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I was asked to help building investment portfolio for a single disable person of 40 years old, having $500K in savings. The person does not own property, most likely, will not be able to work in the future, and his only income will be social security disability insurance benefits (about $1000/month) and income from investment. What would you recommend to maximize his investment income?
@Ted- Good choices but Schwab is showing Vanguard Wellington Fund Investor Shares VWELX as only "Available to Existing Shareholders". VWINX is still open, however.
AFAIK, VWELX is available for purchase only through Vanguard directly. When I opened my Vanguard account(after escaping Scottrade) VWELX was one of the first funds I purchased.
Excellent choices for either the Wellington or Wellesley funds. But I would suggest maybe looking at a 1 fund diversified portfolio from TRP, any of their "retirement" funds (not the target date). Chose the one that fits the equity allocation (50:50, 60:40, 70:30, ect...) that makes sense for a 40 year old's expected returns and withdrawal needs. TRRGX, TRRBX, TRRHX.
Hi David V, First, where's the money at? Savings account? IRA? 401? What are the expenses per month? How safe does this have to be? Does the family help him at all? At 62 or 65, does he get SS or something else? Many questions.....before I would say anything. Also, should this be on auto pilot? God bless the Pudd
@Puddnhead The money is in a brokerage cash account. The investment should be safe as there is no other money to live on. I am not sure about family help. At 62 he will be eligible for SS, but my understanding SS benefits will be similar to SSDI benefits if he does not work in the future. He will get help in portfolio management. His own estimates of the expenses is minimum 3K/month.
3k/mth required, offset by 1k SSDI, leaves 24k/yr to be generated. Raw, before any taxes or fund expenses, that is going to require a permanent, consistent income return of 4.8% on the 500k. That means that there is going to have to be what I would consider to be an excessive risk involved, as I can't see how to generate that kind of guaranteed consistent return with complete safety in today's market. Additionally, as you go forward, the amount required will only increase due to inflation.
We have some very smart people here on MFO... I hope that they can come up with something for you more promising than my appraisal. We don't particularly like annuities, but perhaps something along those lines might be a possibility?
I know it's an unusual solution, but what about buying a duplex with a portion of the money? Your disabled friend lives in one part of the home and a tenant lives in the other, providing a steady stream of income to help pay the mortgage off. There are also tax benefits to owning a duplex, although I am not sure if those will still apply as well in the new tax regime, but in the old basically every expense on the home becomes a write-off. One even more interesting scenario would be to rent the other apartment to a friend or family member at a discounted rate with an agreement to help care for your disabled friend--shopping, cleaning, home maintenance, etc. Also worth considering for a portion for security's sake is I-savings bonds which increase payouts with inflation, short-term TIPs and perhaps discounted municipal bond closed-end funds. I am hesitant to point to any equity fund as a "secure" income payout at this stage. Also, consider a laddered bond portfolio of high quality individual bonds that mature each year or a laddered bond fund or ETF. Bear in mind, nothing in life is risk free.
It would be great to go even more conservative but he has to get 24k or so from this investment of 500k. Do you know anything about lifespan projection; is it affected by the disability? Are we talking a normal 45y ahead, or something less? Has anyone looked into inflation-adjusted annuities?
@davidrmoran It is a mental illness and lifespan is not affected. @Old_Joe What would be optimal investment for consistent income return of 4%, that is considered normal for retirees?
If you want stability, income and some consistency, I would examine how funds performed in 2008 and other volatile years. For a pure fund portfolio I would recommend a combination of the following funds: GTEYX ZEOIX VWAHX SGHIX or RPGAX Maybe 20% or 25% in each. You probably could get a fairly stable 4% annualized out of that. Maybe more, although I haven't run the combined numbers. For a little extra oomph you could add a small weighting to some less volatile emerging market fund.
