Early Retirement Portfolio Income Update, Mid 2015

The closer I get to the reality of living off of my portfolio, the more I like the idea of living off dividend and interest income. However, you can’t just buy stocks with the highest dividend yields and junk bonds with the highest interest rates without giving up something in return. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. My goal is to live off my portfolio income while not reaching too far for yield.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is 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. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (6/24/15) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.79% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.78% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.75% 0.81%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 2.81% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.76% 0.22%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.63% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 2.18% 0.45%
Totals 100% 2.24%

 

The total weighted 12-month yield was 2.24%. This number is lower than the last three updates: 2.41%, 2.49%, and 2.31%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $22,400 in interest and dividends over the last 12 months. Now, 2.24% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. I should note that the muni bond interest in my portfolio is exempt from federal income taxes.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Growth Fund (VASGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.01%. (Last update, it was 2.09%.)

So how am I doing? Using the 2.24% income yield, the combination of ongoing savings and recent market gains have us at 72% of the way to matching our annual household spending target. If I switch to a 3% benchmark, we are 96% there. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a very conservative lower bound.

Sadly, some valuation models predict exactly that: 0% real returns over a long time. My portfolio has certainly gone up a ton in value due to the ongoing bull market. Bottom line is that we are getting closer but not quite where we want to be.

Comments

  1. At the end of the day you and your family are going to be way ahead of of the 60-70% of Americans who have no savings and no retirement. Having said that, I’ve always felt your obsession with low yielding Vanguard/Ishares/Wisdom Tree Funds including your REIT Funds on the one hand and extremely risky almost useless Peer to Peer Lending experiments on the other are neither the best mix nor the best approach for a bright guy like yourself who is willing and capable of doing his own due diligence and finding the best investment solutions for the environment we are forced to operate in today. I think you are in a comfortable rut and not only are you in constant danger of handing back the market gains you mention but will find yourself falling short if you can’t find that right balance of 4% or greater yield while at the same time envisioning and implementing a retirement lifestyle that is matched to your income and not the classic economically non-viable American strategy of trying to stretch your debt and income to match your income. The key is, not some 4% withdrawal rule….it is discipline and balance regardless of the withdrawal rate. But you still need to be earning 4% or greater on your investments and you need to take advantage of all the opportunities that are out there that meet you risk management criteria and not depend on Vanguard to be doing it for you. Just my opinion.

    • I think his early retirement portfolio is intended to be a low cost, diverse, simple portfolio. That way he can manage it without much thought, easily stay the course, and could also hand it off to his wife in the event of his early demise… (there are other benefits as well).

      The other experiments with p2p lending and other experiments are partially content for this blog (leading to a net profit), and entertainment expense (if he were to lose money — which if he has it hasn’t been material). I consider those experiments similar to me buying a single lotto ticket every now and then when I’m filling up gas. 5k at this point is immaterial to MMB’s finances – it’s probably between 0.2% – 0.5% of his net worth.

    • Can you please be more specific? I can’t sift through what you said… What exactly do you think I should I be investing in?

  2. Hi Jonathan,

    Just wondering what the advantages of going for high dividends are as opposed to just straight stock price increase, as you’ve mentioned it in a few postings now that that’s your strategy. Is it income without having to sell stock?

    Thanks!

    • I’m not really pursuing a true high dividend strategy, more of a total market approach with a tiny bit of small value spice on top. If I wanted high dividends I could yield a whole lot more than 2.24%.

  3. Hi JR….I also assumed the same thing about Jonathan’s motivations….I guess my point is that for the stage he’s in, in his life its an okay strategy….the “BUT”……is….then once you are retired you get hit by that moment of truth or at least your cash flow analysis does….you’ve either saved enough funds to invest that your income from investments regardless of prevailing interest rates plus Social Security plus any pensions or retirement accounts you have is adequate to support your lifestyle and essentials or not. Even though I consider the 4% withdrawal rule a useless criteria for anything I have found that 4%+ seems to be the minimum number to meet reasonable lifestyle and income objectives. To be honest, in the years I’ve read Jonathan’s blog and did my own analysis of his holdings at least in terms of yield I just never understood what he see’s in these funds when higher yielding opportunities with at least as great or greater principle protection are out there.

    • Larry,
      Study after study shows that’s passive low cost index investing beats active trading over the long term. There are certainly exceptions but that is generally the case. I believe Johnathan is very wise to be investing in low cost diverse passive index funds. Beating the market with active trading has more to do with luck than intelligence in my opinion.

    • Nick R. says:

      I am interested in finding out more about the kind of funds with higher yield and same amount of risk. Can you please share your examples? Usually, when the yield goes up, so does the risk. If you found some gems out there, please let us know about them.

  4. Spending and saving can be difficult to manage for the current work force that wants to live in the moment. I am a saver by nature but it can be hard. The problem that I see regularly is that investors want to strike it rich and expect the market to show big gains by turning investing more into gambling than a lifelong investment in yourself and your future. The question I have is theoretically what is the breaking point where there are too many unprepared retirees to maintain any resemblance of a quality of life? With social security going broke and no end in sight to government spending it seems like we are approaching a cliff. This makes saving that much more important.

Speak Your Mind

*