I have been a proponent of SPIAs and MYGAs since I retired at age 63 (12 years now). For us, it provided the peace-of-mind that we wanted in retirement. The use of SPIA also allowed us to choose how much additional lifetime income we needed such that in combination with my SS benefit, it would cover our essential expenses. It was also important (to us) to limit the amount used for this annuity to be no more than 1/3rd of our portfolio. I thought of this as “setting aside” 1/3rd of our retirement assets to fund our own joint-survivor “pension.” I also wanted to minimize the amount used for this annuity income in order to maximize the investable assets. With this arrangement, all IRA withdrawals would be for discretionary spending and could be variable. This strategy, in turn, also mitigates sequence of return risk (SoRR) by supporting variable savings withdrawals, if necessary. In our case, we need roughly 3% of our portfolio to fund our annual discretionary spending. That led to setting up a “bond allocation” of 30% to cover up to 10 years of discretionary expenses. Half of that bond allocation is CDs and MYGAs. (covering the “next” five years of withdrawals). The other half is bond funds and buffered ETFs. Consequently, that leaves 70% of our portfolio to be invested for the long-term (>10 years). Over the past 12 years (in retirement), this asset allocation has allowed our portfolio to grow fairly consistently and is much higher today than when I retired (after annuitization). This long-term investment horizon can also help mitigate SoRR as well. All these “features” are based on having sufficient lifetime income (factoring SS benefits and annuity income). Another interesting benefit of using SPIA (purchased within an IRA) is the ability to use that annuity payout to further reduce your RMD (via Secure Act 2.0). In our case, our nominal RMD (for our initial 100% tax-deferred portfolio) started off around 4% of our portfolio. We then converted 40% of our portfolio to Roth over a six-year period. That reduced our RMD to 2.4% of our portfolio. If I then compute the revised RMD using “excess” SPIA payout to reduce the non-annuitized T-IRA RMD, the revised RMD drops to 0.9%. Currently, we use 3% for spending and have no need to use this revised RMD. However, when a spouse passes away (and now has to file as single), this revised RMD (at ~1%) can avoid the widower’s tax penalty by substantially reducing taxable income. Roth income (~2%) would then supplement any additional income needed – allowing the same 3% withdrawal rate while keeping taxes comparable to filing MFJ.
I’ve implemented a similar plan since 2020 as well. It was the Covid downturn that started it for me, too. In my case, I dynamically adjust my asset allocation between 60/40 and 80/20. I remember on Valentine’s Day (2020), I shifted my asset allocation from 70/30 (my normal asset allocation) to 60/40, in that I thought the market was overvalued. At the time, Covid was a distant epidemic but the market had not reacted to it as yet. Then in rapid sequence, it seems the market decreased dramatically as the pandemic took shape. I had shifted my asset allocation to 70/30 when the market was down 15% (had planned to do so at 10% but it ran past me too quickly). Then in late Mar 2020 (~30% down), I shifted to 80/20. In our case, we have sufficient income (SS benefits plus annuity income) such that all savings withdrawals are for discretionary expenses. Our minimum 20% “bond allocation” will cover about seven years of such spending, allowing us to maintain our lifestyle. When the market recovered (Nov 2020), I rebalanced to 70/30. Since then, I have gradually shifted my asset allocation based on market changes (after the fact) so that no guessing of lows or highs is involved (using percent difference as well). Most of the time, I am at 70/30. The worst case is that the market continues to grow (with no dips or corrections) and I’m “stuck” at 60/40 (which I’m happy to stay at). If that were to happen, then standard rebalancing will maintain that target asset allocation. At the same time, my minimum 20% bond allocation (mostly CDs) during "bad times" allows us to “stay the course” for seven years (while our 30% normal bond allocation will last us 10 years). During this period (2017-2022), I was also doing large Roth conversions. When a significant market downturn took place (~10% or more), I often did my asset allocation shift in conjunction with my planned Roth conversions (converting cash or bonds from T-IRA and buying equities in my Roth). I was at 60/40 last Oct 2024 and shifted to 70/30 a few days ago. If the market continues its downward trend, I will shift to 80/20 and hold until it recovers. Since we’ve achieved our Roth conversion goals, we do smaller conversions in Dec if the conditions (and income headroom) are right.
