Income Portfolio

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May 14, 2009 12:59 pm

Since we all do things a little differently, I just wanted to see what some of you guys would do in this situation:


Client is 60 years old, has about $600k in annuities for income 7-10 years from now.  Rolling over $800k of qualified money that he wants about 5% ($40k) per year, without reducing principle too much.  Fairly risk averse client.  Has another $300k or so in mutual funds/cash for short term/emergency needs.


What would you do with the $800k?

May 14, 2009 1:06 pm

Investment Grade Bond Ladder.

May 14, 2009 1:15 pm

I would do about 70-80% fixed income, combination of corps, TIPS (for stability, not yield), high yield, global fixed income, and the other 20-30% in dividend paying equities and REITS.  Would probably do fine with heavy mix of utility stocks.  You may even consider the high-yield bond portion the more "risky" part of his portfolio, and raise the exposure in that area, due to current yields and potential for capital appreciation (and since dividend cuts might not be over yet).  Choose your own managers, and fiddle with the mix to get to 5%.


Fixed annuity rates are too low right now, VA's won't work for his time frame (I assume this gets him his 0-7 year income?).  CD rates are too low.  It's a tough slog for income needs right now if you don't want much risk, unless you are willing to go the VA route.  But still a good time to lock in some good yields if you are willing to buy equities and corp's.

May 14, 2009 1:20 pm

15 years out or just under, AA taxable munis. The Volvo of fixed income-boring but safe.

May 14, 2009 1:36 pm
SPIA (single life), take the difference of single life and joint life and buy a WL or UL policy for income replacement at death or for replacing assets depleted due to long term care costs.
May 14, 2009 2:43 pm

Read Ray Lucia's "Buckets of Money" and set him up accordingly.


A portion of the rollover could be bucket #1 money, his annuities will complete bucket number 2, and then you can talk to him about bucket #3 (14+ year money).


Is anyone else familiar with the Buckets of Money concept?

May 14, 2009 3:02 pm

No

May 14, 2009 3:16 pm
Borker Boy:

Read Ray Lucia's "Buckets of Money" and set him up accordingly.


A portion of the rollover could be bucket #1 money, his annuities will complete bucket number 2, and then you can talk to him about bucket #3 (14+ year money).


Is anyone else familiar with the Buckets of Money concept?

 
Yes.  That's sort of how I operate (with the right client and right amount of money) with retirees and soon-to-be retirees.  It's nice to let people not worry about certain buckets.  It's just hard when they only want to focus on the bucket that has gone "down".
 
To a degree, I think everyone should be operating this way.  Not sure how money used for the next 3-5 years would be treated the same way as money being used in 20 years.
May 14, 2009 9:05 pm

I have been using a combination of etf'S and funds -
TIP (tips) AGG (High Grade Corps) Pioneer Strat Inc Fund, TBT (to hedge the bonds) and VIG (equity ETF - Vanguard dividend Achievers). I dont remember my weightings, but the yield on the portfolio the way i have it set up is 6.4%

May 15, 2009 7:04 am

Shouldn't you already know what to do? 

May 15, 2009 1:19 pm
HAAIC:

Shouldn't you already know what to do? 

 
I might if I had your laser-like focus.  What are you doing up so early in the morning?
May 15, 2009 1:52 pm

Is 7-10yr his time frame for everything (annuities and 800K) ?

Or does he want to take 5% from the 800K starting this year ? 

2 very different scenerios.

Corp bonds and other relatively conservative fixed income should be the backbone of this portfolio.  High grade corps, convertables, global fixed income, and even some junk exposure (sector has performed well and continue to do so when we start to recover, ETF I like is JNK).

My opinion is to invest enough of the 800k to get 40k per year, invest the remainder of the principle in a diversified equity portfolio- blue chip names, making money etc etc.  Probably about 600-650k in fixed income, remainder in US and International equities (stock, etf, funds).

Income need is taken care of from fixed income portion.

Inflation protection is taken care from the equity portion.  After a few years, rebalance and move some from equity side to fixed income side.

If the client's tax bracket is high enough, he may benefit from muni exposure in his taxable accounts.

Good Luck !

May 15, 2009 2:16 pm
exUBS:

Is 7-10yr his time frame for everything (annuities and 800K) ?

Or does he want to take 5% from the 800K starting this year ? 

2 very different scenerios.

Corp bonds and other relatively conservative fixed income should be the backbone of this portfolio.  High grade corps, convertables, global fixed income, and even some junk exposure (sector has performed well and continue to do so when we start to recover, ETF I like is JNK).

My opinion is to invest enough of the 800k to get 40k per year, invest the remainder of the principle in a diversified equity portfolio- blue chip names, making money etc etc.  Probably about 600-650k in fixed income, remainder in US and International equities (stock, etf, funds).

