How to manage a retirement portfolio?

[thejusticier]

Hi,

I am 54 yol. I want to retire in the next year or two. I have had a career, saved, and maxed my 401K (I have no pension) every year since I graduated from grad school almost 3 decades ago.
Since I started working I have been investing my savings first in mutual funds then in individual stocks and ETFs.

I am interested to hear about the experience of people who have retired and who are deriving their retirement incomes mainly from their investment portfolios.

How did you prepare for retirement?
How do you manage your portfolio for income? Do you mainly draw on interests and dividends? would you harvest capital gains by selling stocks? How do you decide to do so?
What is the composition of your portfolios (% of stocks/bonds)? How much is dedicated to growth and how much to more ‘stable’ and dividend producing stocks? How do you manage your cash? and how much time to you spend on managing your finances? What other resources do you draw on to help you do that?

tj

[JLC]

How did you prepare for retirement?

The biggest “fail” about my early retirement, didn’t have a totally worked out plan about all the spare time. I let myself get bored, which was good for about a month but then it was causing issues. Should have planned that out better other than we will see what happens. Fortunately a couple of hobbies have expanded greatly and thinking about turning one into a pseudo-job. FWIW retired 2 years ago at 55.

How do you manage your portfolio for income? Do you mainly draw on interests and dividends?

Years ago when I was building my portfolio (1998), I decided to invest mainly in dividend growing stocks. So I finally got to a point where the dividends were more than paying for my needs and most of my wants. And up until this past year, the dividend growth rate was outpacing inflation by a long shot. My portfolio’s dividend growth rate averages 8% with a yield currently just below 4%.

would you harvest capital gains by selling stocks? How do you decide to do so?

Occasionally I do, but it is more so when a stock no longer serves its purpose not that I necessarily need to money. For example, held AT&T for a long time. Paid a great dividend and even had some capital gains. But it got to the point where it was suffering from its acquisitions and there was concern of cutting its dividend. That is my biggest trigger, threat to dividend.

What is the composition of your portfolios (% of stocks/bonds)?

I’m about 95% stocks and 5% cash.

and how much time to you spend on managing your finances?

I probably spent more time writing this response than what I spend every month.

One big caveat, I have rental properties too which supply another stream of income should I need it.

JLC

[JonathanRoth]

Remember after you retire, you’ll likely have about 30 years of life ahead of you, so other than losing an income source much everything else remains the same. Planning needs to cover inflation and a likely change in your risk tolerance.

How did you prepare for retirement?
Start exploring what activities you’d like to do. Travel and volunteering are common. Start planning on spending down savings. After a life of saving many find the transition to not saving awkward.

How do you manage your portfolio for income? Do you mainly draw on interests and dividends? would you harvest capital gains by selling stocks? How do you decide to do so?
What is the composition of your portfolios (% of stocks/bonds)? How much is dedicated to growth and how much to more ‘stable’ and dividend producing stocks?

There is no reason to change your portfolio to “income”. Given todays low transaction costs, whatever cash is needed can be acquired by selling a few shares. With planning harvesting cash can be done a few times a year or every few years. So unless something changes, risk tolerance, cash needs change, there’s no need for a significant strategy change.

There’s nothing special about dividends, dividends are essentially a forced sale of stock triggering associated taxes.

I use the two bucket approach, 3-5 years of draw is kept in cash equivalents. This is to prevent having to sell in a down market. The rest is kept invested. Every few years when the market is strong investments are sold to replenish cash.

Your draw is calculated as budget less income. So for example, your budget is $100k/yr and you get $30k Social Security, you’ll need to draw $70k from investments.

This makes the cash bucket $210-$350k, with a $70k annual replenishment. Of course all numbers are adjusted for inflation.

Next I’ll use the 4% rule to make sure I’m not drawing down my investments too fast.

How do you manage your cash?
Same as before.

how much time to you spend on managing your finances?
According to DW, too much time. The two bucket approach & rebalancing need only be looked at a couple of times a year. Ongoing prior investing activity is unchanged.