I wound up having a phased retirement transition, although it wasn’t planned. I went from full-time to part-time when my wife retired (three years before me), which allowed us to travel more while I was still working. When I did retire (at age 63 in 2013), I was offered a “too good to refuse” part-time job (working one day a week from home) that was supposed to last six months but lasted five years. We had traveled to over 20 countries before I retired, not wanting to “wait for retirement.” This was based on my experience of seeing my parents die early and never experiencing retiring together. In retirement, we have enjoyed traveling the world, having visited an additional 30 countries (not visited previously). This year, we spent five weeks in Hawaii, have plans for a four-week road trip to Orlando next month (where we are taking our grandchildren to Disney World for a week), and a four-week trip to the Azores and Portugal with friends in Sept. We planned and executed our safety-first retirement income strategy (in 2013) and have guaranteed lifetime income that still covers our essential expenses today. We partially annuitized our portfolio (1/3rd) to create a self-funded (joint survivor) pension since my company only had 401k plans and no corporate pension plans. The outcome of our retirement financial plan has matched or exceeded my expectations (partly due to a reasonable sequence of return since 2013). We also completed our travel bucket list and have started a new one. Next year, we are focusing on S. America and the Far East. I volunteer at Care Givers to give rides to those that are homebound and stay active at home maintaining a 1+ acre Japanese garden (with a 5,000-gal koi pond). We live in a three-generation household, where our upstairs is an independent apartment, which was not planned. Socially, things are hectic (two granddaughters age 6 and 9) but it keeps us active and engaged. We custom designed our “last” house (our 7th house) for senior living and energy efficiency. Eleven years later, we are very satisfied with our choices. I don’t think I had much expectations for our non-financial retirement activities other than travel but so far, so good.
We didn’t have a pension so we partially annuitized our IRA such that with my SS benefit at FRA, that combined income would cover our essential expenses. I was able to wait to age 70 to claim SS. That lifetime income (my SS benefit plus joint-survivor immediate annuity) covers all expenses except for major travel. We treat my wife’s SS income as a future inflationary hedge for essential expenses or to supplement our discretionary spending. Since 2018 (when TCJA became effective), we have converted 40% of our portfolio to Roth as well. For a surviving spouse, the remaining SS benefit plus the annuity income still cover all essential expenses. The RMD (which is 40% less due to the prior conversions) is sufficient to cover any additional income needs. If needed, we can also further reduce the RMD by applying the annuity income toward “satisfying” some of the RMD based on the non-annuitized end of year balance (a new Secure Act 2.0 feature). If needed, the surviving spouse can then use the Roth account to cover any additional needs without tax implications. This combination minimizes the widower’s tax penalty.
I’m curious as to what people think what “simplification” means from an investing viewpoint. For us, I’ve been trying to create an income stream (nowadays, to address our RMDs) that we can collect monthly with the appropriate tax withholding while reducing, if not eliminating, the what, when, and how much to buy or sell. In essence, my goal is to do away with the need to rebalance, especially as we enter our 80s and may have to deal with cognitive decline at some point. Presently, while my investment strategy is based on diversified low-cost index funds (simple in itself), I have a somewhat complicate tax planning and dynamic asset allocation approach along with a multi-year structured Roth conversion plan. Fortunately, our conversion plan is coming to an end and simplification is now becoming a priority for us. To explore this approach while I have the mental acuity to assess the outcome, I have set aside a $100K account with a 60/40 asset allocation to test out a concept. This account has 30% in S&P 500 for growth (fully reinvested), 30% in US Div 100 (dividend-paying equities) for growth and income, and 40% in 20-year Treasury bonds for income. Currently, this trial account has experienced (at an annualized rate) a 10% capital growth with a 3.6% dividend/interest “income” stream. The historical growth for this mix has been closer to 7% while the dividend/interest has been close to 3%. Since our RMD withdrawal needs is about 3% (due to 40% of our portfolio in Roth), this income stream seems like a good candidate mix for simplification (short of using an advisor). The actual mechanism is that the monthly withdrawals come from the cash reserve, which is the repository of all non-reinvested dividends and interest). Due to uneven deposits, the cash reserve can be seeded with sufficient assets to satisfy monthly withdrawals. Furthermore, if the cash reserve should be depleted, a backup account (S&P500 index fund, for example) can be used to address any shortfalls (automatically). One thing I'm looking closely at is the consistency of the "income stream" compared to the monthly market volatility (NAV vs dividends). Since you are not selling anything, all growth can be viewed as long-term. This assume that the dividend income is somewhat reliable on an annual basis. I know a “total return” strategy would result in a bit more gain but this seems like it could be a good trade-off if the “income” (over a year) satisfies the RMD withdrawals.
