Message Font: Serif | Sans-Serif

No. of Recommendations: 0
Greetings, jla711, and welcome. You wrote:

<<I have questions that while very basic could have enormous consequences to one's ability to retire early. It regards the source of % income that is often written about and will be dealt with in the Fools retirement portfolio, as well.
If one has a portfolio of 25% bonds/75%stocks and takes 6% annually as income, where does the 6% come from? For instance, is it a combination of the yield from the bonds and from the selling of stock and dividends, or just from the selling of stocks?>>

As far as the Retiree Portfolios are concerned, the initial rates of withdrawal were established based on a subjective judgment of the success of the various portfolios using those rates over the years 1961 through 1998 for the various withdrawal periods. Thus, if after making such an analysis, you decide to take a 6% withdrawal for one of the portfolios, you take \$6,000 in the first year. At the end of the year you look at two things, the total market value of the portfolio and that year's inflation rate. You would increase that year's payout (i.e., the \$6K) by the inflation rate for that year. That becomes next year's withdrawal. Subtract that amount from your market value, and you have what will be invested in the following year. You then readjust your portfolio based on that amount and take the next year's income. Here's a quick example.

I start with \$100K from which I take \$6K for income. The remaining \$94K gets invested as 75% (\$70.5K) in the Foolish Four and 25% (\$23.5K) in bonds. I now reach my anniversary date at the end of the year. At that time I note the inflation rate for the year was 2.5%. That means the income I want for year two is \$6,150 (\$6K X 1.025). The market value of my portfolio is \$80,370 for the FF and \$25,028 for the bonds, or \$105,398 total. I subtact the \$6,150 from the \$105,398 to get \$99,248. Of the \$99,248, I want \$74,436 invested in my new FF and \$24,812 in bonds. I take the \$6,150 in cash, and readjust the FF and bond holdings to reflect the allocation desired. At the end of year two, I repeat the process except that the inflationary increase in income is now applied to the \$6,150 in income I took for year two. The use of the FF (which requires annual adjustments) and bond funds (which are easily traded) makes the process very quick and easy. I don't have to agonize over which or how many shares of stock to sell, and I don't have to worry about bond maturity dates.

<<Is there a reasonably ez way to take in account long term effects of the annual capital gains incurred when selling to obtain income?>>

If you're confident that tax laws won't change and of the rate of return you are using for such projections, then just multiply your expected rate of return by the result of (1.0 - your tax rate). That will work reasonably well whether you're considering your marginal tax bracket for IRA withdrawals or the capital gains rate for taxable LTB&H accounts.

Regards..Pixy

### Announcements

The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.