I recently read an article in Smart Money magazine about retirement and the "viability of the 4% rule." It highlights varying opinions about a "safe" yearly withdrawal percentage from a retirement account. Of course, the long-standing guideline is 4%, yearly adjusted upward for inflation. So, a $1 million account would permit an initial draw of $40,000. The article cities research indicating that 1.8% ($18,000) might be safer. It also cites another study indicating that 7% would be reasonable for a bold investor with other income sources (like a standard pension).
Hmm. As I read the article, I was thinking: how about a portfolio that yields $87,000 a year, with no draw-down whatsoever? Don't tell me this is impossible, because I built it for a close friend, and you could build it right now. I think that beats a theoretical, hind-sight-inspired portfolio to pieces.
Here is a link to a spreadsheet with this portfolio:
https://docs.google.com/spreadsheet/ccc?key=0AmMlf3bsV3rFdFBVMGpSU2tqNUFOZVJPVjloNGF6T1E#gid=0
There are quite a few things to say about it.
1. It is not a classic Bodacious portfolio, as it was not built over 30 years, but rather done from 2008 to the present. But, the values in the portfolio are current, and you could buy most of these issues for the prices indicated. The amount invested is actually more than $1 million ($1.087 million to be exact), so the lower figure would lock in $87,000 per year.
2. The portfolio is poorly laddered, precisely because it was assembled over a shorter period, and more opportunistically (I grabbed things that looked particularly attractive at various times, as money became available for investment). So, the earliest maturities are two years out (Dean Witter) and a very small amount of money. The first serious redemptions begin in 2018, and are still modest. That is due entirely to my personal preference, which was to load up on long-term bonds, and thus lock in the huge yields I was seeing at the time (note the original cost of many bonds is exceptionally low, as they were purchased in 2008 and 2009). If you intended to buy a similar portfolio right now, you would probably want to buy more bonds with shorter maturities, and fewer long-term ones. Why? Well, if inflation kicked in, you would have a steady stream of money coming from redemptions to buy the higher yields. That would cushion the blow. This would mean modestly lower income now, but greater protection from future inflation. And that lower yield would still exceed the classic "safe" 4% drawdown.
3. This portfolio is NOT risk-free. All the bonds are investment-grade (with the exception of a split junk/investment rating on a small Sallie Mae position). The largest positions are in JP Morgan and Goldman Sachs. Again, this was deliberate. If the government was willing to hand these guys billions in 2008, then they have a de facto government guarantee. My thinking is much the same for Abbey PLC, which is a subsidiary of Banco Santander, the 11h largest bank in the world (sixth largest in Europe). I am making the same assumption here, that the bank is too big to fail, and therefore won't. In building this portfolio, I focused first on the risk of default. As long as these companies remain solvent, the portfolio will gush money. Still, each issue must be monitored steadily. A ratings downgrade to junk would probably require some action, even if losses are involved.
4. This portfolio is NOT particularly diversified. First, of course, it contains bonds, and only bonds. That's a no-no for standard experts. It is highly concentrated in bank and insurance stocks, also a no-no, as investment sectors go in and out of fashion. Values can, therefore, swing up and down rapidly. Remember, though, that such fluctuations are largely irrelevant to a Bodacious investor. We're in it for the long haul, and the bonds will all, eventually, mature at par.
5. Note the modest use of leverage in the portfolio. The present value (which would be the cost to purchase, of course) is a bit over $1.4 million, while the margin loan is just about $350,000. That is a margin percentage of 24%. Without margin, the yield on these bonds would be 6.9%; with margin, that jumps to 8.7%! Since the money arrives twice a year, that yield is actually closer to 9%. That's the power of margin rates at 1.25%.
So folks, tell me, please, why you would waste time and stomach acid with stocks when you can pull this kind of steady income from a Bodacious portfolio? Remember, experts debate the safety of a 4% draw, which assumes you are depleting your investment portfolio at a steady rate, with the goal of not running dry before you die. My friend's humble portfolio will do twice as well, without depletion! When she dies, there will be plenty left for her kids. Yes, of course, inflation might have its effect down the line, but inflation could damage a standard stock-based portfolio too. There is, at least, a clear way to deal with that future inflation, as discussed briefly above.
For a future blog, I'll prepare a few alternate Bodacious scenarios, which start with things you can buy now, and look forward with various assumptions.
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