I am not understanding why anyone would recommend global or even look at what we think of as conventional diversification. Seems to me what is wanted here is as equity-aggressive as feasible, but nonpeculative, meaning, solid companies, experienced management, style and parent company, all within severe prudence limits. With a proven record. Hence a 60-40 combination of something like TWEIX plus FTBFX / DODIX, which for the sake of simplicity is what led me to GLRBX or FPURX. I have not yet gone to the sorter to look for other part-equity Owls w low UI.
If you think of high valuation as a risk factor, there is ample reason to invest outside of the U.S. today. As well as Fidelity Puritan has done recently, it lost 29% in 2008. I would think if low, stable income is the goal, equity aggressive in general is a mistake.
I've posted this article in the past, but seemed worth re-posting:
From Article:
Criteria: The Retirement Income withdrawal will be 4% of the beginning investment value with each successive year's withdrawal increasing by 3% to allow for inflation. Any dividends collected in excess of this will be accumulated in a money market account (MMA) until the year the mutual fund produces less in dividend income than is required and the difference between the next year's household income need and the dividend collected is taken from the MMF. I'm assuming the interest rate on the MMA is zero. If the collective cash reserve is not sufficient…or non-existent…and the dividend collected that year is not sufficient to meet household income need, then sufficient shares will be sold at the end of the year to provide the required cash. This is repeated each December at the end of the month (last trading day).
VWINX is the clear winner. Providing 25 years of inflation adjusted 4% annual distributions with a residual value over 89% greater than its beginning value.
@LB, by equity-aggressive I meant proportionally, not the holdings themselves. I would avoid foreign for this person. VWINX looks like the choice, yes. Interesting its UI is high-ish (greater than VOOG and DSENX, e.g.). If someone was 'managing' >1 fund, I would consider a mix of TWEIX and DODIX if FPURX dents comfort level. SPLV or CAPE could be the equity position instead of TWEIX, of course.
What would you recommend to maximize his investment income?
The investment should be safe as there is no other money to live on.
I think this is the crux of the problem when trying to give advice on this. These 2 "wants" are contradictions. Old_Joe made this point a couple times. Basically expecting to withdraw $24k and increasing each year for inflation and wanting it to last 45+ years has little probability of succeeding with any 60:40 or even 80:20 portfolio for that matter. The 4% rule I believe is based on a 25 or 30 year life span. Bee spelled it out in her post. Hate to be a wet blanket, but anything less than 100% equities probably can't last.
Maybe it is more realistic to plan 20 years and reevaluate circumstances periodically.
P.S., here is where Monte Carlo would be helpful at least for a realistic view of expectations.
The other problem is this. VWINX is an excellent fund because of low fees and good management. These facts will likely continue into the future. But to project its past performance into the future is a mistake. Consider the author of the aforementioned seekingalpha article's premise regarding backtesting. He looks back to January 1, 1992. These were the conditions for the market in January 1992: Dividend yield of the S&P 500: 3% multpl.com/s-p-500-dividend-yield/ 10-Year Treasury yield 7% macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart 10-year Shiller P/E ratio 19 https://dqydj.com/shiller-pe-cape-ratio-calculator/ Here is where we are today S&P 500 Dividend yield: 1.77% 10-Year Treasury yield: 2.4% 10-year Shiller p/e: 34 To back-test and assume the past from January 1992 is prelude for the future today based on these numbers I think is a mistake. We have lived through a historic period of falling interesting rates and rising stock valuations from 1982 onward. That period as far as interest rates goes is over and I'm not sure how much longer the rising valuations will continue. Creative thinking is necessary.
@DavidV- With respect to your question: "What would be optimal investment for consistent income return of 4%", I think that @bee, above, gives you a pretty good insight. Both @Ted and @bee are well regarded with respect to financial matters; because they both mention VWINX perhaps you should give that fund particular attention.
The problem which all of us face is that all data sets for financial calculations are backward-looking: forward-looking data sets are very hard to come by. @LewisBraham, immediately above, expands on this.
