I'm 62, married, and ready to retire with assets approximately 700k. Is it better to keep money in an index fund and draw off 7-8% yearly, or does it make more sense to draw annual income from money market accounts? Or, is there a balance you'd recommend.
While reading on the Retirement Investing Board, I came accross an approach which says essentially1) put 1 year's income (say 6 or 7%) in a money market2) put 3 years income in a bond fund (short to intermediate)3) keep the rest in stocks (index or growth or what ever)The idea is if stock take a serious dive, you can leave your money there and don't have to take losses. If stocks go up, then you just keep the system full.Also I found an excel spread sheet which gave a suggested distribution between bonds and stock based on your expected life expenctancy. This is a very good board.
laryjoyce wrote, I'm 62, married, and ready to retire with assets approximately 700k. Is it better to keep money in an index fund and draw off 7-8% yearly, or does it make more sense to draw annual income from money market accounts? Or, is there a balance you'd recommend. If those are the only two choices I'd put it all in the index. It depends on you and how you will react when the market drops.In a S&P 500 index you can expect around 10-11% returns over the long haul. You can expect the NASDAQ to do even better but it is more volitle. This way you will maintain your capital and perhaps see it grow a little. Currently the uninsured money market funds are yielding about 4.5% per year. So you would be continually dipping into your $700K. If your withdrew 7% per year. You might do better at some times but only when inflation is also high. Bank money market funds that are insured are currently yielding less than 1% per year. Not enough to cover your annual expenses or the loss in value due to inflation. Have you read any of the Motley Fool literature? If I wasn't restricted to your two choices I would put most of my money in a foolish four portfolio which folling the Foolish plan you roll over annually. Great time to then pull next years needs for income. Historically this strategy has yielded over 20% per year. Now were talking. I am relative new to the Foolish ways but I plan to put about 30% of my portfolio in this stratagey. I will invest quarterly, holding each quarters stocks for a year. In this mannor I will have quarterly cash flows following the stratagy. The other stratagy I would recomend is to invest in a Rule Maker portfolio. These are very large stable companies you should hold for 10 years or so. They will also give returns over 20%. This stratagy is not as liquid as the foolish four, but you also won't need a large portion of your retirement funds for over 10 years either. I am planning about 30% in this stratagy also. I am going to put the remaining 40% of my portfolio in potential high growth small caps, and in Rule Breaker stratigies. In fairness, I should mention my tolerance for risk is high. While my stock portfolio is smaller than yours, I have a reasonably large holding of rental property in addition to my stock investments. This makes my total holdings larger than yours which makes it easier to assume risk. You have to decide what's your tolerance for risk. The Foolish Four and the Rule Makers will have their loosing or poor performing years. I own Coke KO which is a Rule Maker. It has lost 20% of its value in the last year. If you couldn't live with this kind of loss (albeit probably a temporary one) then you need to stick to the low yielding but lower risk indexes. Rember too though that you can have losses by not assuming enough risk. Money in a money market fund that is insured will probably lose value over time due to inflation. Finally, I highly recomend two books, "The Motley Fool Investment Guide" by David and Tom Gardner. If you haven't read this already you should do so soon. The second book is "The Motley Fools Rule Breakers, Rule Makers", also by Tome and David Gardner. These two books are perhaps the best I've read about investing. Hope this is helpful, Chuck O'Neil
TwoCybers wrote:1) put 1 year's income (say 6 or 7%) in a money market2) put 3 years income in a bond fund (short to intermediate)3) keep the rest in stocks (index or growth or what ever)I guess he was writing at the same time I was. I didn't see his post until I finished my last one. While this may be a great board, I must respectivly disagree. IMHO, this sounds more Wise than Foolish. This aproach views loss in terms of absolute decline in value. It ignores other types of risks and losses and is too consertative. If the market takes a dive you have lost, period. You haven't made any income while it is diving. Thats an opportunity loss. Even if it recovers, you have lost in that you weren't earning any money while it was down. If you need to sell a portion of your portfolio when the market is down, so what? Take your loss and sell. This rare situation is more than compensated for by much higher earnings over the long haul. Which do you prefer, to occasionally lose 10 or 20% but inspite of those losses you average over 20% per year. Or would you rather earn 4.5% each and every year and risk losing relative value to to inflation or absolute value due to rising interest rates? If the market does drop when you need to be selling, you won't be selling everything and you will still have plenty to continue investing for better years. You may have a small loss in that year but overall your returns over time will be much greater than investing in money market funds or in Bonds. Has anyone ever seen a "dive" last a year or more? In my 58 years I've seen some long flat markets, I've seen some very short periods when the market dropped significantly but recovered in a matters of weeks or months, not years. Even the Crash of '29 was relatively short lived. It occured partly because of poor regulation. We now have much better regulations and safety nets that make a repeat fall highly unlikely. We now have a central bank, insured accounts etc. that weren't in place then. It