A Retirement Income Plan That Is Cheap And Simple
Create a monthly payout without making middlemen rich.
You can spend a lot of time struggling to turn a pile of capital into monthly income. Or you can spend a lot of money. What if you don’t want to spend either of those things? Then you may find this guide very helpful.
The model income plan here assumes that you have $1 million in an IRA, your mortgage is paid off and you’ve quit work. It’s extremely simple to put in place. It’s ridiculously cheap compared to the stuff that stockbrokers and other financial pros usually have on offer.
The annual money-management cost for this plan is going to be, for a $1 million stake, between $100 and $900 a year, depending on where you have your account. Engage a financial planner to accomplish the same result and you’ll fork over $10,000 a year.
Cheap-And-Simple is not right for everyone. It’s not right for someone with financial complications (like a small business). It’s not right for someone with personal complications (like a divorce or a disabled child).
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But would be right for the millions of retirees who don’t have complications and yet are now spending time or money getting that monthly check.
The plan is to draw $3,000 a month from each $1 million of savings. That’s a 3.6% annual take. Yes, you can get that in a world of sub-2% yields on stocks and bonds. No, you don’t have to do a lot of fiddling or trading to get your payout.
What about all those complicated solutions to the income problem? There are high-yield stocks and dividend aristocrats and closed-end funds and option strategies and master limited partnerships and all manner of convoluted products concocted by bankers. Here’s what these things have in common: no increase in your risk-adjusted return.
That’s the grim truth about the securities market. Any investment scheme that offers an enhanced yield comes with a give-back in the form of higher risk or reduced appreciation. The probability of finding a free lunch somewhere on Wall Street is exactly zero.
Now, if your idea of a retirement hobby is to sit in front of a computer looking at stock screens, go ahead with a complicated portfolio. It might include real estate investment trusts, a bond ladder, junk bonds and an index fund that owns companies with rising dividends.
The complicated solution might generate a high yield, if that matters to you. That is, you could get your 3.6% payout without regularly selling shares. But it’s not going to leave you any better off financially.
If you’d rather spend your time playing kickball with your grandchildren, then skip the fancy footwork and just follow this cheap-and-simple income scheme:
Using index funds, put 60% of your savings in U.S. stocks and 40% in U.S. bonds. Then arrange an automated withdrawal.
What about foreign securities? John Bogle, the founder of Vanguard, was skeptical about the global angle. There’s some theoretical advantage to international diversification, he said, but it’s not as great as you might think: Your U.S. index fund is dominated by companies like Apple and Alphabet that have a global footprint.
So I’m skipping the foreign stocks in the interest of making your portfolio as simple as it can be.
Many a brokerage firm can help you set up a Cheap-And-Simple plan. I reviewed the details at three big companies.
At Fidelity Investments, put 60% of your IRA in Fidelity Zero Total Market Index Fund (ticker: FZROX) and 40% in Fidelity U.S. Bond Index Fund (FXNAX). Set up an automated withdrawal going to your bank account. State how much tax you want withheld.
This is one good deal. The annual cost, all via the expense ratio of the bond fund (the Zero fund has no fees), comes to $100.
Those funds with vanishing expense ratios are loss leaders at Fidelity. Take advantage. Fidelity may hope that you will someday move assets into expensive funds or services, but you don’t have to. At Fido, bargain hunters get royal treatment.
For Vanguard clients the account is even simpler, with a single position in Vanguard Balanced Index Fund (VBIAX). The cost comes to $700 a year, in the form of an expense ratio on the fund. You can set up an automatic $3,000 redemption every month, with proceeds going into a Vanguard money market fund, from which they can be sent on an automated schedule to your bank account.
The advantage to this fund is that it is rebalanced. If stocks crash, the fund sells bonds and buys stocks. Rebalancing does nothing to increase expected returns, but it’s valuable to investors who want to keep their risk level constant. It’s nice when you can get rebalanced without paying money or pulling out your calculator.
The offering at Charles Schwab is a service called Intelligent Portfolios, which combines a roboadvisory portfolio with, if you want it, an automatic monthly payout into your checking account.
With this program you can’t spell out your favorite index funds for your IRA; instead, you have to take whatever mix a robot assigns to you. But this robot knows something about costs. Many of the funds on the Schwab shopping list are low-fee ETFs that qualify for the Forbes Best Buy list.
Since the mix varies with the age, risk tolerance and goals of the customer, I can’t calculate a cost figure. But I think it’s likely that your combined fund expenses would come to less than $900 a year for a $1 million account. There are no other fees—management fees or commissions—for this basic service.
The stock/bond allocation is, again, a function of all those variables, so I can’t spell that out either. But it will probably veer not very far from the classic 60/40 ratio except in one respect: Schwab likes to hold a fair amount of your assets (like 10% – 15%) in low-yielding cash.
The basic service includes some tax optimization. If your assets are split between a taxable account and an IRA, the robot will know which to draw on. It can also shuffle the funds in the taxable account in order to harvest capital loss deductions.
For a modest additional sum (a one-time $300 plus $30 a month) you get all that the robot offers plus some access to a human financial planner. This is a terrific option for retirees who want a little hand-holding.
In short, large financial institutions are quite capable of delivering Cheap-And-Simple to people who have the sense to ask for it. The big question that must now be addressed: Will your money last?
A $3,000 monthly spending rate is low enough that you can award yourself inflation adjustments, provided that your account does not suffer a market crash early on. But $3,000 is high enough that you must be equipped to tighten your belt if there’s a market meltdown during your first decade in retirement.
Stock and bond prices are at crazy high levels in relation to corporate earnings and bond coupons. What that does to safe withdrawal rates is explored in Three Fallacies Of Wealth Creation, And Three Antidotes.
Whatever your spending rate, don’t hand over $10,000 a year to a middleman unless you really need to.
Fidelity automatic withdrawals
Vanguard automatic withdrawals
Schwab Intelligent Portfolios
Funds used at Schwab Intelligent Portfolios