@MikeM, above, makes an excellent suggestion with reference to on-line "Monte Carlo" sites which can be very helpful in analyzing individual retirement schemes. The Monte Carlo simulators have long been championed here on MFO by another poster, @MJG.
I've used the "Search" feature to go back and find a few of his references and links to such sites:
You mentioned that "He will get help in portfolio management." Perhaps it would be helpful if you could expand a bit on this aspect- will he have the benefit of a professional manager of some sort?
I don't have any reason to doubt what DavidV or this person suggested but I'd look hard at the budget. A 4.8% consistent real return gets easier if you're able to reduce the costs in the beginning and allow the assets to do more work for you, especially while inflation is still relatively low.
It may not be possible or palatable but if this person lives in a high cost of living place it might be worth considering relocation as a way of reducing costs.
And if there's any possibility to work, even at a low wage job, increasing income reduces the burden on those assets, helps even with boredom and feeling productive, and provides an opportunity to build a slightly bigger nest egg for the future.
The most important years are those at the beginning because the impact gets compounded for many years to come.
What about something like VWEHX or PONDX? VWEHX is risky to the principal I know but as long as the income keeps rolling in it'll recover given his stated time frame. PONDX is less risky for an almost equal effect. Have smaller amounts in Ted's 2 suggestions to absorb any excess distributions above his needs. It's 14 below zero outside (read: brain freeze) so show a little mercy if my thinking is way off base.
I avoided mentioning PONDX because I was trying to envision worst-case scenarios going forward. I concur in the take that the longterm future is unlikely to be like the bull past we have enjoyed. Looking chiefly at GOs' UI in Premium, I still think trying to achieve the $24k/y would entail over half but hopefully not two-thirds in DODIX or Vanguard equivalent, with the rest --- as much as comfort-bearable --- in TWEIX / SPLV / CAPE or a combo of them. 40% or more.
Else VWINX, though I do not think it will quite hit the almost 5%-withdrawal mark.
Or this might do best, since security is paramount:
I have been handling the brokerage investment account for a disabled sister for almost 20 years. Periodic withdrawals from that account together with SS (previously SSDI) have been her only source of income since her husband passed away several years ago. (By income, I mean dollars available to pay for living expenses. This could include some withdrawals of principal as I think on a total return basis.)
My first thought is there needs to be a set-aside of CASH. At minimum, I would suggest a 1 year set-aside, significantly more if rapidly increasing medical expenses are a significant concern. That set-aside provides a cushion for emergencies and also helps you to roll with the punches through the decades as the markets churn.
The comments @bee made about VWINX make sense to me. That fund has been around since the mid-1970's and has successfully navigated both rising and falling interest rate environments as well as both bear and bull stock markets. The comments @LewisBraham made about the challenging current market environment also make sense to me. So, going 100% into VWINX does not currently seem advisable to me. My SWAG suggestion would be putting maybe 35% of the assets available for investment into VWINX.
The general idea behind the suggestions @LewisBraham make for an investment mix also makes sense to me -- for the remaining 65% of the assets available for investment. My sister's account has included both RPAGX and ZEOIX since January 2016 (January is when most portfolio changes for the year are made).
VWAHX makes sense to me with maybe a little VWEHX mixed in if medical expenses will keep taxes from being an issue. Taxes might not be an issue anyway given the new personal exemption limits. That's something to look into.
Including a multi-sector bond fund in the mix also makes sense to to me - @Mark suggested PONDX. That fund has significantly outperformed VWINX when viewed since inception in 2007 due to its relatively strong performance during the bear stock market. But, can it continue to perform that well? Perhaps mixing it 50/50 with PTIAX in this component of the portfolio would make sense. Lumping GTEYX into your thinking about multi-sector bonds might also make sense.
If rapidly rising medical expenses are a potential concern, including a conservative bond fund such as DLSNX also makes sense to me. Holding a fund like this can also be a comfort when the markets turn against the portfolio.
