No. of Recommendations: 0
I'm trying to plan for an income of $100,000 per year after-tax cash flow for our retirement. Our $2.5 million portfolio consists of 65% equities and 35% fixed income investments. Living expenses for 2005 are in a money market fund, 2006 and 2007 are in a CD ladder and 2008 and 2009 are in short and intermediate-term bond funds. The rest of our portfolio consists of stock mutual funds. My question is, what strategy should I use to sell the stock mutual funds to replenish the fixed-income investments as they are used up? One option is to sell equities each year to replenish the $100,000 of fixed-income funds, in which case I'll be selling in both up and down markets? Or should I use some criteria that would result in selling equities in "good" times, when the market is up? How can I know when the "up" times are? Any thoughts would be appreciated.
Foolishly yours,
donfool
Print the post Back To Top
No. of Recommendations: 0
"My question is, what strategy should I use to sell the stock mutual funds to replenish the fixed-income investments as they are used up?"

One option to consider is selling according to your asset allocation. If you live off of the fixed-income, then you are putting yourself at high risk for stock-market fluctuations due to drawing down your fixed-income funds. Your current allocation is 65% equities and 35% fixed income. So, why not keep it that way as you draw money out of it? If you need $100,000, then sell $65,000 worth of stock and use up no more than $35,000 from your fixed-income.

Hedge
Print the post Back To Top
No. of Recommendations: 1
How are you going to adjust for inflation?

Are you selling out of IRAs?

Do you need $100,000 or do you want $100,000?

Do you get social security?

What kind or ROR are you getting on your portfolio? Just estimating, using a return of 3% for fixed and 8% for equities, I come up with a portfolio return of around 6.25%. Your current withdrawal rate is 4%. If inflation is running at 3% or higher, you are losing ground each year.

One thing you might consider is pulling out 3 years of living expenses and parking them in fixed income. Then on an annual basis, you could move money from equities into the fixed income portion if your equity portion performed well. Otherwise you could wait another year.

Just some things to think about. But, we don't want to put the cart before the ox (I hate stupid sayings, but this one is appropriate.).

JLP

http://AllThingsFinancial.blogspot.com
Print the post Back To Top
No. of Recommendations: 1
What kind or ROR are you getting on your portfolio? Just estimating, using a return of 3% for fixed and 8% for equities, I come up with a portfolio return of around 6.25%. Your current withdrawal rate is 4%. If inflation is running at 3% or higher, you are losing ground each year.

Actually you're gaining ground each year, at least for the first couple of decades. After 20 years, using your numbers, the $2,500,000 portfolio would have grown to $2,908,512. Reason is the withdrawal inflation only applies to a small part of the port.

Nick
Print the post Back To Top
No. of Recommendations: 0
Nick,

What you say is all true IF he keeps his withdrawal rate at a static $100,000.

A lot of it depends on his age and what his goals are. Some people are happy to draw down principal.

JLP

Print the post Back To Top
No. of Recommendations: 2
What you say is all true IF he keeps his withdrawal rate at a static $100,000.

No, it's true even if he raises his withdrawal rate at 3% per year, as in your example.

Nick
Print the post Back To Top
No. of Recommendations: 1
My question is, what strategy should I use to sell the stock mutual funds to replenish the fixed-income investments as they are used up?

My only "complaint" about your set up is bond funds. I'm totally against bond funds. You run the risk of losing principle just like an equity fund. Plus you can almost match the bond fund return with a CD.

My suggestions.

One, put 5 years living expenses in a CD ladder. You've pretty much done this, just need to move 2008 and 2009 monies. The advantage of a 5 year ladder, you now exactly what you have available 5 years out. Plus, "the market" rarely has a down 5 year period, so enough time to recover from any down turn.

As far as replenishment, if you're set on a 65/35 split, it is simple. At the time of rebalance, just sell enough equities to get back to 65%. Then buy a 5 year CD with 4%.

For example, 7 years from now, your portfolio has grown to $2.75 million after withdrawls. You have 4 CDs of laddered maturities worth $100k, $103k, $103k, and $107k. You have $1.975 million in equities. To get back to 65%, you'd need to sell $187,500 of equities. Then buy a 5 year CD worth $110k. You'd still have $439,500 to put in money market fund or 1 year CDs to be ready for next years rebalance.

Personally, 4% withdrawl is for someone not wanting to spend down principle. Some studies and Monte Carlo examples have shown 5-6% can be easily done if you're willing to spend down.

JLC
Print the post Back To Top
No. of Recommendations: 1
My question is, what strategy should I use to sell the stock mutual funds to replenish the fixed-income investments as they are used up? One option is to sell equities each year to replenish the $100,000 of fixed-income funds, in which case I'll be selling in both up and down markets? Or should I use some criteria that would result in selling equities in "good" times, when the market is up? How can I know when the "up" times are?

First of all, congratulations on saving a substantial nest egg, $2.5 million is a real acheivement.

I would use your annual withdrawals to keep your asset allocation in balance. Simply withdraw enough from both equities and fixed income to maintain the allocation you want (65%/35% seems reasonable). This way you have a mechanical way of taking more from stocks when they do well and less when they don't.

