Thursday, September 11, 2014

End Game Retirement Strategies

A traditional end game retirement strategy was to convert assets into bonds (often municipal bonds as a way to avoid federal and state income tax) or buy utility stocks with decent dividend yields.  Utility stocks are traditionally considered "widow and orphan" stocks because once upon a time public utilities were regulated in the public interest and for that reason they were guaranteed to be profitable.  As a result it was hard to buy public utility stocks and have them stop paying dividends.

Times have changed.  Bond yields while better today than they were a few months ago, but still pretty disappointing.  There are municipal  bonds with yields of 4%-- which means you need a nest egg of about one to two miilion dollars to live a middle class lifestyle on bond interest only.

There is an alternative strategy (fortunately).  Take a million dollar nest egg. buy equity mutual funds.  Most reasonably  well managed growth equity funds grow about 10-15% a year.  If you sell 6% of these mutual funds each year, you get about $60,000 a year in taxable income. Most of this is going to be long-term capital gains and thus only subject to the 15% federal marginal tax rate.  After federal and state income taxes, that $60,000 will be at least $47,000 (depending on your Schedule A deductions).  At the same time, only selling 6% of your mutual funds means that on average the remainder will grow about 4-7% a year.  The Rule of 72 tells us that the million dollar nest egg will still double in 10-18 years.  Why do you care about this.  You can't take it with you.  The reason is twofold: you don't want to outlive your nest egg, and I would like to leave a few million to my kids.

Now, there are other portfolio mixtures that work too.  Over the last few  years, I have purchased a mixture of common and preferred stocks, many with yields above 5%, and corporate and municipal bonds with yields in the 5-8% range.  These dividends range from exempt from federal and state income taxes to subject to the 15% marginal federal income tax rate.  The net effect is similar to the above.

Index funds might be a better choice than many of the mutual funds.


  1. ... Most reasonably well managed growth equity funds grow about 10-15% a year. If you sell 6% of these mutual funds each year, ...

    This is on the optimistic side. A rule of thumb is the 4% rule. See here for some discussion. A lot depends on your personal circumstances (like life expectancy) of course.

  2. I wish you luck with those funds, but I am extremely skeptical.

    A lot of research has shown that managed mutual funds do worse than simply buying market averages (ETF's). The good numbers are there because of the way the reporting system works. When a fund does poorly, it is shut down and thus doesn't appear in the stats. As long as it does well, it stays in the statistics. This naturally badly biases the statistics - they look as if there are "good managers" (there apparently aren't) and as if their "skill" leads to good returns.