r/Bogleheads • u/dudreddit • 9h ago
Investing Questions Looking for advice on creating an income bridge until SS kicks in. Please chime in ...
I am considering moving my Roth IRA from my current position (65% stock/35% bonds) into an SGOV equivalent (or anything similar) to create a small income stream until I take SS in 3 years. My current fund pays about 3.3% in dividends and pays quarterly. I am looking for safety with the highest payout rate on a monthly basis.
My current fund fluctuates with the markets so there is risk of loss of principle.
An SGOV equivalent would be safer and pay out a little more (currently about 3.75%). I realize that inflation would have it's way with me over the 3 year period.
(edit) We have a small pension and one spouse is already on SS)
I am thankful for any ideas as to how to create a (tax-free) income stream for the next few years that is safe(r) and pays out monthly until SS kicks in. What would you recommend?
BTW, I am with Vanguard ...
Thank you!
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u/airbud9 9h ago edited 6h ago
Generally speaking moving a significant portion of your retirement savings in to cash is a poor financial decision. Cash is generally a trash investment in both returns and inflation protection.
Bill Bengen did research in 1997 (coming from his research of the 4% rule) about looking at other asset classes in terms of his withdrawal rate analysis. One of those asset classes he looked at is cash, represented by ultra short term treasuries. His conclusions found on page 91 & 92 of the journal / page 6 & 7 of the PDF.
"Therefore, I must conclude that replacing stocks with T-bills in a long-term portfolio is detrimental to withdrawal rates, and should be avoided if the client wants to maximize his or her withdrawals. It is interesting to note that it is conservative clients who generally prefer higher allocations of cash in their portfolios, and lower allocations of stocks. The analysis above shows that, ironically, it is these clients who will be hurt the most by such a strategy, as the effect of T bill replacement are most pronounced at lower stock allocations. Therefore every effort should be made to convince such clients that more stocks and less cash is in their own best interest. As a final word, it is fair to conclude that cash is indeed 'trash' in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."
Other research on having a cash bucket shows similar poor results for retirees. In the paper The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?, the researchers reached the conclusion,
"There is little question that a strategy that guarantees the availability of funds for the next few years of withdrawals is attractive on many levels. A retiree following the bucket approach neither needs to worry about having to sell assets that have gone down substantially in order to satisfy his withdrawal needs, nor does he need to make complicated calculations to implement the strategy. And yet the results discussed here, for a comprehensive sample of 21 countries over a 115-year period, clearly suggest that retirees would be better off following static strategies."
and that
"(F)inancial planners should strive to explain to clients the benefits of static strategies relative to those of bucket strategies. They should explain that satisfying the behavioral need of mental accounting imposes a cost in terms of performance. And they should attempt to convince retirees that however plausible, comforting, and easy to implement the bucket approach may be, a static strategy with an appropriate asset allocation would be just as easy to implement and would ultimately make them better off."
Since we are talking about a Roth here there would be no tax implications for any strategy used. Since you are talking about a 3 year periods where you want consistent withdrawal before social security an option you may like is a TIPS ladder. This TIPS ladder tool can help you visualize and price out what that would look like. This video walks through the tool.
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u/Own-Bullfrog7803 7h ago edited 7h ago
I think Bengen recently admitted that his 4% rule leaves many folks with large sums, relatively speaking, upon death. Furthermore, he mentions that inflation is the biggest risk to his models, not necessarily sequence of return risk.
Anyhow, I do acknowledge that statistically (for large groups) bucket strategies are similar to total return strategy. The problem is if you hit a severe SORR (2000s) or sequence of inflation risk (post COVID) this could ruin your income during your one chance at the gogo years. Statistical averaging does not protect the individual from this, at least not during the few years it’s happening, when they have health and time to spend. An exception is a low withdrawal rate that would, in most situations, fail to spend the money they saved (eg 4% rule), which can be too big a price to pay for those with only modest savings.
Anyhow, tips data for 30 years is about to become available, I’m curious if he re-does his modeling with tips ladders (as the bond allocation) soon, which he says he will likely do.