When I retired, I was also a bit frugal when it came to traveling. When my wife got cancer (rare, aggressive form), we were given a poor prognosis. After surgery and two rounds of chemo, she was “declared” cancer free. Before this "declaration" though, she was in the ICU and the doctor told us on one occasion that she would not make it through the night. So we had a lot of ups and downs. After the "good" news, we discovered that the cancer came back within nine months. Her oncologist told her that she had the “best” two treatments (Dana Farber Cancer Center) and didn’t feel that any further treatment would be fruitful (although they had some phase two trials that didn’t look particularly interesting). I couldn’t accept that and started interviewing other medical centers across the country that had clinical trials for this type of cancer and found two that looked promising. This was one time we were glad that we opted for regular Medicare with supplement (Plan F). After a few interviews, I managed to get her enrolled in a trial. One year later, she was cancer free and has been for the past nine years. It was soon after, that my “frugal” travel trends disappeared. Where previously, I would balk at spending three or four times more for business or first class (compared to economy), these days I don’t even look at what economy class cost (unless it is short flight). While we liked traveling, we hated the waiting in line, struggling for overhead space, sitting in cramped seats, dealing with center seat arm “wrestling,” and dealing with that five-year old behind you that likes to kick the seat back. Now traveling is much more comfortable and I don’t think about the cost. My criteria is that we spend a certain amount each year for travel (now that amount is our RMD). As long as we don’t exceed that amount too much, I don’t bother thinking about it. I typically use a travel agent and tell her to book business or first class and only look at the total cost. These days, we consider every trip we take might be our “last” trip. I know you have to worry about having sufficient funds for your heirs (so do I) but once you have that “under control,” why not splurge more.
I consider it speculation. It is unstable and extremely volatile. On the other hand, you can’t deny the long-term growth since its creation in 2009. For that reason, I “invested” about 3% of my portfolio a few years ago in my Roth via a limited partnership (LP) managed by Fidelity (the only organization that I would trust at that time). Originally, my goal was to leave it to my beneficiaries and had disregarded that fund (as being part of my portfolio from a retirement asset viewpoint). When Fidelity’s spot bitcoin ETF (FBTC) became available, I swapped out of the LP (which was charging a 1% expense ratio) and purchased the equivalent amount of FBTC (at 0.25% ER). At first, the Fidelity website denied the trade due to the account categorization being "growth and income." I fixed that by recategorizing it to “most aggressive,” made the purchase, and went back to “growth and income” again. I guess they want to make sure that you are aware that the purchase of such funds is speculative in nature since all kinds of warnings pop up when you change to “most aggressive.” Since the original purchase, the growth of bitcoin has increased that percentage from the original 3% of my portfolio to almost 9%, making it difficult to ignore. It didn’t have quite that much gain in that I did buy an extra bitcoin during one of the downturns. More recently, I attributed that FBTC fund to be part of my equity allocation, maintaining my 70/30 ratio with that inclusion. While my plan is still to leave it to my beneficiaries (who know that I’ve got this speculative holding), I also told them that if bitcoin hits $500K, I’m cashing out and spending it.
I didn’t plan it but my retirement went through an eight-year phased process. After my wife retired, I scaled back my work by getting rid of my management role. This eliminated the primary source of work-related stress for me but left my research and development work, which I enjoyed. I then transitioned to working four-day weeks, although I was often working 10-hour days. This, at least, gave me consistent three-day weekends. The year prior to retiring, I cut my hours by 20%, coming close to what I envisioned our retirement income might look like. While not planned, I was offered a consulting job at a different company, working one day per week from home, reporting directly to the CEO. I was getting a five-figure monthly retainer so as not to worry about billable hours. While this was for a six-month “task,” this arrangement lasted three years. I then requested a further reduction during the last two years, working one day per month before finally retiring in earnest. After that, I volunteered for our local Care Givers organization where I give rides to people who are homebound to their doctor’s appointment. There’s no pay but once a month, we get free pastries/bread from Panera.
I had a similar experience while working (being somewhat frugal). After the death of my mother (in her 40s) and my father (in his 60s) both from illness, it impacted my thought process. I swung the pendulum the other way and max’ed out our $25K credit card back in the 80s. It took about five years to dig myself out of that mess and reverted back to being somewhat frugal again, though not as bad.
One “leftover” from lessons learned about my parents was that they planned all these trips for after retirement. Since my mother fell ill during my father’s retirement ceremony (and passed away three days later), none of those plans came to pass. That had a big impact on me and made it easier to decide to “enjoy life while you can.” Prior to retiring we did some traveling and visited about 20 countries while still working. After retiring (11 years now), we have visited 30 new countries. It was only since 2019 that I decided that we can afford to go first class. At the time, the thought of spending that kind of money was bit “weird” but now, I view it as “just money” (so long as you have enough) and the amount (that we spend) has little impact to our long term finances. We also have a built-in spending “guardrail” of sorts now. Since we are now withdrawing our RMDs, I don’t really think much about our spending while our full RMDs have not been taken. So far, I’ve been able to reduce our taxable RMDs via QCDs and take the final portion in early Dec to pay via withholdings any federal taxes due (for Roth conversions or prior RMD withdrawals).
