Quote:
Originally Posted by Scanner
Actually, it could be made serious if you twist it around from the obvious "I've got something to sell (MLM)" to an investing question.
Investing for income used to be really in but in the 80's and 90's, it was more "in vogue" to invest for growth.
Sometimes I think about constructing an entire portfolio on income and "easing" my way into retirement.
Let's figure for every $100,000 you have, you can average $5000/year on 5% interest. You just keep buying treasuries, muni's, CD's, and dividend stocks (utilities are good) and every year, your paycheck means less and less.
Now, before you poo-poo me, think about this for a minute. You get up to $500,000 and you now have $25,000/year in passive income. If you are a family that makes $75,000/year. . .you don't worry so much if you get a disability, lose a job, etc.
However, if it's in a Roth, well. . .it may as well be buried in a box in Fiji, right?
I often wonder if stuffing our retirement money in tax shelters (ROTHS, SEP's, 401(k)'s) just because the pundits tell us to do this is really the right idea. I mean, we all save and save and save and save, for that magic age of 65 (67.5 for my generation) when we can go on Medicare and we don't get to enjoy any of the fruits of our savings.
I'm not sure this entirely makes sense sometimes.
I'm always one to question the status quo and give a contrarian idea some due.
My mentor in my field just bought muni bonds, never had an IRA or any other shelter. While that was a conservative investment philosophy, esp. in the roaring 80's and 90's, when he became disabled, he had a lot of passive income from them (plus more than a little principal) and he didn't have to go raid or borrow from a Roth or 401(k).
Something to think about. . .although I know contrarian thoughts don't usually go over well here at savingadvice.com
|
I toy with a similar idea all the time.
Based on what others tell me, there are two flaws with getting a $1 M bond portfolio which yields 5%:
1) I have not a found a bond fund which yields 5%, so generating 50k of income from just bonds is tough to do year in and year out.
2) Retiring at 65 with modest 2% inflation will cut the spending power of the 40k or 50k yield within a decade or two.
That being said, my solution to the inflation problem is to use dividends (now I just need to find a fund which can yield 3% consistently). My top dividend fund currently yields about 2.5%.
My solution to the 5% yield problem is twofold:
1) I plan to use 4% yield for planning purposes. That way when I get 4.23% or something similar, I have some extra I can set aside (to generate more income) the following year.
2) My plan is to have 3 contributions to income stream:
dividends (2.5%)
bonds (4.25%)
managed payout fund (or annuity) 7%
Then I plug some numbers into a simple equation:
income needed=2.5%*d+4.25%*b+7%*a
Then I start plugging numbers in and thinking of the asset allocation and risks associated with the aa.
2.5%*500k+4.25%*500k+7%*500k for example is an income of $12,500+$21250+$35,000=$68750
with a 50-50 asset allocation (some people might call this 33-67 because the annuity is similar to bonds).
That income ($68750) can grow at slightly less than 1% per year. The 500k dividend position should average about 5% appreciation over long term (with 2.5% yield staying contant), so the dividend position increases by $625 per year.
So 1% is my inflation adjustment. Not good enough? overweight the dividends.
2.5%*750k+4.25%*250k+7%*500k for example is an income of $18,750+$10625+$35,000=$64375.
The inflation adjustment is 1.5% in this case.
Because income went down in second example, I would either need to work longer and save more than 1.5 M or adjust spending downward 4k per year relative to normal expenses.
A traditional spend down plan (4% SWR) would be 60k, so both examples exceed the traditional 4% guideline.
---
edit:
In addition to dealing with the math, the other issues associated with bond investing includes inflation risk, interest rate risk, duration risk, tax risk and also principal risk.
I have mentioned inflation already (yield will not increase, yet prices will).
Interest rate risk- I could plan for the 4% yield all I wanted- if I had a bond maturing now and needed 4% from it, with todays rates that might be hard to find.
Duration risk- retirement is for 30-40-50 years. Treasuries can be purchased for a 30 year duration, so there is risk that the duration of the bonds might not be long enough to constantly guarantee the income stream for the timeframe desired.
Tax risk is the interest on the bonds is taxable (at marginal bracket rates). Dividends are taxed at a rate less than this. So in second example the income looks to be 4k less, but the reality is the tax bill (using todays tax code) is much less, such that a 100% dividend portfolio might have a better after tax spending income than a 100% bond porfolio.
Principal risk- just because a person puts 100k into a bond yielding 5% does not mean they will get all 100k back. If a person needs to sell the bond to raise cash, if rates have gone up, the value of the bond will have decreased, erasing principal from the portfolio.