For me, dividend growth stocks and ETFs that grow their dividends with inflation, 10% in I-bonds that grow with inflation. Between growing dividends and interest, most of my expenses are covered.
15 years ago, we purchased a Variable Annuity, a very small portion of our portfolio, with aggressive subaccounts (Tech mostly, and international stocks). One of us will have a pension stream from employment. Along with social security and dividends from stocks and bonds, we will have 4 income streams when we turn 65 next year. This should cover our essential spending (utilities, property taxes, food etc.)
1 month treasury at 5.48% now. You might put 10% of you savings in those and 90% in something like S&P 500. Combine this with Social Security, Pensions, and any other rental type income you have and you basically execute the 90% stock approach Warren Buffet recommends.
Other than that you can look at various portfolios recommended by professionals here:
It is a mult-step process. Before you leave your career role, identify retirement income sources – pension (if any), wage income in retirement, returns on taxable investments, etc.
Then use a Social Security calculator to identify the optimal claiming strategy – and, as necessary, get counsel on this all-important decision.
If the sources of retirement income are insufficient, the best strategy may be one of deferral – deferral of commencing retirement, and deferral of commencing Social Security benefits as the most cost-effective “annuity” for most low- and middle-income households is to consider deferring commencement of Social Security.
Deferral is generally more favorably priced than annuities in the insurance marketplace, and Social Security comes with specific surviving spouse benefits.
i guess i am a contrarian here. as i moved towards retirement i kept reading, hearing about, being told, income streams were the way to go. as an english major i ended up siding with mark twain. ‘put all your eggs in one basket, then watch that basket.” i call my philosophy ‘ keep your income streams, give me an asset pond’. i am a widower and lately, an orphan. my choices are easier. i want to sleep easy and having a giant pot of cash in several banks AND ss, i know i will be fine.
My favorite (particularly now that interest rates are back up, and it requires less capital to do so): Buy an immediate annuity that will produce the monthly income needed to meet one’s budget when added to social security, then keep the rest invested for the long term, since the sequence-of-return risk has now been greatly reduced with the fixed income streams.
Good choice. I have something similar but I used a series of FIAs w/Income Riders. 3 are funded with Roth Dollars, 1 is funded with traditional IRA dollars, although I am beginning to do “piece meal Roth Conversions” within the Annuity, starting this year.
Our Social Security provides @111% of our standard retirement expenses and the remainder of our portfolio is in Vanguard VTI and VXUS, 80/20.
My next scheduled portfolio review is 7-1-2024, and I will be discussing realigning the VTI/VXUS to include ETFs with increased dividends to be used for additional income, as I want my annuities to continue growing internally, until we choose to turn them on.
The remaining portfolio will be available for travel, auto replacement, and later in life major health issues, should they arise. Otherwise, legacy dollars for our two adult children.
I will have 5 potential income streams if I retire from my current position at age 62. The first is a pension from current employer, that will pay me 46% of my gross salary. Second is a pension from a former employer, worth $1000 monthly at age 65. Third is Social Security, but I plan to wait until age 70 to file.
Since the first three income streams will be available at different ages, I’m considering how to handle the fourth and fifth potential income streams, working and drawing down my investments. Ideally, I’ll find lower stress work to help pay bills for a few years. I rather like the structure of a job, but I’m looking forward to leaving management in a few years.
if I didn’t have pension income, I’d probably buy an annuity to cover essential expenses, then use investments for discretionary expenses.
Not easy. Start saving early and contribute the max you can to a retirement pension plan, public or private. Compounding is your best friend. You could also invest in real estate that could be a big part of your egg nest.
One source of retirement income I don’t often see mentioned is cumulative preferred stocks. These often times have a par value of about $25 per share, and some pay dividends of 8 per cent or more. In the past I have owned the preferred of companies such as CHS, a huge ag cooperative which paid an 8% coupon (trades as CHSCP). Fidelity has a section in their stock screen web site to find these. Many of them have current yield in the 5-7 per cent range. These is also a Preferred Stock ETF trading under the symbol PFF.