Adenovir
Print the post Back To Top
No. of Recommendations: 0
                 (minus)                    Ending
YR Investments Cash Needs  Balance   ROR    Balance
 1   2,500,000   $309,090 2,190,910 7.55% $2,356,324
 2  $2,356,324   $103,000 2,253,324 7.55% $2,423,450
 3  $2,423,450   $106,090 2,317,360 7.55% $2,492,320
 4  $2,492,320   $109,273 2,383,048 7.55% $2,562,968
 5  $2,562,968   $112,551 2,450,417 7.55% $2,635,423
 6  $2,635,423   $115,927 2,519,496 7.55% $2,709,718
 7  $2,709,718   $119,405 2,590,313 7.55% $2,785,881
 8  $2,785,881   $122,987 2,662,894 7.55% $2,863,942
 9  $2,863,942   $126,677 2,737,265 7.55% $2,943,929
10  $2,943,929   $130,477 2,813,451 7.55% $3,025,867
11  $3,025,867   $134,392 2,891,475 7.55% $3,109,782
12  $3,109,782   $138,423 2,971,358 7.55% $3,195,696
13  $3,195,696   $142,576 3,053,120 7.55% $3,283,630
14  $3,283,630   $146,853 3,136,777 7.55% $3,373,604
15  $3,373,604   $151,259 3,222,345 7.55% $3,465,632
16  $3,465,632   $155,797 3,309,835 7.55% $3,559,728
17  $3,559,728   $160,471 3,399,257 7.55% $3,655,901
18  $3,655,901   $165,285 3,490,616 7.55% $3,754,158
19  $3,754,158   $170,243 3,583,914 7.55% $3,854,500
20  $3,854,500   $175,351 3,679,149 7.55% $3,956,925
21  $3,956,925   $180,611 3,776,314 7.55% $4,061,426
Print the post Back To Top
No. of Recommendations: 0
DANG IT! I posted that BEFORE I added some commentary! GEEEEEZ!

Nick,

You are right. I set up a spreadsheet with the following assumptions:

$2,500,000 Beginning Amount
$309,090 withdrawn and set aside in a cash account for 3 years of income needs. Then the amount withdrawn from the investment account each year is the income need plus inflation.
I assumed a 10% ROR on the equities portion and a 3% return on the fixed income portion for a total portfolio return of 7.55%. I also assumed a 3% return on the cash account.

Interesting stuff.

JLP

http://AllThingsFinancial.blogspot.com
Print the post Back To Top
No. of Recommendations: 2
JLP, JLC, Adenovir, yobria, Nick and Hedge ---

Thanks for your valuable comments.
I've consolidated your comments and will be doing the following:
-Keep two years living expenses in money market funds.
-Sell the ST bond funds and extend the CD ladder for years 3 - 5.
-Rebalance annually by selling equities to a percentage that starts at 65/35 in 2005, and reduces equities by about one % per year, recognizing that we're not getting any younger.
-Rebalancing will involve selling whatever is up, with some discretion to defer selling in a down market.
-Increase our annual withdrawal to $125,000 before-tax, since we will also have Soc Sec and pensions, and we're willing to spend down the principal slowly.

Thanks again for your comments.
Donfool

Print the post Back To Top
No. of Recommendations: 2
My only "complaint" about your set up is bond funds. I'm totally against bond funds. You run the risk of losing principle just like an equity fund. Plus you can almost match the bond fund return with a CD.

YES! With bond yields at current lows, the potiental for loss in a bond fund is more than buying the NAS at the peak of the bubble. Well, almost that bad. If the Fed rate goes to 5%, a bond fund could easliy lose 50% of its value. I wouldn't touch a bond fund.

cliff
Print the post Back To Top
No. of Recommendations: 0
In 2005 I've been selling most bond funds and holding the money in a money market mutual fund. The money market is currently yielding 2.2% and the rate will climb as the Fed raises short term rates. I hate settling for such a low rate but the yields on most bond funds don't compensate for the risk to principal from rising interest rates. Once the Fed is done and things settle down I'll move back to intermediate bond funds.
Print the post Back To Top
No. of Recommendations: 0
How dangerous do you guys think short-term bond funds are (Duration of 1-2 years)?

I'm parking a percentage of my money there right now, in case the stock market comes down. Should I have it in a money market instead? We're talking 3% vs 2%.

Print the post Back To Top
No. of Recommendations: 1
rrosenkoetter asks,

How dangerous do you guys think short-term bond funds are (Duration of 1-2 years)?

I'm parking a percentage of my money there right now, in case the stock market comes down. Should I have it in a money market instead? We're talking 3% vs 2%.


I'd put it in an FDIC-insured INGDirect Orange account at 2.35%

http://home.ingdirect.com/

intercst
Print the post Back To Top
No. of Recommendations: 0
<<<How dangerous do you guys think short-term bond funds are (Duration of 1-2 years)?

I'm parking a percentage of my money there right now, in case the stock market comes down. Should I have it in a money market instead? We're talking 3% vs 2%.>>>


I don't think the short-term bond fund is worth the risk right now. Duration is telling you an interest rate increase of 1% will reduce principal 1 to 2%. You're getting only a 1% spread over the money market fund. And if short term rates do rise the money market yield will also rise. You do the math.

In 2004 I had money in a short-term bond fund for about 10 months. Yield was about 3% but when the Fed began raising rates the principal started dropping. By the time I bailed from the fund my total return was about equal to what I would have earned in a money market mutual fund. Ironically I went into the short-term fund because I expected intermediate funds to be hit harder by interest rate increases. As Alan Greenspan said this week the behavior of intermediate rates has been a carnondrum. Sometimes you just can't win.
Print the post Back To Top