was partly caused by and lasted as long as it did because of poor goverenmental economic policy. We know a lot better now. Investing in the stock market is hundreds of times more safe than it was then. When the market drops not all stocks drop. If you have invested Foolishly, it is less likely that yours are the ones that are dropping. I haven't picked stocks Foolishly yet but while my Coke stock lost 20% my Sun SUNW has gained about 300%. Over all in these tough past few months, my portfolio continues to grow even though several of my stocks are continuing to drop.So why hold money market funds for a year? Keep enough on hand to meet your needs for a quarter so you can weather out any temporary drop. Three years of income in a bond fund!? I've never heard of the market droping and staying down for three years. It may have gone through some three year periods of relatively flat performance but those are usually during high inflation and high interest rate periods. High inflation and rising interest rates cause bonds to lose value. Why accept the low yields of Bonds? People seem to think that Bonds are somehow "safe" but this is true only if long term interest rates don't rise. Bonds assume the risk of changing interest rates and high inflation. When rates rise, bond prices drop. Ever seen a period when long term rates have continually risen for three years? How about those sixties and seventies? If you were holding bonds through that period then you would continually see the value of your portfolio drop in both absolute terms, and because of excessive inflation, in relative terms. Bonds can be very risky and require one to try to predict the trend of long term rates. Does anyone seriously think Allen Greenspan is predictable? Is Congress or the actions of the president predictable? They can all adopt policies that will have a big impact on long term rates. Keep the rest in whatever??!! PleassssssssssseeeeeeI suspose the advice is to go to your broker and pay huge commissions for poor performance that go with their advise. Not "whatever" but invest Foolishly! I iterate that investing in the Foolish Four stratagy 4 times a year for a full year will give you the quarterly cash flow you need independently of what the Market does. This stratagy is to hold selected stocks for a full year and a day and then to sell the stocks or roll them over into the next annual investment. This is done even if the market drops and even if you have a loss for the year. Each quarter then you can withdraw whatever portion you need for the next three months. This stratagy doesn't invest in any four stocks it invests in the four Dow Jones stocks most likely to increase in the next year. These are very large companies and the risk in owning them is very small. Read the book and read about the stratagy on this site. Note too that the earnings are taxed at the much lower capital gains rates while interest income from bonds or mutual funds are taxed at the normal higher rates.TwoCypers also wrote,I found an excel spread sheet which gave a suggested distribution between bonds and stock based on your expected life expenctancy. Please ignore the above suggestion it is a misuse of the actuarilly sound number. It has no place in determining stratagies for an individual.Life expectancy is a tool used by actuaries and insurance companies. Insurance companies can reduce their risk by insuring very large numbers of people. The live expectancy is very accurate and useful for very large groups. But for an individual like yourself, this number has no meaning. Any individual may or may not live out their expectancy. Some of us will die tomorrow and some will live to be over 100. The insurance company doesn't care which of us does what. They know that in fact some of us will die tomorrow and some will live to be over a 100. None of us know how much longer we will live. Basing individual investment stratagies on actuarial statistics can be very dangerous. Sorry to get carried away but the previous post struck me with all due respect, as being very foolish. Chuck O'Neil
I'm glad to find someone else on this board that agrees with me. I am retiring in 2 - 3 years and have never held anything but stocks. (One short period I owned $10,000 of 16 1/2% Phillips Pet. Co. bonds) This was during Carter's presidency and interest was crazy.I have developed a similar strategy to yours, but expect to only adjust my FF in December and invest one years salary in SPY. Sell SPY each month for income. With the base income of Social Security plus 2 small pensions any down years may reduce my entertainment, but should not affect my basic standard of living. I too think that most people donot understand the basic risk of owning bonds or bond funds (loss of principle from interest rate changes).
JDWinNOLA I'm also glad to see someone agreeing with me. This same subject was also being discussed on the retirement board and I guess I got carried away because I'm taking a lot of flack this morning!One question. What's a SPY? I haven't heard this acronym before.Chuck O'Neil
SPY in the symbol for spiders which is the S&P 500. (as an interesting asside, today there are only 499 stocks in the S&P 500. They will add one more tomorrow.)Bonds do have an interest risk and it was nasty during the late 70's. However, if you get short term bonds say 1 to 4 years -- that risk is much less and you can earn what ever the prevailing interest rate is. For example a bond with 2 years until maturity has very little interest risk and even if things turn bad, you can keep the bond until maturity and get what ever the prevailing interest rate was at the time the bond was purchased.
I suggest you visit the following sites for additional info on the subject of % to withdraw and stock/bond allocations:www.scottburns.com/index.htm www.aaii.com(look here for the Trinity study) and www.morningstar.net (conversation titled: Investing during retirement) You'll find different perspectives and then, according to your personal risk/reward profile execute an strategy. Good Luck!
