How do you turn a pile of money into income for the rest of your life? I have read hundreds of articles about this topic, and have found no ideal solution. Much of the advice applies to those aged 65+, but what about someone in their 40s with a much longer time horizon?
During the accumulation phase, 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 not close to retirement, your time is better spent focusing on your earning potential via better career moves, investing in your skillset, and/or look for entrepreneurial opportunities where you own equity in a business.
My crude and simple solution is to first build a portfolio designed for total return, and then spend the income. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. Bond interest from high-quality IOUs are more reliable, but won’t rise as quickly.
As you’ll see below, my portfolio distributes about 2.5% in the form of dividends and interest. If we were to stop working, we would then take out another 0.5% by selling a few shares and then we’d have our 3%. Right now, we are both still employed and thus we withdraw less than 2.5%, so we don’t have to sell anything.
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 12/24/19)||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 bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. I see it as a very conservative, valuation-based withdrawal rate metric due to our very long retirement horizon of 40+ years.
What’s not shown in the chart above is how the total income rises as the portfolio value rises. I have a chart of my portfolio income as well, but it mixes in my own contributions so it doesn’t present a clear picture.
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.
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. We use our nest egg to allow us to work less hours in a more flexible manner as parents of young children. We are very fortunate to be in this situation, although I’ve also been working towards this goal steadily for 15 years! Others may use their portfolio income to start a new business, travel around the world, sit on a beach, do charity or volunteer work, and so on.