people see no point in it. Some people make blunders such as thinking that dividends are free money, but most people who might like dividend investing are not that naive.

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 9:53 am

dbr wrote:
Fri Nov 15, 2019 9:26 am
secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

While that is a portfolio comprising three funds, it is not a three fund portfolio. What is missing is diversification across the entire domestic and international stock markets. Wide diversification is an important concept behind the three fund portfolio.

It is totally unnecessary to engineer your portfolio to take withdrawals in the form of dividends. Withdrawals can be by any combination of dividends, interest, and sales of shares. It all comes out the same. The only issue is how does the rate of withdrawal compare to the returns delivered over a sequence of years, and it is very difficult to prove that your proposed asset allocation would be a better choice than a portfolio of total market funds. In any case that problem is dominated first of all by the luck of when you retire and secondly by the withdrawal rate.

It is also unlikely that your portfolio will not work at 3% rate of withdrawal, so if a person likes taking dividends or finds it convenient then that is fine. Another question to ask is whether or not one will be comfortable with the volatility of 66% stocks. The three fund concept is not specific as to what the proportion between stocks and bonds should be. That question depends on a person's need, ability, and willingness to take risk. That said 66% stocks is not out of line for most retirees, especially for a longer retirement.
Fair point, I am probably just more comfortable to know that I don't have to sell the principal to fund my retirement, but it really doesn't matter, 3% is 3%. I am also comfortable with 66% stocks for the first 12 years of early retirement, but may adjust 12 years later. :sharebeer

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 10:05 am

lostdog wrote:
Fri Nov 15, 2019 9:35 am
secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am
After following this forum for a few months, I am completely sold by the simple retirement strategy that has been practiced by a lot of people here. Specifically, I like the 3 funds portfolio idea and I am also comfortable with the 3% SWR. I am planing to retire next year at age 55. Already have 12 years' of essential expenses saved in company deferred income. House is already paid for and no other debt. For discretionary expense, I plan to put my investment funds (about 2 millions) in the following 3 funds:

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

With the above 3 funds, I am getting exactly 3% yield,I don't have to touch my principal, but will re-balance every 6 months. Since portfolio is for discretionary expense only, so I am OK to spend 30% less when the portfolio drops by 30%. When we reach 67 years old, we will start SS for DW and I and I also have a small pension, that should cover our essential expenses. We can continue with 3% withdraw rate from our investment portfolio for discretionary expenses. If the SS disappears completely, we can probably increase our withdraw rate to 5% at age 67, we should still be OK.

Comments?
If you want a diversified dividend portfolio you could go:

33% VYM (3.3% yield) U.S. Stock
33% VYMI (4.29% yield) International Stock
34% BND (2.74% yield)

https://investor.vanguard.com/etf/profile/VYM

https://investor.vanguard.com/etf/profile/VYMI
I have everything in Fidelity, don't want trigger a Vanguard vs Fidelity debut :)

lostdog
Posts: 2044
Joined: Thu Feb 04, 2016 2:15 pm

Re: 3 funds and 3% withdraw rate

Post by lostdog » Fri Nov 15, 2019 10:06 am

secondlife2020 wrote:
Fri Nov 15, 2019 10:05 am
lostdog wrote:
Fri Nov 15, 2019 9:35 am
secondlife2020 wrote:
Fri Nov 15, 2019 12:33 am
After following this forum for a few months, I am completely sold by the simple retirement strategy that has been practiced by a lot of people here. Specifically, I like the 3 funds portfolio idea and I am also comfortable with the 3% SWR. I am planing to retire next year at age 55. Already have 12 years' of essential expenses saved in company deferred income. House is already paid for and no other debt. For discretionary expense, I plan to put my investment funds (about 2 millions) in the following 3 funds:

33% SPY (dividend yield 1.81%)
33% SPYD (dividend yield 4.46%)
34% BND (dividend 2.74%)

With the above 3 funds, I am getting exactly 3% yield,I don't have to touch my principal, but will re-balance every 6 months. Since portfolio is for discretionary expense only, so I am OK to spend 30% less when the portfolio drops by 30%. When we reach 67 years old, we will start SS for DW and I and I also have a small pension, that should cover our essential expenses. We can continue with 3% withdraw rate from our investment portfolio for discretionary expenses. If the SS disappears completely, we can probably increase our withdraw rate to 5% at age 67, we should still be OK.