A final thought. There needs to be some flexibility to decrease the withdrawal rate in the years following a major market decline unless STRICT NECESSITY does not permit this to happen. Otherwise, accepting the strong possibility/probability of the portfolio being exhausted as some point in the future is necessary.
@Old_Joe & @DavidV, @Ted suggested VWELX which is Vanguard Wellington (65 Equity/30% Bond) fund. VWINX is Vanguard Wellesley (32% Equity/58% Bond) fund. Ted's suggestion might a bit more aggressive, but a consideration for longevity risk (living a long life).
Comments
Regards,
Ted
First, where's the money at? Savings account? IRA? 401? What are the expenses per month? How safe does this have to be? Does the family help him at all? At 62 or 65, does he get SS or something else? Many questions.....before I would say anything. Also, should this be on auto pilot?
God bless
the Pudd
We have some very smart people here on MFO... I hope that they can come up with something for you more promising than my appraisal. We don't particularly like annuities, but perhaps something along those lines might be a possibility?
Also worth considering for a portion for security's sake is I-savings bonds which increase payouts with inflation, short-term TIPs and perhaps discounted municipal bond closed-end funds. I am hesitant to point to any equity fund as a "secure" income payout at this stage. Also, consider a laddered bond portfolio of high quality individual bonds that mature each year or a laddered bond fund or ETF. Bear in mind, nothing in life is risk free.
It would be great to go even more conservative but he has to get 24k or so from this investment of 500k. Do you know anything about lifespan projection; is it affected by the disability? Are we talking a normal 45y ahead, or something less?
Has anyone looked into inflation-adjusted annuities?
@Old_Joe What would be optimal investment for consistent income return of 4%, that is considered normal for retirees?
I would stick w FPURX
GTEYX
ZEOIX
VWAHX
SGHIX or RPGAX
Maybe 20% or 25% in each. You probably could get a fairly stable 4% annualized out of that. Maybe more, although I haven't run the combined numbers. For a little extra oomph you could add a small weighting to some less volatile emerging market fund.
Hence a 60-40 combination of something like TWEIX plus FTBFX / DODIX, which for the sake of simplicity is what led me to GLRBX or FPURX. I have not yet gone to the sorter to look for other part-equity Owls w low UI.
From Article: Article:
long-term-growing-income-open-end-mutual-fund-possible
VWINX looks like the choice, yes. Interesting its UI is high-ish (greater than VOOG and DSENX, e.g.).
If someone was 'managing' >1 fund, I would consider a mix of TWEIX and DODIX if FPURX dents comfort level. SPLV or CAPE could be the equity position instead of TWEIX, of course.
Maybe it is more realistic to plan 20 years and reevaluate circumstances periodically.
P.S., here is where Monte Carlo would be helpful at least for a realistic view of expectations.
These were the conditions for the market in January 1992:
Dividend yield of the S&P 500: 3%
multpl.com/s-p-500-dividend-yield/
10-Year Treasury yield 7%
macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
10-year Shiller P/E ratio 19
https://dqydj.com/shiller-pe-cape-ratio-calculator/
Here is where we are today
S&P 500 Dividend yield: 1.77%
10-Year Treasury yield: 2.4%
10-year Shiller p/e: 34
To back-test and assume the past from January 1992 is prelude for the future today based on these numbers I think is a mistake. We have lived through a historic period of falling interesting rates and rising stock valuations from 1982 onward. That period as far as interest rates goes is over and I'm not sure how much longer the rising valuations will continue. Creative thinking is necessary.
The problem which all of us face is that all data sets for financial calculations are backward-looking: forward-looking data sets are very hard to come by. @LewisBraham, immediately above, expands on this.
@MikeM, above, makes an excellent suggestion with reference to on-line "Monte Carlo" sites which can be very helpful in analyzing individual retirement schemes. The Monte Carlo simulators have long been championed here on MFO by another poster, @MJG.