I'm 62, married, and ready to retire with assets approximately 700k. Is it better to keep money in an index fund and draw off 7-8% yearly, or does it make more sense to draw annual income from money market accounts? Or, is there a balance you'd recommend.I tend to agree with most of the remarks by Chuck except for the following:The Foolish Four system is mechanical and should be followed - if not, don't complain!The rule is to invest annually, in December after having held the four stocks for a year and at least one day to avoid short term taxes. At that time, the money is reinvested in the then current Foolish Four stocks to be held for a year and a day again.Investing at different times does not ruin the concept but it is known the returns are slightly less for the time period if different.Other money invested in the 500 Index Funds is a good idea but, I like to have two years expenses in a money fund as well. If a money fund is maintained, I do not have to sell my stocks when they are low and I need cash. (The Money Fund is built up each year when the FF stocks roll over). Most recommendations for withdrawals suggest a max of 5% to preserve capital over the long run.I do not like bonds and am happy I have 15 to 25% in real estate rentals. I think rentals level things off when the market is going nuts and the big shots are doing things that are not in my favor!Chuck's advice to read the Motley Fool's literature is excellent. Go to their home page and read the Fool's School and then --- read it again.H.
The Foolish Four system is mechanical and should be followed - if not, don't complain!The rule is to invest annually, in December after having held the four stocks for a year and at least one day to avoid short term taxes. At that time, the money is reinvested in the then current Foolish Four stocks to be held for a year and a day again.Investing at different times does not ruin the concept but it is known the returns are slightly less for the time period if different.PS:Re: Quarterly FF investing vs annually. The number of trades should be held to a minimum.Trading expenses add up too fast.H.
It's true that starting in different months provides different returns. The book, "The Foolish Four, How to Crush your Mutual Funds in 15 Minutes a Year" lists those average returns over 25 years. see page 39. Actually the highest historical return occurs in January. With an average of 24.62% The lowest is june with 15.04%. Even a 15% return is much higher than a money market account. It is my premise that it is better to earn 15% on a foolish four portfolio starting in June than to earn 5% in a money market fund. I will continue to maintain (until shown that it is foolish) that more than one quarters worth of income in a money market account is unnecessary. Look at the 5, 10 & 20 year rolling averages for the foolish four on pages 63,64&65 of the "Foolish Four" book. Taking the longer term aproach, one would almost never be selling at a loss. This includes the 73 - 74 "crash". I can see the point of a January Foolish Four portfolio with a years worth of income in a money market account but without running the numbers I still think four annual foolish four portfolios would bring a higher return. Commissions are a consideration and Tom & David recomend less than 2%. Using a discount broker you can make trades for $8 to $10 per share. At $10 one would need to invest at least $1000 each quarter in each of four stocks or $4000 to acheive this goal. This counts the commissions for buy and selling each year. I think most retirees will want at least that amount rolling over each quarter. Best wishesChuck
In my previous post I said in part, It's true that starting in different months provides different returns. The book, "The Foolish Four, How to Crush your Mutual Funds in 15 Minutes a Year" lists those average returns over 25 years. see page 39. Actually the highest historical return occurs in January. With an average of 24.62% The lowest is june with 15.04%. Even a 15% return is much higher than a money market account. It is my premise that it is better to earn 15% on a foolish four portfolio starting in June than to earn 5% in a money market fund. I will continue to maintain (until shown that it is foolish) that more than one quarters worth of income in a money market account is unnecessary. Look at the 5, 10 & 20 year rolling averages for the foolish four on pages 63,64&65 of the "Foolish Four" book. Taking the longer term aproach, one would almost never be selling at a loss. This includes the 73 - 74 "crash". After I wrote this I got to thinking about it. I know I should think before I respond. My position about quarterly investments in the Foolish Four is foolish. A years worth of income is some percent of the total amount invested. A $300,000 FF portfolio will yield about $72,000 per year. I would rather earn 24% on 300,000 and 5% on $72,000 than to earn 24% on one fourth of #300,000 or 75,000 in a Jan. port, 15.3% on 75000 in an April port, 15.04% on a june port and 17.5% on an Oct. port. I haven't done the math but clearly investing the full $300,000 at 24% and $72,000 at 5% is much better. Incedentally, if you are interested, I prepared an analysis of the Foolish Four strategy and associated risks in message 14588 of the retierment investing board. Based on that analysis I conclude that it isn't necessary to maintain more than one years worth of income in money market accounts.Thanks for pointing out the seasonality issue. I missed that point.Chuck
SPY is the ticker on the AMEX for a basket of S&P stocksThis is also known as SPDR (pronounced spider) Itstands for S & P Depository Receipts.
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