It’s not too difficult to construct a portfolio of dividend paying REITs, ETFs, CEFs, BCDs and a few individual stocks, to produce a 7% yield. I am doing this and my dividends pay for our entire spending in retirement, of around $90K annually, without having to apply yet for Social Security and without a pension; none of my holdings need to be sold to meet our spending. There is way too much emphasis on only ‘dividend growth’, although this has some importance. But so many of these ‘Aristocrats’ have less than a 1.5% or even 2% yield; some yields are under even 1%! Even if they grow 5-10% a year, their dividends will not be able to provide much retirement income.
This is almost exactly our plan RayRayyy. After years of being Bogleheads we became DGI’ers. And then as I reached mandatory airline retirement we began the process of slowly morphing to DHI (Dividend Growth Investing>>Dividend “Harvest” Investing). Almost a year into this thing called retirement we haven’t come close to touching principal. I have avoided ETF’s for the most part except where it’s difficult to diversify (i.e. small cap dividend payers). Holding mostly dividend champions, I prefer their regular dividend payments where an ETF will fluctuate their payments.
We may want to keep an eye on tax reform proposals in Congress. Some want to eliminate the “qualified” status on some dividends, and treat all dividends as income.
A recent article in the Wall Street Journal cited research showing that corporate dividend payments decline when taxes on dividends rise.
I would just add that if RAYRAYY’s portfolio is in 401K, IRA’s, Rollovers (as is ours) then the dividends and interest you withdraw is treated as income anyway.
I am a big fan of working part time in retirement. The key is to find/create work that you love to do. Continuing to generate some active income provides a margin of (retirement) safety as described by Benjamin Graham.
In a few words, multiple sources. I am fortunate to live on a pension. To me the thought of not having a pension is scary and I do think about what it would be like without it.
I woukd seek to accumulate assets both within and outside retirement plans. I would take some of qualified assets and buy an immediate annuity. I would have brokerage account investments that generate income from dividends and interest without touching principal.
So, I would have RMDs, or 4% withdrawal before 72, SS, an modest annuity and dividends and interest and hopefully still growth from the investments long term.
Except for the pension you nicely summarized our income plan! There are also a few bridge items, investments which help carry us from here to the start of my Social Security benefit and our deferred income annuity.
I think retirees need to try to shift their focus away from “income” and simply toward using assets to fund their spending needs–whether that comes via dividends & interest or by selling securities.
Social Security, rental properties, pensions, annuities, and the like can help. But keeping a portfolio simple with stocks and bonds at the appropriate risk level is important. With the US aggregate bond market yielding about 1.5% right now, 1% below 5-10yr inflation expectations, reaching for yield can turn dangerous as it can lead to taking on an overly-risky portfolio.
It makes deferring Social Security to age 70 all the more important, particularly for married couples.
Bottom line: take a total return approach to retirement and diversify assets while not taking on too much risk or spending too much time managing the assets.
Mike, you are on the right track. People who are retired need to focus on cash flow rather than income. You can’t pay your bills with income. You have to have the cash in the checking account to write checks that will be honored.
You can’t pay your bills with shares of VTI. You can’t pay your bills with your mortgage free home. You can’t pay bills with a gold ingot.
So you need a cash flow plan. It is like taking inventory…
1) At the end of the year how much cash (Checking/Savings/Money Market/Folding Green/Brokerage Cash) do I have?
2) How much cash will I need to pay my bills next year? Make a list of your estimated expenses including taxes. . 3) Where am I going to get it? a. Social Security (net of deductions like Part B insurance) b. Interest and dividends in my taxable account c. RMDs net of tax withheld and QCDs d. Rental or business income net of expenses e. Asset sales from taxable account f. Gifts from others g. Pensions, annuities, etc. h. Reverse mortgage i. Roth withdrawals
Theoretically, you could sell all your assets and keep all the cash in a bag under your mattress, taking it out as you need it, buying money orders at Walmart. You might have zero income, but you would still be able to pay your bills.