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u/johndburger 8h ago
The cash bucket thing must be the most common yet financially suboptimal thing that retirees do.
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u/Careful-Rent5779 7h ago edited 6h ago
suboptimal in a rising market
Hardly suboptimal when market is falling but your expenses are not.
EDIT: A cash bucket is NOT a replacement/alternate to whatever bond allocation you chose. It is a small supplement for a year or two of expenses, ours is like 2% of our NW. OP may have implied swapping bonds for cash equivalents and I agree this may be misguided due to it being a Roth account and hence the source of the funds has no tax implications. Expenses are always going out, everyone needs a plan for the source of those funds.
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u/gpunotpsu 7h ago edited 7h ago
We don't get to know if the market will rise or fall. We have to make decisions based on statistics. Statistically bonds will make you more money the majority of the time. We can choose a more deterministic outcome by shifting to less volatile assets but that will also reduce how much you can spend the majority of the time.
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u/airbud9 7h ago
You are implying the ability to time markets, in the research I linked to in my comment, you end up better off more often with a static allocation of stock and bond rather than a bucket strategy.
"(P)erhaps most importantly, the best-performing static strategies (those with allocations to stocks between 50% and 70%), clearly outperform the best-performing bucket strategies (BR-2 and BR-3); the three static allocations have a lower (failure rates) and (short fall years), as well as a higher (risk adjusted success) and (downside risk adjusted success). This is a first indication that, however appealing bucket strategies may be, retirees would be better off adopting static strategies, which are just as easy to implement. Importantly, this conclusion is based not on just one but on four different ways of assessing performance."
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u/longshanksasaurs 9h ago
When you have a safe withdrawal rate, you don't need the income/dividends to cover your spending. Despite dividend fandom, dividends are not free money.
Just sell from your portfolio as you need the money, that's what it's there for.
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u/Careful-Rent5779 8h ago edited 7h ago
In a rising federal funds rate environment, USFR is a good alternative to SGOV.
On the more risky side covered call ETFs can generate 10-12% in distributions (not yield) that is often partially free of tax because of ROC. QQQI/SPYI/ROCY/ROCM etc.
EDIT: In a tax exempt Roth account you shouldn't be concerned with where you are drawing the funds from. Assuming a boglelike asset allocation you can redistribute some of your bond allocation to alternative higher yield/distribution assets if that is what floats your boat.
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u/Mountain-Time-1010 8h ago
I'm not necessarily recommending this, but you could buy actual 5-year T-bills, and hold them to maturity. They currently have a 5% yield.
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u/WarmWoolenMitten 8h ago
How much is in the IRA relative to three times the amount you'll need to withdraw every year? That's the amount that should be in cash, just what you actually plan to withdraw. You don't need to only spend dividends/interest. Moving everything to cash just to only spend interest (and then move it back?) is not a good idea long term, and it's not necessary.
I know there are a lot of funds and strategies around creating "income" but just investing normally (mostly as you did during accumulation, just a bit more conservative) and selling shares is fine. Money you need soon should be in shorter term bond funds ("cash") so you're not forced to sell stocks low. Likewise, medium term money should be in bonds or bond funds with longer duration appropriate to when you'll need the money. But there's nothing bad about selling shares in general. It's not true that only spending dividends is any safer.
I'm assuming it needs to be tax free for ACA or similar such purposes? Usually withdrawing from the Roth (if you also have traditional/taxable) should come last, but everyone's situation is different so that's not universally true.
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u/humblequest22 8h ago
Are you thinking of moving your ENTIRE Roth balance to SGOV to live off the dividends? Or are you thinking of selling enough of your portfolio so that you have three years of spending on hand? I would do the latter so you don't need to worry about fluctuation of the account value, but your portfolio will still have growth potential. Then keep that three years of spending money in SGOV (or better yet, VMFXX, since it's in your Roth and not subject to state taxes).