Three years prior to retiring, I also did not know how much we were spending. I only got concerned if the bank account balance dropped below a certain threshold. When my wife retired (three years before me), I finally started to get some sense of our spending. It was difficult to know how to translate our current spending to what we might spend in retirement. I made my best attempt and did something similar to you by breaking out our essential versus discretionary expenses. When I retired, I also transitioned almost all our spending to credit cards since I preferred the documentation options (spreadsheet) for our transactions. The cash back didn't hurt either. I was able to process these monthly statements, put every item into one of 35 categories (semi-automatically), and sum up each expense category in a spreadsheet. I also added a mutually exclusive flag for each item being either essential or discretionary. I would then use this data to update the NewRetirement PlannerPlus “budgeter” worksheet and the Fidelity Retirement Analysis Tool budget worksheet. This update is our actual expense ledger for that year and accounts for over 99% of our income and withdrawals. Since I keep an annual copy of these reports, I also have a running expense history that provides some insight to our personal inflation rate for these expense categories and can analyze our spending trends.
What you are proposing (for retirement income generation) is basically what we’ve done since retiring 10 years ago (at age 63). When I retired, I estimated my SS benefit at my full retirement age (FRA) of 66. After determining what our essential expenses were, we purchased sufficient SPIA income such that the combination covered those expenses. However, we limited the SPIA purchases to less than 1/3rd our portfolio in order to maintain financial flexibility. I set up a CD ladder to get to FRA, where each rung covered the shortfall of not taking SS (at the FRA rate) and our estimated discretionary spending. Each year from age 66 to 70, I reassessed the “need” to start my SS benefit but was able to hold off until age 70. I kept extending the ladder to guarantee that any anticipated shortfall in income (for essential spending) was met with fixed-income assets. In the meantime, we maintained a 70/30 asset allocation for the past 10 years (with our asset mix being close to what you indicated except less international but with an REIT fund). As a result of waiting to age 70 to claim SS benefits, our lifetime income covers all our expenses (essential and discretionary) except for major international travel. Alternatively, we could also consider this “excess” lifetime income (discretionary portion) available to compensate for the lack of COLA for the SPIA income. At 3% inflation, I estimate that this lifetime income will continue to cover essential expenses minimally through 2028. Another interesting outcome is that my SS benefit (as the higher income earner) plus our (joint-survivor) SPIA income plus (our current) RMD is more than the cost of a skilled nursing facility in our area. This was not planned but I thought it was an interesting coincidence.
Since all IRA withdrawals are for discretionary spending (except for planned major expenses such as a new car), it has provided peace-of-mind, allowed a variable savings withdrawal rate, and mitigates sequence of return risk. With the heavier weighting in equities, we have being able to achieve an annualized rate of return of 8% since retiring. As a result, our portfolio continues to grow each year and we will (despite our spending) most likely die at our highest net worth. Our 20-30% bond allocation also allows us (if necessary) to draw on non-equity assets for 10-15 years, allowing the equity funds to stay invested for the long term. While we initially averaged close to 6% withdrawal per year, a good portion of that withdrawal rate was for travel (visited 27 new countries since retiring) and six years of paying large Roth conversion taxes. Those conversions reduced our T-IRA balance by almost 40%, making a big dent in our RMDs, which also got us below the Medicare IRMAA thresholds. For the past two years, we have not had to withdraw more than our RMD (which only applies to 60% of our portfolio). I estimate that our children will inherit our assets with 66% of such assets tax-free.
In our mid-70s now, I am working on further simplifying our portfolio, not unlike what you have proposed. One strategy I recently explored with our CFP is transitioning toward generating more dividends to create an income stream to satisfy our RMD. While I have always been more of a total return person, this strategy (at this stage of our retirement) would pretty much eliminate the need to decide what to sell or buy, rebalance, or replenish buckets. I can even have our RMDs computed and distributed monthly with no intervention on our part. In parallel, I have also set up an automated cash flow and autobill payment on the expense side. But that is another story.