Income is a word with many potential definitions. When paying your bills, it is better to forget income and think about cash.
I think this is one of the most challenging questions in personal financial planning. A traditional pension, combined with Social Security, and some savings, made up the so-called “three legged retirement stool”. We all know what has become of traditional pensions, although some public sector jobs, and some private companies, still have traditional pensions. For most retirees in the present and future, Social Security, retirement savings, and possibly working longer, or part time, will have to do it.
The American College of Finance developed an entire certification (Retirement Income Certified Professional – RICP) to address this question. It requires 9 college credits, and 2 years experience to claim the certification. The curriculum was developed from some of the top minds in PFP, including Dr Wade Pfau (https://www.retirement-insight.com/how-much-can-i-spend-in-retirement-a-guide-to-investment-based-retirement-income-strategies/). I completed the class work in the summer of 2017 after I stopped working full time.
So the “best” strategy will focus on your personal situation. It will be dependent on your resources, your longevity, your risk tolerance, and your goals or desires. If you are wealthy and have ample resources, it becomes an optimization problem that maximizes income, minimizes taxes, and leaves a substantial legacy to your heirs. If you have meager resources, you have to find creative ways to fund your retirement. Strategies include part-time work, downsizing, home-sharing, support from children, and public resources.
For those of us between these two extremes, we have to choose if we want to lock in some level of guaranteed income (annuities), when two claim SS, how much risk we want in our portfolios, and how much we feel safe in withdrawing. One of the keys is an annual assessment of how the plan is working and making adjustments as required.
For me, dividend growth stocks and ETFs that grow their dividends with inflation, 10% in I-bonds that grow with inflation. Between growing dividends and interest, most of my expenses are covered.
15 years ago, we purchased a Variable Annuity, a very small portion of our portfolio, with aggressive subaccounts (Tech mostly, and international stocks). One of us will have a pension stream from employment. Along with social security and dividends from stocks and bonds, we will have 4 income streams when we turn 65 next year. This should cover our essential spending (utilities, property taxes, food etc.)
1 month treasury at 5.48% now. You might put 10% of you savings in those and 90% in something like S&P 500. Combine this with Social Security, Pensions, and any other rental type income you have and you basically execute the 90% stock approach Warren Buffet recommends.
Other than that you can look at various portfolios recommended by professionals here:
https://www.optimizedportfolio.com/lazy-portfolios/
It is a mult-step process. Before you leave your career role, identify retirement income sources – pension (if any), wage income in retirement, returns on taxable investments, etc.
Then use a Social Security calculator to identify the optimal claiming strategy – and, as necessary, get counsel on this all-important decision.
If the sources of retirement income are insufficient, the best strategy may be one of deferral – deferral of commencing retirement, and deferral of commencing Social Security benefits as the most cost-effective “annuity” for most low- and middle-income households is to consider deferring commencement of Social Security.
Deferral is generally more favorably priced than annuities in the insurance marketplace, and Social Security comes with specific surviving spouse benefits.
See: https://crr.bc.edu/wp-content/uploads/2021/12/wp_2021-27.pdf
Depreciation-protected rents cover 75% of expenses and individual dividend growth stocks the rest.
i guess i am a contrarian here. as i moved towards retirement i kept reading, hearing about, being told, income streams were the way to go. as an english major i ended up siding with mark twain. ‘put all your eggs in one basket, then watch that basket.” i call my philosophy ‘ keep your income streams, give me an asset pond’. i am a widower and lately, an orphan. my choices are easier. i want to sleep easy and having a giant pot of cash in several banks AND ss, i know i will be fine.
It’s hard to beat” sleep easy”.
My favorite (particularly now that interest rates are back up, and it requires less capital to do so): Buy an immediate annuity that will produce the monthly income needed to meet one’s budget when added to social security, then keep the rest invested for the long term, since the sequence-of-return risk has now been greatly reduced with the fixed income streams.
