My Four Goals – How a pro plans for the future 

My Four Goals Jonathan Clements  |  July 18, 2020

I’M PROBABLY a year or two away from regularly tapping my portfolio for income. That prospect—coupled with this year’s market turmoil—has led me to tinker with my investment mix and ponder how I’ll generate cash once I’m retired. One surprising result: I have more in stocks today than I’ve had at any time in the past three years, and I’m thinking of increasing my allocation even further.

Since 2014, I’ve thought of myself as semi-retired. I’m working harder than ever, but these days I only take on projects I enjoy. I earn just a third of what I made when I worked on Wall Street and I expect that to dwindle further in the years ahead. That’ll leave me heavily dependent on my financial accounts. Currently, I’m 76% in stocks and 24% in bonds and cash investments. If I figure in the private mortgage I wrote for my daughter—which I consider comparable to a bond investment—the mix is more like 67% stocks and 33% conservative investments.

How am I going to take this mix of assets and generate income? I think in terms of four goals.

1. I want income I can’t outlive. The mortgage I wrote for my daughter pays me income every month. Assuming she doesn’t move or refinance, I have another 25 years of checks coming my way. At age 57, this is an income stream I hope to outlive—but I could be wrong. I also want some income I’m guaranteed not to outlive. Research suggests our ability to manage money deteriorates as we age. Research also suggests that retirees with predictable income tend to be happier. Where to get that predictable lifetime income? At the top of my list is Social Security, which I plan to claim at age 70.

In addition, I intend to make a series of immediate fixed annuity purchases, possibly starting as early as age 60. By making multiple purchases over 10 years or so, I can buy from multiple insurers—thus limiting my exposure should any one insurer go belly up—and I’ll benefit if interest rates head higher from today’s anemic level. I know many folks hate the idea that they’ll make a big annuity purchase, only to keel over a few months later. That’s why I like the idea of buying gradually. It lowers the stakes associated with each purchase and, by starting to buy at age 60, I’m confident I’ll get at least some income back, even if I do go to an early grave.

2. I want a pool of cash I can count on. As I buy more immediate annuities and once I claim Social Security, I’ll need less cash each year from my portfolio. But for the money I do need to withdraw, I want to be confident it’ll be there. To that end, I’ve taken my already conservative bond portfolio and made it more so. In June, I swapped my intermediate-term inflation-indexed bond fund for a short-term inflation-indexed bond fund, and I sold my short-term corporate fund and replaced it with a short-term government fund. In other words, all my bond money is now in government bonds, and the duration is so short that it’s almost like holding cash investments.

All this reflects my evolving view of bonds. They’re no longer a good source of income. How could they be with yields so low? Instead, their sole role is to provide portfolio protection, acting as both a shock absorber and a place from which to draw spending money when stocks are struggling. My goal is to have at least enough in my two short-term government bond funds to cover my next five years of portfolio withdrawals. Right now, I’m above that level. With 24% in bonds and assuming a 4% withdrawal rate, my bond holdings would cover six years of portfolio withdrawals. On top of that, I’m not even drawing on my portfolio today, because I have enough income coming in to cover my living expenses. That makes me wonder whether I should further reduce my bond holdings and invest more in stocks.


Source: My Four Goals – HumbleDollar

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