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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75525  
Subject: Income from Equities Date: 1/7/1998 4:07 PM
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Greetings to all.

Since the topic is retirement investing, perhaps it is not inappropriate to bring up the subject of how best to utilize your lifelong savings to produce a sufficient and dependable cash flow once salary income is no longer available. I realize that everyone's personal situation is unique with regard to the amount and type of financial resources, pensions etc. that they take forward into full retirement. However, it would seem that a common issue which must be dealt with is the logistics involved in generating the required cash flows at appropriate intervals.

Consider my personal situation.... I have determined that retirement income equivalent to a minimum of 85% of my pre-retirement salary will be sufficient to retain my current lifestyle. I expect to receive a pension in an amount equal to 60% of my salary. This is the result in taking part over a period of 36 years in a defined benefit pension program with the same employer. This pension is indexed. Therefore it would appear that my primary goal will be to insure that I can generate from other assets the equivalent of 25% of my pre-retirement income with a provision for growth in the principle at least equivalent to the rate of inflation.

My other assets consist of a traditional IRA and a taxable brokerage account, each invested 100% in equities. Since I am a firm believer in dow dividend based investment strategies, I feel a minimum expected long term return of 10% per year is not unreasonable. My goal is to limit my withdrawals to 5% of the principle value of of these assets. Secondary goals are to minimize the tax paid on withdrawals and otherwise create a fairly consistent and logistically simple income stream. It would appear prudent to rely entirely upon the taxable brokerage account (even to the point of exhaustion of principle) to maximize the tax deferred compounding provided by the IRA. This will probably result in drawing down the taxable brokerage account at a rate in excess of 10% event though the overall goal of keeping withdrawals at a level less than 5% would still be met since the IRA remains untouched.

Now on to the logistics..... The pension will be paid biweekly or monthly and requires no further action on my part. It is my intent to reap the dividends from the taxable brokerage account (and eventually the IRA) quarterly as they are paid. To make up the balance, some portion of the equities must be liquidated on a more or less regular basis. This is where the sledding gets a little tougher. The more frequently equities are sold, the more trading costs and short term gains are incurred and the more bookeeping is required. This "averaging out" process does create a consistent income stream however. Making fewer (but larger) withdrawls reduces trading costs but also returns.

I have found little written information on the process of optimizing the creation of income streams from equities. Surely somebody has grappled with this and can provide some recommendations. Any and all comments on this and my general approach are appreciated.
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1118 of 75525
Subject: Re: Income from Equities Date: 1/7/1998 4:51 PM
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FoolMeOnce,

<<I have found little written information on the process of optimizing the creation of income streams from equities. Surely somebody has grappled with this and can provide some recommendations. Any and all comments on this and my general approach are appreciated.>>

Overall, it sounds like a well-thought out plan to me. I particularly like the 5% drawdown. That, based on history, should be more than reasonable and sustainable. As to a quarterly withdrawal, perhaps. I used annually in my illustrations. If you scroll back to mid-August 1998 under the subject of Retiree Porfolios you'll find a series of posts that discuss the drawdown problem. They won't specifically answer your query, but may add food for thought.

Regards.....Pixy

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1153 of 75525
Subject: Re: Income from Equities Date: 1/9/1998 11:25 AM
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I wrote a 4-part posting on Draw Down for Retirement this summer. You might want to find and read it.

FWIW, I'm helping my Mom (age 73) with her finances, after her Full-Service Broker had been "servicing" her account. You can use margin to help ease the mechanics of drawing down your stock investments--kind of like a reverse mortgage. Take a monthly withdrawal, which increases your margin loan. When you do your annual update, pay off the entire margin loan as part of the normal update process. That way, you don't incure extra commissions. Over the long run, you'll pay maybe 7%-8% interest (on the increasing balance), but gain 15%-18% in growth (of the stocks you are delaying liquidating), so the margin interest isn't a net cost.

Or just put it in an index fund, take a monthly check withdrawal, and get 10.5% average growth, but no messing around with margin, annual updates, etc.

Regards,
Ray

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1162 of 75525
Subject: Re: Income from Equities Date: 1/9/1998 1:58 PM
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Ray,

<<You can use margin to help ease the mechanics of drawing down your stock investments--kind of like a reverse mortgage. Take a monthly withdrawal, which increases your margin loan. When you do your annual update, pay off the entire margin loan as part of the normal update process. That way, you don't incure extra commissions. Over the long run, you'll pay maybe 7%-8% interest (on the increasing balance), but gain 15%-18% in growth (of the stocks you are delaying liquidating), so the margin interest isn't a net cost.>>

Now that's an interesting twist that has definite possibilities. Only thing that would upset that apple cart is if the market really tanked.


Regards....Pixy


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