Good choice. I have something similar but I used a series of FIAs w/Income Riders. 3 are funded with Roth Dollars, 1 is funded with traditional IRA dollars, although I am beginning to do “piece meal Roth Conversions” within the Annuity, starting this year.
Our Social Security provides @111% of our standard retirement expenses and the remainder of our portfolio is in Vanguard VTI and VXUS, 80/20.
My next scheduled portfolio review is 7-1-2024, and I will be discussing realigning the VTI/VXUS to include ETFs with increased dividends to be used for additional income, as I want my annuities to continue growing internally, until we choose to turn them on.
The remaining portfolio will be available for travel, auto replacement, and later in life major health issues, should they arise. Otherwise, legacy dollars for our two adult children.
I will have 5 potential income streams if I retire from my current position at age 62. The first is a pension from current employer, that will pay me 46% of my gross salary. Second is a pension from a former employer, worth $1000 monthly at age 65. Third is Social Security, but I plan to wait until age 70 to file.
Since the first three income streams will be available at different ages, I’m considering how to handle the fourth and fifth potential income streams, working and drawing down my investments. Ideally, I’ll find lower stress work to help pay bills for a few years. I rather like the structure of a job, but I’m looking forward to leaving management in a few years.
if I didn’t have pension income, I’d probably buy an annuity to cover essential expenses, then use investments for discretionary expenses.
Not easy. Start saving early and contribute the max you can to a retirement pension plan, public or private. Compounding is your best friend. You could also invest in real estate that could be a big part of your egg nest.
You can currently receive a 3.54% risk-free return on I bonds. These can be purchased through TreasuryDirect.gov with an annual limit of $10,000 per account holder. To learn more, read this excellent piece by Jason Zweig:
https://www.wsj.com/articles/i-bonds-the-safe-high-return-trade-hiding-in-plain-sight-11622213324
One source of retirement income I don’t often see mentioned is cumulative preferred stocks. These often times have a par value of about $25 per share, and some pay dividends of 8 per cent or more. In the past I have owned the preferred of companies such as CHS, a huge ag cooperative which paid an 8% coupon (trades as CHSCP). Fidelity has a section in their stock screen web site to find these.
Many of them have current yield in the 5-7 per cent range. These is also a Preferred Stock ETF trading under the symbol PFF.
It’s not too difficult to construct a portfolio of dividend paying REITs, ETFs, CEFs, BCDs and a few individual stocks, to produce a 7% yield. I am doing this and my dividends pay for our entire spending in retirement, of around $90K annually, without having to apply yet for Social Security and without a pension; none of my holdings need to be sold to meet our spending. There is way too much emphasis on only ‘dividend growth’, although this has some importance. But so many of these ‘Aristocrats’ have less than a 1.5% or even 2% yield; some yields are under even 1%! Even if they grow 5-10% a year, their dividends will not be able to provide much retirement income.
RayRayyy 90K annually is a great return. Can you list some specific examples of your REITS and EFTs you selected?
This is almost exactly our plan RayRayyy. After years of being Bogleheads we became DGI’ers. And then as I reached mandatory airline retirement we began the process of slowly morphing to DHI (Dividend Growth Investing>>Dividend “Harvest” Investing). Almost a year into this thing called retirement we haven’t come close to touching principal. I have avoided ETF’s for the most part except where it’s difficult to diversify (i.e. small cap dividend payers). Holding mostly dividend champions, I prefer their regular dividend payments where an ETF will fluctuate their payments.
We may want to keep an eye on tax reform proposals in Congress. Some want to eliminate the “qualified” status on some dividends, and treat all dividends as income.
A recent article in the Wall Street Journal cited research showing that corporate dividend payments decline when taxes on dividends rise.
I would just add that if RAYRAYY’s portfolio is in 401K, IRA’s, Rollovers (as is ours) then the dividends and interest you withdraw is treated as income anyway.
Dividend Growth stocks. The operative word is “GROWTH”.