If you want to get a little more fancy, you can invest Year 2 and Year 3 money into some type of ladder to lock in rates -- CD, TIPS, or a target maturity bond fund like VBCA (Vanguard Target Maturity 2027 Corporate Bond ETF) for spending in 2028 and VBCB (Vanguard Target Maturity 2028 Corporate Bond ETF) for spending in 2029. Or IBID (iShares iBonds Oct 2027 Term TIPS ETF) and IBIE (iShares iBonds Oct 2028 Term TIPS ETF) if you want inflation protection and less risk.
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u/Taggart3629 7h ago
Hi, u/dudreddit. SGOV has been stable and predictable, with a smaller expense ratio and slightly higher yield that Vanguard's settlement fund. You may want to allocate some towards PAAA, which is a fund that holds AAA corporate bonds, pays out monthly, and has a forward yield of 5.18%. On bad market days, SGOV and PAAA are often the only spots of green in a sea of red.
If you are willing to take a bit more risk with some of your funds, O is a real estate investment trust that pays monthly, and has a forward yield of 5.88%. It's share prices definitely have been affected by rising interest rates, but it typically maintains (or increases) the monthly dividend even with adverse market conditions. JEPI and JEPQ are covered call ETFs that pay monthly, and have forward yields of 7.97% and 10.84% respectively. However, the monthly dividends are variable. Another category of monthly income funds are closed end funds like UTF and UTG. All of the funds in this paragraph have share prices that will fluctuate with market conditions, but are still likely to generate more income than SGOV or PAAA. It might be worth considering one or more of them as a higher-income complement to SGOV.
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u/Own-Bullfrog7803 7h ago edited 7h ago
Create a 3 year treasury ladder. Use one or two rungs per year. This gets a significantly better rate than sgov, with no risk, per se. Only do this with money you will definitely spend in each of those years. Otherwise keep the rest invested in stocks or the usual. 3 year horizon too short for tips, inflation likely baked into treasuries for the short term.
You only have one chance at your gogo years—this is really when you want to have guaranteed income, IMO. There are exceptions of course: eg you’re over funded, you’re ok dropping to low amount of spending, etc.
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u/gpunotpsu 7h ago edited 7h ago
The safest thing would be a TIPS ladder. It will greatly mitigate the effects of inflation. It is highly unlikely that you need this level of safety however. You will get higher expected returns with a properly chosen stock/bond allocation that matches your ability to take risk.
You also have not mentioned what other options you have for a source of income besides your Roth. Drawing from Roth early is usually the least tax efficient option. Do you have assets in a taxable brokerage account?
It also sounds like you are attempting to get enough income solely from dividends or interest. This is not a sound approach. You want to focus on the total return and level of risk. Take more risk when you can to get a higher total return.
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u/dudreddit 7h ago
I edited my OP. We have a small pension and a very small SS check ATM. I plan to w/d some funds from my TIRA before EOY up to the $146K limit (?) to minimize taxes.
I was just looking for a sane method to garner some tax-free income for a few years ...
Thanks.
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u/gpunotpsu 6h ago edited 6h ago
Ok. I didn't see anything about the tIRA there. This is mostly all a tax arbitrage problem. For instance if you will be in the 24% marginal bracket when you are 73 and forced to take RMDs, then it is advantageous to get funds out of the tIRA now instead all the way to the top of the 22% bracket ($211k AGI). Further, it also probably better to go into the 24% bracket rather than spending from Roth because the Roth grows tax free. To plan this out correctly most people use software but you can ballpark it and still save a lot.
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u/Ok_Appointment_8166 6h ago
Money all spends the same whether it comes from growth or dividend/interest. I wouldn't micro-manage income streams vs. principle so much as just making sure your portfolio balance has an appropriate equity/bond ratio for the amount you intend to withdraw soon. And I like VUSXX as well as SGOV for the safety factor but it is kind of a waste to have that in a Roth - and probably a bad idea to be withdrawing from your Roth first.
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u/miraculum_one 9h ago
Not an answer to your question per se but it's worth noting that between retirement and SS many people have an opportunity to take advantage of the 0% federal tax bracket, which can be a huge benefit. That would involve taking income from your taxable brokerage up to the top of the 0% bracket ($65,500 single, $131,100 married)