Comments?
If you want a diversified dividend portfolio you could go:

33% VYM (3.3% yield) U.S. Stock
33% VYMI (4.29% yield) International Stock
34% BND (2.74% yield)

https://investor.vanguard.com/etf/profile/VYM

https://investor.vanguard.com/etf/profile/VYMI
I have everything in Fidelity, don't want trigger a Vanguard vs Fidelity debut :)
You can buy those etf's commission free at Fidelity.
Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

lostdog
Posts: 2044
Joined: Thu Feb 04, 2016 2:15 pm

Re: 3 funds and 3% withdraw rate

Post by lostdog » Fri Nov 15, 2019 10:25 am

Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 10:46 am

Thank you. Great article. Dividend is indeed a forced sell with the schedule determined by the company.

lostdog
Posts: 2044
Joined: Thu Feb 04, 2016 2:15 pm

Re: 3 funds and 3% withdraw rate

Post by lostdog » Fri Nov 15, 2019 10:52 am

secondlife2020 wrote:
Fri Nov 15, 2019 10:46 am
Thank you. Great article. Dividend is indeed a forced sell with the schedule determined by the company.
Yeah it was. That was my first time reading the article. The light bulb went off in the Warren Buffet section on why he doesn't distribute dividends. He wants his shareholders to have more control.
Total World Stock and Total World Bond. The simple two fund diversified portfolio. "Simplicity is the master key to financial success."

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: 3 funds and 3% withdraw rate

Post by dbr » Fri Nov 15, 2019 10:57 am

secondlife2020 wrote:
Fri Nov 15, 2019 10:46 am
Thank you. Great article. Dividend is indeed a forced sell with the schedule determined by the company.
I was going to add to this that the division principle/income is a kind of traditional view of how investing works that has a rationale but may not be the best way to think about spending from a retirement portfolio. It might be interesting to read an article somewhere about that concept which may be rooted more in the old endowment or trust holding of assets. One hears about English gentry having their wealth characterized by the income it produced: "He is worth 2000 Pounds a year." That was because the wealth came from rents on land that could not be sold or perhaps from Consoles or never to mature bonds. Today for most investors a portfolio theory model probably is simpler and makes more sense. In that model one owns liquid (aka marketable) assets of variable value and the whole thing produces returns consisting of interest, dividends, and capital gains. The growth of the portfolio is determined by the compounded sequence of returns plus contributions and less withdrawals. In that context a dividend spent is an invasion of returns and reduces the growth of the portfolio. It does so exactly the same as a sale of shares. One could say a spent dividend is the sale of shares that would have been purchased by reinvesting the dividend (aka compounding all the return). It is only if you can show that selecting investments for dividend also affects return that the investment selection matters. By return we mean the entire statistical distribution from which each annual result is imagined to be a sample.

Topic Author
secondlife2020
Posts: 10
Joined: Thu Nov 14, 2019 10:52 pm

Re: 3 funds and 3% withdraw rate

Post by secondlife2020 » Fri Nov 15, 2019 1:56 pm

Thank you all for your valuable comments. I had no intention to do stock selection, and also with my tax situation, focusing on total return instead of dividend probably provide me with more tax flexibility, so I will stay with traditional 3 fund portfolio:

50% domestic, SPY or VTI
20% emerging market fund
30% BND, thought about BSV, but decide not to do market timing.

This is a great forum.

Cheers

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