Comments
I have been a proponent of SPIAs and MYGAs since I retired at age 63 (12 years now). For us, it provided the peace-of-mind that we wanted in retirement. The use of SPIA also allowed us to choose how much additional lifetime income we needed such that in combination with my SS benefit, it would cover our essential expenses. It was also important (to us) to limit the amount used for this annuity to be no more than 1/3rd of our portfolio. I thought of this as “setting aside” 1/3rd of our retirement assets to fund our own joint-survivor “pension.” I also wanted to minimize the amount used for this annuity income in order to maximize the investable assets. With this arrangement, all IRA withdrawals would be for discretionary spending and could be variable. This strategy, in turn, also mitigates sequence of return risk (SoRR) by supporting variable savings withdrawals, if necessary. In our case, we need roughly 3% of our portfolio to fund our annual discretionary spending. That led to setting up a “bond allocation” of 30% to cover up to 10 years of discretionary expenses. Half of that bond allocation is CDs and MYGAs. (covering the “next” five years of withdrawals). The other half is bond funds and buffered ETFs. Consequently, that leaves 70% of our portfolio to be invested for the long-term (>10 years). Over the past 12 years (in retirement), this asset allocation has allowed our portfolio to grow fairly consistently and is much higher today than when I retired (after annuitization). This long-term investment horizon can also help mitigate SoRR as well. All these “features” are based on having sufficient lifetime income (factoring SS benefits and annuity income). Another interesting benefit of using SPIA (purchased within an IRA) is the ability to use that annuity payout to further reduce your RMD (via Secure Act 2.0). In our case, our nominal RMD (for our initial 100% tax-deferred portfolio) started off around 4% of our portfolio. We then converted 40% of our portfolio to Roth over a six-year period. That reduced our RMD to 2.4% of our portfolio. If I then compute the revised RMD using “excess” SPIA payout to reduce the non-annuitized T-IRA RMD, the revised RMD drops to 0.9%. Currently, we use 3% for spending and have no need to use this revised RMD. However, when a spouse passes away (and now has to file as single), this revised RMD (at ~1%) can avoid the widower’s tax penalty by substantially reducing taxable income. Roth income (~2%) would then supplement any additional income needed – allowing the same 3% withdrawal rate while keeping taxes comparable to filing MFJ.
Post: RDQ Sorry folks, I still see annuities, including deferred annuities, as a viable option for creating steady retirement income.
Link to comment from April 26, 2025
I’ve implemented a similar plan since 2020 as well. It was the Covid downturn that started it for me, too. In my case, I dynamically adjust my asset allocation between 60/40 and 80/20. I remember on Valentine’s Day (2020), I shifted my asset allocation from 70/30 (my normal asset allocation) to 60/40, in that I thought the market was overvalued. At the time, Covid was a distant epidemic but the market had not reacted to it as yet. Then in rapid sequence, it seems the market decreased dramatically as the pandemic took shape. I had shifted my asset allocation to 70/30 when the market was down 15% (had planned to do so at 10% but it ran past me too quickly). Then in late Mar 2020 (~30% down), I shifted to 80/20. In our case, we have sufficient income (SS benefits plus annuity income) such that all savings withdrawals are for discretionary expenses. Our minimum 20% “bond allocation” will cover about seven years of such spending, allowing us to maintain our lifestyle. When the market recovered (Nov 2020), I rebalanced to 70/30. Since then, I have gradually shifted my asset allocation based on market changes (after the fact) so that no guessing of lows or highs is involved (using percent difference as well). Most of the time, I am at 70/30. The worst case is that the market continues to grow (with no dips or corrections) and I’m “stuck” at 60/40 (which I’m happy to stay at). If that were to happen, then standard rebalancing will maintain that target asset allocation. At the same time, my minimum 20% bond allocation (mostly CDs) during "bad times" allows us to “stay the course” for seven years (while our 30% normal bond allocation will last us 10 years). During this period (2017-2022), I was also doing large Roth conversions. When a significant market downturn took place (~10% or more), I often did my asset allocation shift in conjunction with my planned Roth conversions (converting cash or bonds from T-IRA and buying equities in my Roth). I was at 60/40 last Oct 2024 and shifted to 70/30 a few days ago. If the market continues its downward trend, I will shift to 80/20 and hold until it recovers. Since we’ve achieved our Roth conversion goals, we do smaller conversions in Dec if the conditions (and income headroom) are right.
