Early Retirement Portfolio Income Update, Year-End 2014

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When investing, should you focus on income or total return? I like the idea of living off dividend and interest income, but I also think it is easy for people to reach too far for yield and hurt their overall returns. But what is too far? That’s the hard part. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. If possible, I’d like to invest for total return and then live off the income.

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 (1/5/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.76% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.68% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 3.4% 0.81%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.17% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.60% 0.22%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.68% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 2.24% 0.45%
Totals 100% 2.41%

 

The total weighted 12-month yield was 2.41%, as opposed to 2.49% and 2.31% the previous two quarters. This means that if I had a $1,000,000 portfolio balance today, it would have generated $24,100 in interest and dividends over the last 12 months. Now, 2.41% 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. But in theory the total return will be much greater due to share appreciation.

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 2.09%. Keep in mind that the muni bond interest in my portfolio is exempt from federal income taxes.

So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 91% of the way to matching our annual household spending target. Using the 2.41% number, I am only 73% of the way 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.

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Comments

  1. Very impressive. I’m also curious as to how well you’re doing in terms of saving for your children’s education as I know that’s something you prioritize (not top priority, but it was still on your list from a previous post).

    • I am actually just starting to get serious about college saving. I do think that I will put a serious chunk of money into 529s while I am still working. Will post updates on that soon.

  2. By holding DES instead of VB/VSMAX, are you intentionally prioritizing yield over total return? Though I see that DGS has outperformed VWO in both yield and total return. Seems like you like Vanguard for broad indexes but prefer Wisdom Tree in the value space?

    • DES holds both smaller and more value-y stocks than VBR. I also worry that VBR is getting big on assets and maybe that will hurt their overall performance in this sector with its lower trading volumes. I don’t know if that will turn into higher returns because VBR has a lower expense ratio. I kind of like the diversification in holding a little bit of ETFs from a non-Vanguard company. Net-net it’s probably a draw and VBR is just fine.

      • I can understand your reasoning and agree it’s sort of a draw. My use of Wisdom Tree is through DLS as an allocation to small cap value international in my portfolio. (Seems comparable to a US small cap value allocation to me, though not discussed as often.) Vanguard doesn’t really have a product to fill this role. (Home bias?)

        • Yes it was a close call between DLS and DGS for me. I guess I just looked at the country list on that ETF and thought it would be cool to get access to those growing economies even though the ride will be choppier.

          People have been clamoring for an International Small Value fund from Vanguard for as long as I can remember. But I think in the end Vanguard serves financial advisors and institutions more than individual retail investors, as is evidenced by their wide variety of sector ETFs and various US index ETFs.

          • Vanguard already has an International Small Value fund – VFSVX and its ETF counterpart VSS. Do you mean you have been waiting for an Admiral Share class of this fund? Or an international small cap value that follows a different benchmark than the FTSE fund?

          • VSS and VFSVX are international small, but not international small value.

  3. What about tax? I pay 30% on tax dividends as my fund is located in Singapore. Just something to keep in mind.

  4. Hi – I am daily and long time visitor of your blog. I identify with most ideas that you have but was intrigued by the VTI performance. As per goog finance, the trailing 12 months performance was about 9% while your folio shows 3% or so .. am I missing something here? Often I find similar numbers and then wonder how does that correlate to the daily news where S&P shows a much bigger increase. For instance, for 2014, it shows a 15% increase while similar funds show slightly lesser. I do understand that you might invest monthly and maybe that impacts. But overall I see that the actual return on my funds are far often less than the correponding index. The only exception was when I actually did some trading with individual stocks and there I could see that the difference was more palpable .. as in RoI was greater in my account year on year compared to a similar amount that just sit in an index fund or a dividend yielding mutual fund. Any ideas?

  5. Have you considered whether or not it is worthwhile to maintain your positions in US Small Value and Emerging Markets Small Value, each 3% of your total portfolio? I’ve seen comments on Bogleheads (years ago) that having an allocation of 5% or less to a fund or asset class isn’t worthwhile because the returns from those holdings have such an immaterial impact on your total portfolio while adding complexity that you have to manage. For example, US Small Value would have to outperform US Total Stock by a huge margin to produce a meaningful impact on your net worth.

    While I understand this perspective, keeping these holdings might help you pay attention to these asset classes, and if you enjoy investing and personal finance, perhaps that’s valuable enough to make keeping these investments worthwhile.

    • I don’t really expect them to have a profound impact, just an impact relative to their size. I view these funds as rounding out the “total” stock market with an overweight in small value companies that can represent the many private small businesses that are part of the total economy but not publicly-traded. There is very little overlap between DES and VTI last time I looked into the portfolio holdings. A related post:

      https://www.mymoneyblog.com/total-economy-portfolio.html

      I do also view these as interesting holdings that spice things up a bit while hopefully improving overall return.

      5% is a nice general rule but I think total size of portfolio is important too. I wouldn’t bother if my total portfolio was say $50,000. The trading commissions would also cut into performance.

  6. Not to get too nitpicky, but Limited Term Tax exempt is not really an intermediate term fund. I’d say it’s roughly in the middle of a Short Term Fund and an Intermediate Term fund. Is there a reason you are using this fund instead of the intermediate term fund?

    • I know… limited-term gives flexibility to the fund managers to pick which bonds offer the best mix of yield and term without having to be officially in the short or intermediate buckets. I like owning both limited and intermediate because it keeps my overall duration shorter. I am also reluctant to realize cap gains from my limited-term shares bought when interest rates were higher, as the yield differences are pretty small.

  7. Great job Jonathan! I remember you mentioned you had a long term goal of generating $2500/month ($30k/year) from your retirement portfolio. Quick calculation tells me you have a bit more than $900k after tax which is totally awesome for someone your age.

  8. Good article. I find it’s helpful mentally to focus on yield when the market is doing poorly. Then when market is doing well I focus more in total value. That way it keeps you invested in stocks for the long term.

  9. I’m interested to know how many percent gain you had in your portfolio from how much money you put in? Also for how many years you had this portfolio?

  10. Does this include IRA/401k etc, how do you organize that versus non retirement ones?

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