Income need is taken care of from fixed income portion.

Inflation protection is taken care from the equity portion.  After a few years, rebalance and move some from equity side to fixed income side.

If the client's tax bracket is high enough, he may benefit from muni exposure in his taxable accounts.

Good Luck !

 
The income from the $800k will actually begin October 2010.  I do have about 2.5 years of cash on the sidelines, but the rates make me puke.  The annuities will provide at a minimum $60k per year around 2019 (that's a trip...2019). 
May 15, 2009 3:26 pm
B24:
Borker Boy:

Read Ray Lucia's "Buckets of Money" and set him up accordingly.


A portion of the rollover could be bucket #1 money, his annuities will complete bucket number 2, and then you can talk to him about bucket #3 (14+ year money).


Is anyone else familiar with the Buckets of Money concept?

 
Yes.  That's sort of how I operate (with the right client and right amount of money) with retirees and soon-to-be retirees.  It's nice to let people not worry about certain buckets.  It's just hard when they only want to focus on the bucket that has gone "down".
 
To a degree, I think everyone should be operating this way.  Not sure how money used for the next 3-5 years would be treated the same way as money being used in 20 years.
 
I've found Ray's philosophy to be very helpful. I've never had what I'd consider to be a well-thought out plan or road map to use with clients, just what I was taught by my field trainer, which is to put them into a Jones sample portfolio and start liquidating 5-6% annually. And we all know where that's gotten us.
 
It pays a whole lot less than the 100% mutual fund route, and retiring in a low rate environment sucks for the client, but I think this type of bucket strategy - i.e., guaranteeing that the first 14 or so years of retirement income is covered - is definitely the way to go.
May 15, 2009 3:52 pm

thought.  put some of the money in a variable annuity with some kind of guaranteed income rider.  This gives him the 5% income client needs with the ability for some inflation protection/capital appreciation.

May 15, 2009 4:23 pm
Borker Boy:
B24:
Borker Boy:

Read Ray Lucia's "Buckets of Money" and set him up accordingly.


A portion of the rollover could be bucket #1 money, his annuities will complete bucket number 2, and then you can talk to him about bucket #3 (14+ year money).


Is anyone else familiar with the Buckets of Money concept?

 
Yes.  That's sort of how I operate (with the right client and right amount of money) with retirees and soon-to-be retirees.  It's nice to let people not worry about certain buckets.  It's just hard when they only want to focus on the bucket that has gone "down".
 
To a degree, I think everyone should be operating this way.  Not sure how money used for the next 3-5 years would be treated the same way as money being used in 20 years.
 
I've found Ray's philosophy to be very helpful. I've never had what I'd consider to be a well-thought out plan or road map to use with clients, just what I was taught by my field trainer, which is to put them into a Jones sample portfolio and start liquidating 5-6% annually. And we all know where that's gotten us.
 
It pays a whole lot less than the 100% mutual fund route, and retiring in a low rate environment sucks for the client, but I think this type of bucket strategy - i.e., guaranteeing that the first 14 or so years of retirement income is covered - is definitely the way to go.
 
Well, if you think about it, almost regardless of when he retired, the short-term stuff (0-5 yrs.) wasn't going to make him much interest anyway.  Absent the late 70's/early 80's, we have been in a pretty normal/low rate environment for years.  And as lons as you aer not going heavy on Treasuries/TIPS in the intermediate bucket right now, the yield should be OK for the middle bucket.
 
As far as your advice from your field trainer, my suggestion is to always look for as much advice from different people as possible.  I take advice from several different Jones vets, since nobody is good at everything.  I have the "prospecting" mentor, the "estate planning" mentor, the "retirement income" mentor, etc.  My formal mentor is much more conservative, and he has always managed money this way.  He never really used the "bucket" term, but he basically always protects the principle on his first 5 years of withdrawals, and then staggers out fixed income and equities for the middle and long-term bucket.  He has actually executed very well during this downturn, as the only real "selling" of equities he has done is for tax loss harvesting, since that's all his long-term stuff.  I only started developing protfolios this way about 18-24 months ago, so I have done OK with it, but I actualyl staretd doing it at a time when rates were higher, and have a lot of people 1-2 years into 5 year fixed or immediates that are paying 5-7% for their near-term money.  So they are pretty happy (relatively speaking).  The people that refused to take "only" 5% two years ago are kicking themselves (and I have learned to be more forceful about principal protection).
May 15, 2009 5:39 pm
snaggletooth:
HAAIC:

Shouldn't you already know what to do? 

 
I might if I had your laser-like focus.  What are you doing up so early in the morning?



I'm in Atlanta. Training starts early.