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Subject:  Re: Changing Portfolio into Retirement income Date:  12/12/2012  3:53 PM
Author:  pauleckler Number:  1439 of 1929

The traditional Motley Fool recommendation is that you create a laddered maturity bond portfolio containing 5 years of living expenses. Then you live off of the interest from the portfolio and the funds from the bond that matures. Each year you sell stocks sufficient to purchase another 5 yr bond.

This system gives you a steady stream of income you can count on. And when the market tanks, it allows you to live off of the bond portfolio and avoids being forced to sell in a down market. Of course you still need to replace the missing bonds when the market recovers.

Historically most stock crashes recover in less than 3 years. Hence, 5 yrs is adequate.

Generally Fooldom suggests that you can retire on investments when 4% of your assets covers your living expenses. If you retire on the minimum, that implies that your bond portfolio is 20% of assets. That is a pretty aggressive number. Most retirees have more in bonds, but still stocks offer better return (at higher risk). Hence, on the minimum you need to max your growth potential to get suitable returns. But if your assets exceed the minimums, you can be more conservative.

Note that the 4% of assets implies that as your investments succeed and your assets grow, your funds available to spend also increases. Hence, ideally your net worth rises each year even after your living expenses are paid. This provides inflation protection, and lets your portfolio support you long term.
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