Early Retirement Portfolio Update – June 2014 Income

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There is an ongoing investing debate as to whether you should focus on income or total return. I personally believe that you should focus on total return but realize that income is a critical part of that total return. If you want to live off the income produced by your portfolio, you should make sure it is stable and will grow with inflation. Reaching for yield via riskier stocks or lower-quality bonds is dangerous.

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 (6/5/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.74% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.48% 0.07%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.08% 0.74%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.39% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 2.72% 0.16%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 3.25% 0.65%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 1.74% 0.35%
Totals 100% 2.49%


As you can see, the overall weighted yield is roughly 2.5%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $25,000 in interest and dividends over the last 12 months. Now, 2.5% is 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. My ideal situation is to get by with just spending this 2.5% in income every year. The paranoid part of me likes the idea of just spending the dividends and interest while not reaching too far for yield. That way, theoretically if I owned say 1% of GE or ExxonMobil, if I never sold shares I’d keep owning 1%.

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 85% of the way to matching our annual household spending target. Using the 2.5% number, I am only 71% of the way there. We’ll have to see how much full retirement appeals to me once I reach my goal at a 3% withdrawal rate. I’m not opposed to working part-time if the work is interesting to me, so I’m keeping my options open.

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  1. No VWINX….I’m surprised? In your withdrawal calculations if you consider Social Security and any other retirement pension/401K monies you might find you already where you want to be in terms of having a sustainable income and an economically viable long term plan even without touching your principle.

    • I happen to like Wellington and Wellesley, and I think they are fine solution for creating a portfolio where you can spend just the income and still be reasonably confident that the income will grow with inflation. However, they still have the same ole’ stuff like manager risk, asset bloat risk, somewhat lack of diversification in terms of international exposure and a lower number of stock holdings. But again, I still like VWINX and VWELX.

      I do think Social Security will still be there when I am probably 70 or so. I still have 35 years until I get that so I just think of it as a security policy. I have no pensions to look forward to. 401k is included as retirement portfolio, even if I can’t technically spend it until 55 I can always roll it over to IRA and take SEPP 72(t) withdrawals if I really needed to. I don’t really plan on needing to do that though

    • Just looked it up…. TTM yield for Wellington Admiral shares is 2.45%. TTM yield for Wellesley Admiral shares is 3.11%. Wellesley is 63% bonds and cash, kind of too much for me though. 50/50 Wellesley/Wellington would be a TTM yield of 2.78% and roughly 50/50 stocks bonds. Better.

  2. Somewhat minor point, but if you owned 1% of a company that would change if the company sold more shares, even if you never sold any.

  3. Thanks for the update. A couple of things:

    Not all yield is created equal. Your current estimated income yield is 2.5%. You could boost that by just buying 30-year Treasury bonds, which this morning are yielding about 3.4%. Ostensibly that would get you to your goal immediately. HOWEVER, that $ amount of income would be fixed for the next 30 years. Most advisors suggest a distribution rule of 4% of your portfolio value at retirement that you then grow with inflation so you don’t end up eating cat food in a couple of decades.

    Your 2.5% yield should actually be much more valuable than the 3.5% fixed you could get out of Treasuries today. Your TIPS income is going to grow with price inflation and all the 1.5% yield coming out of your equities should grow with dividends, which historically has outpaced inflation. Not to mention that fact that your nest egg should grow with equities and hopefully keep up with inflation or grow even faster than inflation, whereas if you just bought bonds the real value of your net egg would decline year after year.

    • Agreed, although I am reaching for yield a bit as I’m not just holding short-term Treasuries as some would advise. I think intermediate-term muni are a good compromise in terms of default risk and interest rate risk (also given my tax bracket).

  4. Hello Jonathan & Friends,

    I have a novice question regarding Bonds, please excuse my temporary ignorance. Regarding your roughly 60/40 split between stocks and bonds. I have always understood (been told) Bonds to have an inverse correlation to interest rates. Since the rates are so low and have no where to go but up, wouldn’t Bonds be more risky right now then the stable inflation fighters they have been int the past? It would seem to me that Bonds have very low returns on the horizon.

    I know I’m am wrong in my understanding but will you please explain to me how I’m wrong or why you choose to diversify with Bonds? Thank you and have a great day!


    • Yes this is true for individual bonds, but as rates go up, you will start buying new bonds with those higher rates when your old bonds mature. This is why some people advise sticking with shorter-term bonds (0-3 years) so that your bonds will roll over faster in case of interest rate spikes. Then you’ll like interest rate hikes because you’ll be earning those higher interest rates soon!

      I just happen to think that intermediate term bonds (4-6 years) are a reasonable compromise of interest rate risk in return for somewhat higher interest rates over time. I definitely would be wary of holding 20-30 years Treasuries or similar.

  5. I would prefer to see you own some individual stocks instead of just funds. Also, why not consider some individual high quality, high yielding utilities that pay between 4% and 5% if you are yield hungry.

    • I don’t want to worry about keeping up with dividend stocks in retirement. What happens when a specific company starts paying out too much of earning as dividends? What happens when solar or tech disrupts certain utilities? What happens when legislation hurts them? Dividend investing is fine if you like it, I’d rather focus on saving and leave the rest to a nice index fund.

      There will still be new industries and rising companies as the decades go by. I don’t try to find the needle in the haystack, I just buy the whole haystack. If I wanted to boost dividends a bit, I’d buy a Value index fund like VIVAX or alow-cost active fund that picks dividend stocks like VWINX or VWELX (admiral versions)

  6. Looks good, its a little bit more weighted then I would advise in bonds for your age. Especially since bond yields are super low and when they rise the bond prices are going to plummet (much like the earlier comment posted).

    Personally I love David Swensens method but I am sticking with a Buffett type recommendation of 90% stocks and 10% cash.


    Obviously this carries the risk of running out of cash while the market is down…but if the 10% cash is enough to last a year or two you should be fine. I also – which swensen doesn’t recommend – buy mostly american stocks. He points out that if you did that in Japan a little over a decade ago you would be stuck with horrible returns.

    I think the main thing buffett points out is stocks / apartment buildings is they are productive assets and their earnings grow over time…while bonds stay flat.

    Obviously during the Jimmy Carter era bonds were a great investment.

  7. Jonathan,

    Can you please tell me how you calculate Yield Contribution? Thanks

  8. Great stuff as usual.
    How does creating a tax efficient portfolio work for folks who retire early? What I mean is that you set yourself up such that most of your yield is in tax deferred accounts. But if you retire early, you can’t access those accounts. Assuming you got that 3% yield which is enough to cover expenses so you can retire early today, with at least 2 of that 3% yield coming in your Roth IRAs, IRAs, 401Ks. Do you plan on annually selling the low-yielding funds you own in taxable accounts to make up difference and then re-balancing accordingly? Or is there a better way?

  9. Jonathan, I was reading your updated profile and noticed you indicated your working ~20hr a week. I was curious if you could comment on your healthcare coverage for your family. Is it a part-time benefit your receiving or have you bought an individual policy? Thanks.

    • We aren currently getting our family health insurance through my wife’s employer. She is working part-time, but we have a unique arrangement where she is basically paying for her own premiums through a lower salary. (In other words, she’s not getting any subsidy from employer other than access to the group rate.) But through that arrangement, effectively we are also getting the benefit of the tax deductibility that her employer gets since it doesn’t show up on her W-2 as income (the employer takes it as a business expense). Hopefully that makes sense? I looked into getting individual insurance but this is a better deal. I think our next step is to buy health insurance through our own business to get the same tax deductible business expense treatment, if we don’t qualify for Obamacare subsidy via income.

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