I am a big fan of working part time in retirement. The key is to find/create work that you love to do. Continuing to generate some active income provides a margin of (retirement) safety as described by Benjamin Graham.
In a few words, multiple sources. I am fortunate to live on a pension. To me the thought of not having a pension is scary and I do think about what it would be like without it.
I woukd seek to accumulate assets both within and outside retirement plans. I would take some of qualified assets and buy an immediate annuity. I would have brokerage account investments that generate income from dividends and interest without touching principal.
So, I would have RMDs, or 4% withdrawal before 72, SS, an modest annuity and dividends and interest and hopefully still growth from the investments long term.
Except for the pension you nicely summarized our income plan! There are also a few bridge items, investments which help carry us from here to the start of my Social Security benefit and our deferred income annuity.
I think retirees need to try to shift their focus away from “income” and simply toward using assets to fund their spending needs–whether that comes via dividends & interest or by selling securities.
Social Security, rental properties, pensions, annuities, and the like can help. But keeping a portfolio simple with stocks and bonds at the appropriate risk level is important. With the US aggregate bond market yielding about 1.5% right now, 1% below 5-10yr inflation expectations, reaching for yield can turn dangerous as it can lead to taking on an overly-risky portfolio.
It makes deferring Social Security to age 70 all the more important, particularly for married couples.
Bottom line: take a total return approach to retirement and diversify assets while not taking on too much risk or spending too much time managing the assets.
Mike, you are on the right track. People who are retired need to focus on cash flow rather than income. You can’t pay your bills with income. You have to have the cash in the checking account to write checks that will be honored.
You can’t pay your bills with shares of VTI. You can’t pay your bills with your mortgage free home. You can’t pay bills with a gold ingot.
So you need a cash flow plan. It is like taking inventory…
1) At the end of the year how much cash (Checking/Savings/Money Market/Folding Green/Brokerage Cash) do I have?
2) How much cash will I need to pay my bills next year?
Make a list of your estimated expenses including taxes.
.
3) Where am I going to get it?
a. Social Security (net of deductions like Part B insurance)
b. Interest and dividends in my taxable account
c. RMDs net of tax withheld and QCDs
d. Rental or business income net of expenses
e. Asset sales from taxable account
f. Gifts from others
g. Pensions, annuities, etc.
h. Reverse mortgage
i. Roth withdrawals
Theoretically, you could sell all your assets and keep all the cash in a bag under your mattress, taking it out as you need it, buying money orders at Walmart. You might have zero income, but you would still be able to pay your bills.
Income is a word with many potential definitions. When paying your bills, it is better to forget income and think about cash.
I think this is one of the most challenging questions in personal financial planning. A traditional pension, combined with Social Security, and some savings, made up the so-called “three legged retirement stool”. We all know what has become of traditional pensions, although some public sector jobs, and some private companies, still have traditional pensions. For most retirees in the present and future, Social Security, retirement savings, and possibly working longer, or part time, will have to do it.
The American College of Finance developed an entire certification (Retirement Income Certified Professional – RICP) to address this question. It requires 9 college credits, and 2 years experience to claim the certification. The curriculum was developed from some of the top minds in PFP, including Dr Wade Pfau (https://www.retirement-insight.com/how-much-can-i-spend-in-retirement-a-guide-to-investment-based-retirement-income-strategies/). I completed the class work in the summer of 2017 after I stopped working full time.
So the “best” strategy will focus on your personal situation. It will be dependent on your resources, your longevity, your risk tolerance, and your goals or desires. If you are wealthy and have ample resources, it becomes an optimization problem that maximizes income, minimizes taxes, and leaves a substantial legacy to your heirs. If you have meager resources, you have to find creative ways to fund your retirement. Strategies include part-time work, downsizing, home-sharing, support from children, and public resources.
For those of us between these two extremes, we have to choose if we want to lock in some level of guaranteed income (annuities), when two claim SS, how much risk we want in our portfolios, and how much we feel safe in withdrawing. One of the keys is an annual assessment of how the plan is working and making adjustments as required.