What other resources do you draw on to help you do that?
Given I’m obsessive about money, Excel, Quicken, Fool are my friends.

[JonathanRoth]

Here’s more about dividends:

Dividends are the return of capital. If a $10 stock returns a $1 dividend the stock is then worth $9. The stock holder started with $10 stock and $0 cash and end with $9 stock and $1 cash, the value of what they hold is unchanged at $10. The reason it’s not obvious is because the daily fluctuation in trading price partially hides the impact of dividends.

In older times, selling stocks cost around 5% buying and 5% selling, so buying and selling were avoided. Dividends allowed people to extract cash without any selling cost. Today the cost of selling is minor, so it’s just as easy to sell shares on a yearly or monthly basis to cover expenses.

The down side of dividends is that stock holder is forced to recognize income at the convenience of company whose stock is held. If the stock holder sells stock to cover their cash needs, the income is recognized when they chose.

So invest risk and goal appropriately, don’t worry about dividends.

[pauleckler]

The main thing is a diversified portfolio. I have a core of blue chip stocks for stability but focus on growth stocks for new investments.

I spend about four hours per month going over performance for the last 90 days to decide what to buy and what to sell.

I check prices daily to keep an eye out for developments and usually investigate changes over abt 2%. News related?

Dividends usually cover my needs except for major purchases. I tend to be reducing dividend holdings to accommodate rising rmds.

[gdett2]

Hi pauleckler,

“I tend to be reducing dividend holdings to accommodate rising rmds.”

What do dividends have to do with RMD’s?

If you want to preserve your dividend level, just transfer shares of stock that pay qualified dividends to your taxable account for your RMD or as a part of it.

Or you can transfer shares of a growth stock that you will hold to long-term status as a part of your RMD.

That depends on how much of the RMD you need as cash for expenses. The rest can be stock.

And, at least right now, long-term capital gain rates are lower than income rates. Dividends paid in a taxable account and money earned on LT capgains for stock are lower than what you pay to withdraw them from a traditional retirement account.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

[1poorguy]

My company did “return of capital” a few times. That isn’t the same as a dividend. It is not taxable because it’s just a return of capital you invested, and reduces your basis. A dividend is taxable, and has no effect on your basis.

A dividend is just “sharing” a portion of profits with shareholders, and is an expense to the conpany.

1poorguy

[Howie52]

“How did you prepare for retirement?”

I prepared by developing an investment portfolio of dividend paying stocks - shooting to
use Social Security plus dividends to nominally match my income before retirement.
Then I was laid off.
Then I was hired.
Then I was laid off again.
Then I was rehired.
And then DW developed health problems simultaneously with my being laid off again.

So when the opportunity arose to go back to work I had to refuse.

“How do you manage your portfolio for income? - would you harvest capital gains by selling stocks? How do you decide to do so?”

We followed through on the SS and dividend approach - plus used an emergency fund to
cover home renovation and auto replacement expenses.
We have also sold a mutual fund or individual stock when the reason behind the company or
the fund purchase no longer held true - or when the management turned either idiotic or
greedy or possibly criminal.

"What is the composition of your portfolios (% of stocks/bonds)? "

We have individual stocks - mainly dividend paying companies. Heavy exposure to firms
in industries in which I have knowledge - pharma, chemicals, oil & gas, utilities,
industrials and financials. We have minor positions in small-cap mutual funds, international
funds, and income funds. And we also have a small position in bonds. About 80% equity, 10%bonds and 10% cash/short-term holdings. Our cash position has been reduced due to
home renovations to allow DW to stay in our home a few years longer.

Howie52

[ptheland]

Minor correction. Dividends are not an expense to the company.

—Peter

[pauleckler]

What do dividends have to do with RMD’s?

Capital gains each year are usually optional. Dividends usually are not. As are most other income sources. So as RMDs rise you get pushed into higher tax brackets and especially into super premiums for Medicare.

Trimming dividend stocks when you don’t need the income makes room for RMD increases.

[1poorguy]

They aren’t? It’s money going out. It should be a negative on the bottom line. If not, how do they account for it?

