One of the biggest problems in retirement planning is making sure a pile of money lasts throughout your retirement. I have read hundreds of articles about this topic, and there is no single solution. My imperfect (!) solution is to first build a portfolio designed for total return using assets that have enough faith in to hold through an extended downturn. I do not look for the highest income – no specialized ETFs, no high-dividend-only stocks, no high-yield bonds.
Then, only after that do I check out how much it distributes in dividends and interest. Dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.
I track the “TTM Yield” or “12-Month Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I prefer this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my investment portfolio (2/3rd stocks and 1/3rd bonds).
|Asset Class / Fund||% of Portfolio||Trailing 12-Month Yield (Taken 9/17/19)||Yield Contribution|
| US Total Stock|
Vanguard Total Stock Market Fund (VTI, VTSAX)
| US Small Value|
Vanguard Small-Cap Value ETF (VBR)
| International Total Stock|
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
| Emerging Markets|
Vanguard Emerging Markets ETF (VWO)
| US Real Estate|
Vanguard REIT Index Fund (VNQ, VGSLX)
| Intermediate-Term High Quality Bonds|
Vanguard Intermediate-Term Treasury ETF (VGIT)
| Inflation-Linked Treasury Bonds|
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
Here is a chart showing how this 12-month trailing income rate has varied over the last five years.
One of the things I like about using this number is that when stock prices drop, this percentage metric usually goes up – which makes me feel better in a gloomy market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric. I see it as a very conservative, valuation-based withdrawal rate metric due to our very long retirement horizon of 40+ years.
In practical terms, I let all of my dividends and interest accumulate without automatic reinvestment. I treat this money as my “paycheck”. Then, as with my real paycheck, I can choose to either spend it or reinvest in more stocks and bonds. This number does not dictate how much we actually spend every year, but it gives me an idea of how comfortable I am with our withdrawal rate.
I am a proponent of aggressively saving, and then using the potential income that brings to improve your daily lifestyle. Instead of sitting on a beach, we used our nest egg to allow us to work less hours in a more flexible manner as parents of young children. Others may use it to start a new business, travel around the world, do charity or volunteer work, and so on. The income from our portfolio lets us “work less and live more” now as I now fear running out of time more than running out of money.
(If you’re still in the accumulation phase, you don’t really need to worry about this number. I believe a 3% withdrawal rate remains a reasonable target for something retiring young (before age 50) and a 4% withdrawal rate is a reasonable target for one retiring at a more traditional age (closer to 65). If you are young, instead focus on your earning potential via better career moves, investing in your skill set, and/or look for entrepreneurial opportunities where you own equity in a business.)