1) In order to avoid touching the principal you need earnings of 6.25%/yr to draw $125K, or 4.45% if the $125K is offset by SS ($36K). The formers seems tough as it probably requires some stocks, so it's not risk-free, which it seems like you're after if you're looking at a ladder of CDs. The latter (4.45%) is likely possible with a mixed ladder of 10 year T-bonds (avg of 5.2% ± 7.7% from 1982-2017) and 3 month T-Bills (3.4% ± 3.0%). A ladder avoids principal fluctuation that a bond fund would have (the price does fluctuate until maturity but that doesn't matter if you hold until maturity). If the price fluctuation doesn't bother you that much, a bond fund would be much simpler than a ladder.1) Goal:
A person 65 YO (on Medicare and $3000/mth Social Security) has $2,000,000 liquid cash and wants to live comfortably (defined as $125,000/yr after tax) without touching Principal.
2) Investment:
Invest $250K in 8 different Bank CD's currently paying 5.25% (FIDC insured) ... then in 5 years, re-evaluate the financial landscape. Wash/Rinse/Repeat...or adjust as needed.
What am I missing in this simple "Retirement Income" thinking?
2) The "8 different CDs" investment plan is biased by recent history. Do you not recall when interest rates were near zero and CDs were barely paying 1%? Vanguard's own Prime Money Market paid almost nothing for a good long stretch. Inflation sparked because of the pandemic; interest rates rose in response to gov't spending and fall in payroll tax revenue. You shouldn't expect 5.25% CDs to persist for the next 30 years (or however long you plan to be "living comfortably" @ $125K/yr). The other problem is inflation, which you recognize in later posts. That's best addressed by a percentage of portfolio allocated to stocks, but that adds volatility, which you seem to want to avoid (again CD ladder as your plan).
If your #1 priority is on leaving a minimum dollar amount legacy to heirs/friends/charity, then it's best to simply put that amount aside. You have to recognize that while you're in retirement and have a risk-tolerance appropriate for someone in retirement that needs to draw on their assets to live, that your heirs have a vastly different time-frame and therefore a different risk tolerance.A KNOWN $ amount that will be available at the end of a specific time period.
The crux is that you have two conflicting goals. A) Leaving a minimum legacy dollar amount vs B) The need to draw $125K/yr to live now, with adjustments for inflation in years between now and when you pass. Because these goals are in conflict they can't both be top priority; you have to pick one or the other. If the legacy is #1, then you have to live on less because you'll be setting aside that minimum dollar amount you want to leave to others. If the $125K/yr (+inflation in out years) is #1, then your heirs will have to settle with whatever happens to be left. There are compromise solutions in between the extremes. Pick a weighting between the two goals and plan accordingly.
Statistics: Posted by bonesly — Fri Dec 22, 2023 2:12 am