Post: What to do as the Bear Approaches
Link to comment from April 12, 2025
I wound up having a phased retirement transition, although it wasn’t planned. I went from full-time to part-time when my wife retired (three years before me), which allowed us to travel more while I was still working. When I did retire (at age 63 in 2013), I was offered a “too good to refuse” part-time job (working one day a week from home) that was supposed to last six months but lasted five years. We had traveled to over 20 countries before I retired, not wanting to “wait for retirement.” This was based on my experience of seeing my parents die early and never experiencing retiring together. In retirement, we have enjoyed traveling the world, having visited an additional 30 countries (not visited previously). This year, we spent five weeks in Hawaii, have plans for a four-week road trip to Orlando next month (where we are taking our grandchildren to Disney World for a week), and a four-week trip to the Azores and Portugal with friends in Sept. We planned and executed our safety-first retirement income strategy (in 2013) and have guaranteed lifetime income that still covers our essential expenses today. We partially annuitized our portfolio (1/3rd) to create a self-funded (joint survivor) pension since my company only had 401k plans and no corporate pension plans. The outcome of our retirement financial plan has matched or exceeded my expectations (partly due to a reasonable sequence of return since 2013). We also completed our travel bucket list and have started a new one. Next year, we are focusing on S. America and the Far East. I volunteer at Care Givers to give rides to those that are homebound and stay active at home maintaining a 1+ acre Japanese garden (with a 5,000-gal koi pond). We live in a three-generation household, where our upstairs is an independent apartment, which was not planned. Socially, things are hectic (two granddaughters age 6 and 9) but it keeps us active and engaged. We custom designed our “last” house (our 7th house) for senior living and energy efficiency. Eleven years later, we are very satisfied with our choices. I don’t think I had much expectations for our non-financial retirement activities other than travel but so far, so good.
Post: Meeting Expectations?
Link to comment from March 8, 2025
We didn’t have a pension so we partially annuitized our IRA such that with my SS benefit at FRA, that combined income would cover our essential expenses. I was able to wait to age 70 to claim SS. That lifetime income (my SS benefit plus joint-survivor immediate annuity) covers all expenses except for major travel. We treat my wife’s SS income as a future inflationary hedge for essential expenses or to supplement our discretionary spending. Since 2018 (when TCJA became effective), we have converted 40% of our portfolio to Roth as well. For a surviving spouse, the remaining SS benefit plus the annuity income still cover all essential expenses. The RMD (which is 40% less due to the prior conversions) is sufficient to cover any additional income needs. If needed, we can also further reduce the RMD by applying the annuity income toward “satisfying” some of the RMD based on the non-annuitized end of year balance (a new Secure Act 2.0 feature). If needed, the surviving spouse can then use the Roth account to cover any additional needs without tax implications. This combination minimizes the widower’s tax penalty.
Post: How have you financially protected a surviving spouse or dependent?
Link to comment from August 10, 2024
I’m curious as to what people think what “simplification” means from an investing viewpoint. For us, I’ve been trying to create an income stream (nowadays, to address our RMDs) that we can collect monthly with the appropriate tax withholding while reducing, if not eliminating, the what, when, and how much to buy or sell. In essence, my goal is to do away with the need to rebalance, especially as we enter our 80s and may have to deal with cognitive decline at some point. Presently, while my investment strategy is based on diversified low-cost index funds (simple in itself), I have a somewhat complicate tax planning and dynamic asset allocation approach along with a multi-year structured Roth conversion plan. Fortunately, our conversion plan is coming to an end and simplification is now becoming a priority for us. To explore this approach while I have the mental acuity to assess the outcome, I have set aside a $100K account with a 60/40 asset allocation to test out a concept. This account has 30% in S&P 500 for growth (fully reinvested), 30% in US Div 100 (dividend-paying equities) for growth and income, and 40% in 20-year Treasury bonds for income. Currently, this trial account has experienced (at an annualized rate) a 10% capital growth with a 3.6% dividend/interest “income” stream. The historical growth for this mix has been closer to 7% while the dividend/interest has been close to 3%. Since our RMD withdrawal needs is about 3% (due to 40% of our portfolio in Roth), this income stream seems like a good candidate mix for simplification (short of using an advisor). The actual mechanism is that the monthly withdrawals come from the cash reserve, which is the repository of all non-reinvested dividends and interest). Due to uneven deposits, the cash reserve can be seeded with sufficient assets to satisfy monthly withdrawals. Furthermore, if the cash reserve should be depleted, a backup account (S&P500 index fund, for example) can be used to address any shortfalls (automatically). One thing I'm looking closely at is the consistency of the "income stream" compared to the monthly market volatility (NAV vs dividends). Since you are not selling anything, all growth can be viewed as long-term. This assume that the dividend income is somewhat reliable on an annual basis. I know a “total return” strategy would result in a bit more gain but this seems like it could be a good trade-off if the “income” (over a year) satisfies the RMD withdrawals.
Post: Why Wait?