[bighairymike]

They aren’t? It’s money going out. It should be a negative on the bottom line. If not, how do they account for it? - 1pg

---

On the balance sheet, as a reduction in assets (cash) and a corresponding reduction in retained earnings (equity).

[JonathanRoth]

They aren’t? It’s money going out. It should be a negative on the bottom line. If not, how do they account for it?

For the company dividend’s aren’t an expense, they aren’t buying anything, thus not tax deductible. Dividends are considered a reduction of cash/ shareholder equity.

https://www.investopedia.com/ask/answers/090415/are-dividend….

[gdett2]

Hi pauleckler,

Still like looking at muddy water, trying to see the bottom …

Are the dividend stocks you are trimming for RMD’s inside the retirement account or in a taxable account?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

[JonathanRoth]

A dividend is just “sharing” a portion of profits with shareholders, and is an expense to the company.

Dividends are not an expense, the company is not buying anything.

https://www.investopedia.com/ask/answers/090415/are-dividend….

[ptheland]

What everyone else said. Reduce cash, reduce Retained Earnings.

This is the source of “double taxation” that people complain about from time to time. The corporation earns money, pays taxes, then distributes those earnings to shareholders as a dividend. Then the shareholder gets to pay taxes again.

Of course, this ignores a similar situation where a wager earner earns money, pays taxes, then buys a widget, generating income for the widget maker. Who pays taxes on that money again. Most of the widgets a wage earner buys are not deductible, either. There are a couple of exceptions, for certain specific widgets.

–Peter

[CuriousQ]

I am interested to hear about the experience of people who have retired and who are deriving their retirement incomes mainly from their investment portfolios.

A thought you might find useful:
I retired at age 60, and my model indicates that my best age to start social security might be 67. It also might be age 70. But, it is definitely not age 62. So, I will wait until I’m 66 and revisit the calculation using actual returns from years 60 through 66 rather than estimates of what those returns might be. That said, I need to provide all my own income from age 61 through age 66 (or even more).

That means that even though I am a fairly aggressive investor (80/20 Stocks+Other Volatile / Bonds+Cash) in my long term portfolio, I have larger income needs short term. So, I calculated how much I will need of my own money now to account for the SS I’m not taking yet, and all that is in cash + iBonds + other non-volatile investments.

So, if you looked at my outflow, you’d think I was nuts taking ~7% withdrawals. But, that’s only for a few years. Once I start SS, I’ll be at like 3%.

[GWPotter]

My reactions –

Even for a few years, 7% scares me today. S&P down 20%. So the dollars that there were 7% in January would be 8.75% today. That higher percentage withdraw hits two ways. First the portfolio drops in size faster. But more importantly when the market goes back up you have less money to grow. It is the old fact, if the market goes down 50%, to return to “before” you must increase by 100%.

Not starting SS at 62 is wise, waiting until 70 is wiser. Where can you get an annual 8% pay raise with a cost of living escalator?

Obviously don’t know what bonds you have, but I avoid any sovereign debt – particularly US government stuff. It will not keep up with inflation. I used corporate debt and one specific High Yield bond fund – VWEA. As high yield funds it has a low return. But it also has dramatically lower defaults.

[pauleckler]

The dividend stocks being trimmed are in taxable accounts and hence contribute to taxable earnings.

[Rayvt]

Not starting SS at 62 is wise, waiting until 70 is wiser. Where can you get an annual 8% pay raise with a cost of living escalator?

This is so wrong.
It’s not even close to “an 8% raise”. It’s not any kind of “raise”. It’s getting more money for a shorter period of time in lieu of getting a lesser sum for a longer period of time.
And of course, all SS benefits go up by the same COL escalator whether or not you are collecting SS or not.

One problem with waiting until 70 instead of 62 is seen all around us right now. If you delay doing something until later, when the later comes along the opportunity that existed 8 years earlier may no longer be available.

We traveled around the world and visited dozens of countries in 2014. Five years later, Covid suddenly happened and closed off travel. Today you can’t even easily visit Canada.

And you certainly cannot make a tourist visit to the beautiful country of Ukraine.