I've used the "Search" feature to go back and find a few of his references and links to such sites:
MJG Post #1 provides this Monte Carlo link.
and MJG Post #2 provides this Monte Carlo link.
You mentioned that "He will get help in portfolio management." Perhaps it would be helpful if you could expand a bit on this aspect- will he have the benefit of a professional manager of some sort?
We all wish you well in your efforts to help.
It may not be possible or palatable but if this person lives in a high cost of living place it might be worth considering relocation as a way of reducing costs.
And if there's any possibility to work, even at a low wage job, increasing income reduces the burden on those assets, helps even with boredom and feeling productive, and provides an opportunity to build a slightly bigger nest egg for the future.
The most important years are those at the beginning because the impact gets compounded for many years to come.
Else VWINX, though I do not think it will quite hit the almost 5%-withdrawal mark.
Or this might do best, since security is paramount:
https://personal.vanguard.com/us/funds/snapshot?FundId=1263&FundIntExt=INT&ps_disable_redirect=true
or
https://www.fidelity.com/annuities/immediate-fixed-income-annuities/compare
I have been handling the brokerage investment account for a disabled sister for almost 20 years. Periodic withdrawals from that account together with SS (previously SSDI) have been her only source of income since her husband passed away several years ago. (By income, I mean dollars available to pay for living expenses. This could include some withdrawals of principal as I think on a total return basis.)
My first thought is there needs to be a set-aside of CASH. At minimum, I would suggest a 1 year set-aside, significantly more if rapidly increasing medical expenses are a significant concern. That set-aside provides a cushion for emergencies and also helps you to roll with the punches through the decades as the markets churn.
The comments @bee made about VWINX make sense to me. That fund has been around since the mid-1970's and has successfully navigated both rising and falling interest rate environments as well as both bear and bull stock markets. The comments @LewisBraham made about the challenging current market environment also make sense to me. So, going 100% into VWINX does not currently seem advisable to me. My SWAG suggestion would be putting maybe 35% of the assets available for investment into VWINX.
The general idea behind the suggestions @LewisBraham make for an investment mix also makes sense to me -- for the remaining 65% of the assets available for investment. My sister's account has included both RPAGX and ZEOIX since January 2016 (January is when most portfolio changes for the year are made).
VWAHX makes sense to me with maybe a little VWEHX mixed in if medical expenses will keep taxes from being an issue. Taxes might not be an issue anyway given the new personal exemption limits. That's something to look into.
Including a multi-sector bond fund in the mix also makes sense to to me - @Mark suggested PONDX. That fund has significantly outperformed VWINX when viewed since inception in 2007 due to its relatively strong performance during the bear stock market. But, can it continue to perform that well? Perhaps mixing it 50/50 with PTIAX in this component of the portfolio would make sense. Lumping GTEYX into your thinking about multi-sector bonds might also make sense.
If rapidly rising medical expenses are a potential concern, including a conservative bond fund such as DLSNX also makes sense to me. Holding a fund like this can also be a comfort when the markets turn against the portfolio.
A final thought. There needs to be some flexibility to decrease the withdrawal rate in the years following a major market decline unless STRICT NECESSITY does not permit this to happen. Otherwise, accepting the strong possibility/probability of the portfolio being exhausted as some point in the future is necessary.
I hope these general comments are helpful.....
When I run 'money last' calculators, it does not show making it to age 70. (6% return, 2.5% inflation, 10% fed marginal bracket -- reasonable?)
$476k (1y cash) with the above data gets one to 30y, yes, but no farther.
Not seeing how such bond heaviness is going to work.
@Ted suggested VWELX which is Vanguard Wellington (65 Equity/30% Bond) fund. VWINX is Vanguard Wellesley (32% Equity/58% Bond) fund. Ted's suggestion might a bit more aggressive, but a consideration for longevity risk (living a long life).