Link to comment from July 6, 2024
When I retired, I was also a bit frugal when it came to traveling. When my wife got cancer (rare, aggressive form), we were given a poor prognosis. After surgery and two rounds of chemo, she was “declared” cancer free. Before this "declaration" though, she was in the ICU and the doctor told us on one occasion that she would not make it through the night. So we had a lot of ups and downs. After the "good" news, we discovered that the cancer came back within nine months. Her oncologist told her that she had the “best” two treatments (Dana Farber Cancer Center) and didn’t feel that any further treatment would be fruitful (although they had some phase two trials that didn’t look particularly interesting). I couldn’t accept that and started interviewing other medical centers across the country that had clinical trials for this type of cancer and found two that looked promising. This was one time we were glad that we opted for regular Medicare with supplement (Plan F). After a few interviews, I managed to get her enrolled in a trial. One year later, she was cancer free and has been for the past nine years. It was soon after, that my “frugal” travel trends disappeared. Where previously, I would balk at spending three or four times more for business or first class (compared to economy), these days I don’t even look at what economy class cost (unless it is short flight). While we liked traveling, we hated the waiting in line, struggling for overhead space, sitting in cramped seats, dealing with center seat arm “wrestling,” and dealing with that five-year old behind you that likes to kick the seat back. Now traveling is much more comfortable and I don’t think about the cost. My criteria is that we spend a certain amount each year for travel (now that amount is our RMD). As long as we don’t exceed that amount too much, I don’t bother thinking about it. I typically use a travel agent and tell her to book business or first class and only look at the total cost. These days, we consider every trip we take might be our “last” trip. I know you have to worry about having sufficient funds for your heirs (so do I) but once you have that “under control,” why not splurge more.
Post: Looking Different
Link to comment from July 6, 2024
I consider it speculation. It is unstable and extremely volatile. On the other hand, you can’t deny the long-term growth since its creation in 2009. For that reason, I “invested” about 3% of my portfolio a few years ago in my Roth via a limited partnership (LP) managed by Fidelity (the only organization that I would trust at that time). Originally, my goal was to leave it to my beneficiaries and had disregarded that fund (as being part of my portfolio from a retirement asset viewpoint). When Fidelity’s spot bitcoin ETF (FBTC) became available, I swapped out of the LP (which was charging a 1% expense ratio) and purchased the equivalent amount of FBTC (at 0.25% ER). At first, the Fidelity website denied the trade due to the account categorization being "growth and income." I fixed that by recategorizing it to “most aggressive,” made the purchase, and went back to “growth and income” again. I guess they want to make sure that you are aware that the purchase of such funds is speculative in nature since all kinds of warnings pop up when you change to “most aggressive.” Since the original purchase, the growth of bitcoin has increased that percentage from the original 3% of my portfolio to almost 9%, making it difficult to ignore. It didn’t have quite that much gain in that I did buy an extra bitcoin during one of the downturns. More recently, I attributed that FBTC fund to be part of my equity allocation, maintaining my 70/30 ratio with that inclusion. While my plan is still to leave it to my beneficiaries (who know that I’ve got this speculative holding), I also told them that if bitcoin hits $500K, I’m cashing out and spending it.
Post: Is bitcoin an investment or a speculation—and why?
Link to comment from June 8, 2024
I didn’t plan it but my retirement went through an eight-year phased process. After my wife retired, I scaled back my work by getting rid of my management role. This eliminated the primary source of work-related stress for me but left my research and development work, which I enjoyed. I then transitioned to working four-day weeks, although I was often working 10-hour days. This, at least, gave me consistent three-day weekends. The year prior to retiring, I cut my hours by 20%, coming close to what I envisioned our retirement income might look like. While not planned, I was offered a consulting job at a different company, working one day per week from home, reporting directly to the CEO. I was getting a five-figure monthly retainer so as not to worry about billable hours. While this was for a six-month “task,” this arrangement lasted three years. I then requested a further reduction during the last two years, working one day per month before finally retiring in earnest. After that, I volunteered for our local Care Givers organization where I give rides to people who are homebound to their doctor’s appointment. There’s no pay but once a month, we get free pastries/bread from Panera.
