Message Font: Serif | Sans-Serif
 
No. of Recommendations: 2
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

Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
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.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.