I’m pondering what, where and how to set up for a retirement income withdrawal base when I retire. What I’m leaning towards is having an independent (from my Schwab IRA) IRA bucket that would be equivalent to 4 years of withdrawals. This “safe” IRA bucket would hold 4 years of needed withdrawals. Year 1 would be in a money market/savings account. The MM would be tied to my checking account. Years 2, 3 and 4 would be in a CD ladder that would feed the MM each year. For my needs, this safe withdrawal bucket would account for about 14% of total tax deferred savings, also known as “the nest egg”. The purpose of the 4 years of course is to be able to not pull money from the growth part of the nest egg in down markets. The growth-IRA, 86% of the total, would be allocated at about 60% equity, 40% bonds/cash. The growth-IRA feeds the safe-IRA at some undetermined set of rules (still thinking about that). I think this is a pretty typical approach to setting up a base for a retirement income stream from savings, but I’m soliciting opinions.
The rest of the pondering is where to keep that safe-bucket. What I’m leaning towards is setting up an IRA with one of the online banks, like Ally or Synchrony for example. Both have very good ratings. Ally I’ve dealt with before with good, pleasant results when I was managing my mother’s money. Right now these online banks offer around 1.3% on IRA MM accounts, 1.5-2.5% on CDs depending on term length. I would expect those rates to rise in the coming years - I hope.
These are my thoughts to this point, a plan in process. I plan to retire sometime next year, middle or end of 2018. I’d be interested to hear from others how they plan or have set up their savings income streams. Always interested in what others do.
Comments
I would say the 4 year "safe money" helps protect against a temporary downturn or market risk.
Over a long retirement time period, I would ponder how to combat:
- "Flight to safety" risk...maybe consider a little gold or LT Treasuries
- Inflation risk (your buying power and savings are negatively impacted by inflation)
- Currency risk (your buying power is impacted by a strong or weak currency)
- Longevity risk (having ample resources if you live a long life)
- Fund manager risk (managers come and go...they get hot and then not)..maybe use multiple (3) funds
- Large One time costs (a car, a wedding, a divorce, a sickness, discretionary spending)
- Portfolio execution risk (will this plan "work" if you predecease your spouse?)
You mention the desire to grow 86% of your portfolio using allocation funds.
Allocation Funds - I screened for:
- ER under 1%,
- Higher than average 3 yr Sharpe Ratio and lower than average Beta
-"Higher than category" 5 Yr Returns.
Listed by percentage equity exposure are:
15% -30% - FTANX, CBUZX, and AONIX
30% -50% - HBLIX, PRSIX, VTMFX, and VWINX
50% -70% - FPURX, PAEEX, VGSTX, FBALX
70% -85% - PRWCX, TRSGX
85% - up - BTBFX
On couple of your bullets:
- I didn't really get into the growth part of the nest egg only to say I would have about a 60:40 allocation, not use all allocation funds. Right now 1/2 my IRA is in a Schwab robo at 62:48 and it has done pretty well. The other 1/2 I like to self manage. Self managed has done slightly less than the robo but only because I have it at about 42% equity. Haven't decided how to distribute to that 60:40 plan for the growth side in retirement as of yet.
- 'flight to safety' with gold and treasuries... not sure I need that. Complicates things in my head. I kind of see the 4 year safety bucket of MM and CDs as the safety I need and a way of not having to "flight to" anything, but I see your point. Possibly expanding the safe-IRA draw-down bucket to add other asset classes could be considered to get a little more return, but that comes with added risk. The safety bucket in my eyes only has one purpose, to make consistent withdrawals and to never lose money. Damn, that's 2 purposes
- Fund manager risk... don't subscribe to it. Don't like duplicate funds. Don't like a lot of funds. Adding to many of the same, to me, just gives you an average return at best. I know no manager or team is going to win all the time, but I'm trusting the ones I pick to win over 5 or 10 year stretches. On the other hand is the robo-portfolio. That's all index ETFs. There is your average return per category.
@PRESSmUP, yes, pretty much.
If you ever get in totally passive mode, you can always do what a member of my family does, AOA and AOK 50-50 (or whatever other proportion suits you). She draws cashflow from AOK most of the time, obvs, at least recently.
I do much like you are thinking as I let my portfolio's investment sleeves feed the cash sleeves; but, I do it through taking most all of my mutual fund distributions in cash over selling fund shares to fund the cash sleeves. I have ten investment sleeves plus a demand cash sleeve and an invetment cash sleeve. Generally, the investment cash sleeve is about double the size of the demand cash sleeve and is comprised of my savings accounts and brokered CD's which are laddered. The advantage of the brokered CD's is they can be sold in the market place without cashout penatly should additional cash be needed. You should be able to buy these CD's through your broker (Charles Schwab). Usually, I keep about 5% of my assets in demand cash, about 5% in savings and 5% in CD's for a total cash allocation in my portfolio of about 15% plus what my mutual funds hold.
Currently, I am finding 6mo CD's at better than 1.5%, 12mo CD's at about 1.8% and 18mo CD's around 2.0%. In view of the recent announced December Fed rate hike these CD rates might improve and continue to move upward should the Fed continue with their planned rate hikes in 2018.
Generally, I take no more than a distribution sum equal to 1/2 of what my portfolio's five year average return is running on the investment sleeves. In this way, principal builds over time. Naturally, for this to work one will have to have saved, and reached a critical mass of invested assets, in order to meet retirement distributions needs. About 60% of my invested assets are in taxable accounts and 40% in retirement accounts.
Good luck to you as you prepare for and enter retirement. I'm sure you will come up with something that will meet your needs.
Old_Skeet
I will be sitting down with my Schwab consultant in January to clarify, but what I see from their web-site is very poultry % return on MM's and CD's within tax-deferred accounts. That is why I'm thinking I will move IRA money from Schwab to a separate IRA in an online bank like Ally, which offers CD returns like the one's you mention. That means the 4 years of "safe" money, money I plan to take monthly withdrawals from, still stays in a tax deferred account and will be fed from a tax deferred Schwab account as needed.
@davidrmoran , that is a simple idea to look at versus the robo. Would have to see if the diversification would still be there. Thanks.
Is there an allocation level that would have generated sufficient distributions over say the past 10 years (to include a down market))? That way you could simply take all your annual distributions from your growth IRA and move them into your safe IRA, some years you will contribute more, some less, but overall it should be enough to keep about 4 years of expenses safe and not worry about selling in a down market.
>> Would have to see if the diversification would still be there.
The AO_ family holds these etfs in four markedly different proportions:
ishares core total usd bond market
ishares core s&p 500 etf
ishares core msci int devel etf
ishares core msci emerging markets
ishares core intl aggregate bnd et
ishares core s&p midcap etf
ishares core s&p small-cap etf
No RE at the moment (I think there used to be a little), and for many not enough (perhaps) SC and MC. All easy to fix.
I am not claiming any necessary superiority over individual assemblages, etf or other, and do not follow this approach myself most of the time. As I said, it was just an extremely simple and handy solution for a family member. And when I see large lists of a dozen or two or three mfunds here, it occurred to me that an x-ray plus performance graphs might show something close to parity of the simple approach. (Sometimes anyway.)