Post: Buying Freedom
Link to comment from June 1, 2024
I had a similar experience while working (being somewhat frugal). After the death of my mother (in her 40s) and my father (in his 60s) both from illness, it impacted my thought process. I swung the pendulum the other way and max’ed out our $25K credit card back in the 80s. It took about five years to dig myself out of that mess and reverted back to being somewhat frugal again, though not as bad. One “leftover” from lessons learned about my parents was that they planned all these trips for after retirement. Since my mother fell ill during my father’s retirement ceremony (and passed away three days later), none of those plans came to pass. That had a big impact on me and made it easier to decide to “enjoy life while you can.” Prior to retiring we did some traveling and visited about 20 countries while still working. After retiring (11 years now), we have visited 30 new countries. It was only since 2019 that I decided that we can afford to go first class. At the time, the thought of spending that kind of money was bit “weird” but now, I view it as “just money” (so long as you have enough) and the amount (that we spend) has little impact to our long term finances. We also have a built-in spending “guardrail” of sorts now. Since we are now withdrawing our RMDs, I don’t really think much about our spending while our full RMDs have not been taken. So far, I’ve been able to reduce our taxable RMDs via QCDs and take the final portion in early Dec to pay via withholdings any federal taxes due (for Roth conversions or prior RMD withdrawals). Three years prior to retiring, I also did not know how much we were spending. I only got concerned if the bank account balance dropped below a certain threshold. When my wife retired (three years before me), I finally started to get some sense of our spending. It was difficult to know how to translate our current spending to what we might spend in retirement. I made my best attempt and did something similar to you by breaking out our essential versus discretionary expenses. When I retired, I also transitioned almost all our spending to credit cards since I preferred the documentation options (spreadsheet) for our transactions. The cash back didn't hurt either. I was able to process these monthly statements, put every item into one of 35 categories (semi-automatically), and sum up each expense category in a spreadsheet. I also added a mutually exclusive flag for each item being either essential or discretionary. I would then use this data to update the NewRetirement PlannerPlus “budgeter” worksheet and the Fidelity Retirement Analysis Tool budget worksheet. This update is our actual expense ledger for that year and accounts for over 99% of our income and withdrawals. Since I keep an annual copy of these reports, I also have a running expense history that provides some insight to our personal inflation rate for these expense categories and can analyze our spending trends.
Post: Where It Goes
Link to comment from April 14, 2024
What you are proposing (for retirement income generation) is basically what we’ve done since retiring 10 years ago (at age 63). When I retired, I estimated my SS benefit at my full retirement age (FRA) of 66. After determining what our essential expenses were, we purchased sufficient SPIA income such that the combination covered those expenses. However, we limited the SPIA purchases to less than 1/3rd our portfolio in order to maintain financial flexibility. I set up a CD ladder to get to FRA, where each rung covered the shortfall of not taking SS (at the FRA rate) and our estimated discretionary spending. Each year from age 66 to 70, I reassessed the “need” to start my SS benefit but was able to hold off until age 70. I kept extending the ladder to guarantee that any anticipated shortfall in income (for essential spending) was met with fixed-income assets. In the meantime, we maintained a 70/30 asset allocation for the past 10 years (with our asset mix being close to what you indicated except less international but with an REIT fund). As a result of waiting to age 70 to claim SS benefits, our lifetime income covers all our expenses (essential and discretionary) except for major international travel. Alternatively, we could also consider this “excess” lifetime income (discretionary portion) available to compensate for the lack of COLA for the SPIA income. At 3% inflation, I estimate that this lifetime income will continue to cover essential expenses minimally through 2028. Another interesting outcome is that my SS benefit (as the higher income earner) plus our (joint-survivor) SPIA income plus (our current) RMD is more than the cost of a skilled nursing facility in our area. This was not planned but I thought it was an interesting coincidence. Since all IRA withdrawals are for discretionary spending (except for planned major expenses such as a new car), it has provided peace-of-mind, allowed a variable savings withdrawal rate, and mitigates sequence of return risk. With the heavier weighting in equities, we have being able to achieve an annualized rate of return of 8% since retiring. As a result, our portfolio continues to grow each year and we will (despite our spending) most likely die at our highest net worth. Our 20-30% bond allocation also allows us (if necessary) to draw on non-equity assets for 10-15 years, allowing the equity funds to stay invested for the long term. While we initially averaged close to 6% withdrawal per year, a good portion of that withdrawal rate was for travel (visited 27 new countries since retiring) and six years of paying large Roth conversion taxes. Those conversions reduced our T-IRA balance by almost 40%, making a big dent in our RMDs, which also got us below the Medicare IRMAA thresholds. For the past two years, we have not had to withdraw more than our RMD (which only applies to 60% of our portfolio). I estimate that our children will inherit our assets with 66% of such assets tax-free. In our mid-70s now, I am working on further simplifying our portfolio, not unlike what you have proposed. One strategy I recently explored with our CFP is transitioning toward generating more dividends to create an income stream to satisfy our RMD. While I have always been more of a total return person, this strategy (at this stage of our retirement) would pretty much eliminate the need to decide what to sell or buy, rebalance, or replenish buckets. I can even have our RMDs computed and distributed monthly with no intervention on our part. In parallel, I have also set up an automated cash flow and autobill payment on the expense side. But that is another story.
Post: Happily Ever After
Link to comment from December 16, 2023