Retirement plan

[ken-do-nim]

Here's the basic plan; please critique.

Current age: 51
Earliest possible retirement age: 55

Minimum Threshold for 55-59 retirement
Taxable account: $3 million
401k: $1.5 million

When I decide to retire, I take $1.5 million of the taxable account and put it into high dividend payers - my favorite being OMF - and average 8%.  8% of $1.5 million = $120,000 per year.  I let that cash build up in a high yield savings account.  I keep the 401k in a strong performing fund like the S&P 500 index or a similar large cap growth fund.  I start taking funds monthly from the 401k to live on, at a $200,000 per year rate.  However, if the market is down in a given month, like this April was, I suspend the 401k payment for that month and probably a couple more, and draw from the cash in the savings account instead.  So, if the 401k has a good first year and earns say 13.3%, it will stay at $1.5 million.  Furthermore, it probably can do less well than that and maintain, because on bad months I draw from the dividend-produced cash instead, so it gets time to build back up.

Meanwhile, the other $1.5 million or more in the taxable account is still invested in growth.  Every year, I trim some of that growth and make the dividend payer side larger.  Ideally 4-5 years into it, it has grown from $1.5 million to $2 million, and thus to $160,000 a year of cash producing.  Furthermore, if the cash pile in the savings account ever reaches $400,000, I cap it there.  That's already 2 years of savings to live off of in case of a nasty market downturn, so dividends produced beyond that go to reinvesting in the growth side of the portfolio.

At age 59.5, the ROTH IRA kicks in.  There too, I split it in half, with half going to high dividend payers, and the other half staying in growth.  I can't really tell what it's going to be then, but if it manages to reach say $1 million, then with $500k at 9% payers, that's $45,000 additional a year tax free.  If I haven't managed to amass enough funds prior to 59.5, I would think the ROTH coming in puts me over the edge.

Beyond age 60, the dividends should reach the point where I don't even need to draw from the 401k anymore.

The main flaw in this plan is I think retiring right at the start of a 2022 like year.  The dividend payers won't have built up the cash yet, and I won't want to draw from the 401k yet either.  I could try to live off $120k a year instead of $200k until market conditions improve (and that's assuming dividends aren't cut), I could postpone retirement, or I could convert more of the growth part of the portfolio to dividend payers.  $3 million at even 6% = $180k per year.  When market conditions improve, I could start tapping the 401k, and then put some of the taxable portfolio back into growth.

High div payers I like are OMF, HTGC, ARCC, BXSL.  I'm going to research and find more.

[crimsonghost747]

Firstly, do look real real deep into these high dividend payers. You know that their dividends are extremely high, which is part of the reason you picked them, but can they really sustain those dividends if/when things go sideways? Because if they cut that dividend, for whatever reason, then you're losing a big part of your cash flow AND the stock price will tank like 20% in a day. That is no small loss of capital, even if your $1.5m is split into 10 different high payers and only one goes and fails.

I don't know how the tax stuff for you goes, but I would assume that you'll be paying some sort of a tax for the dividends received. So do take that into account in your calculations.

Also, I would highly recommend to have a relatively large cash buffer from day 1. Whether this means working an extra month or two, or making the switch to high div payers 6 months before retirement so they can already accumulate a decent chunk of cash... there are plenty of ways. But just having that cash there ready to go is a great way to ease your mind as it'll protect you from "life happens". Plus that cash will eliminate any risk of retiring on the eve of a big market crash and being forced to start to butcher your 401k into falling prices during the first months of retirement.

[ken-do-nim]

Here are how those 4 held up during some recent downturns:

OMF
Yield: 8.13%
overall 5 year return: +50.90%
2020: dividend payout unaffected
2022: dividend payout unaffected
Also, this past February was the first time they didn't raise the dividend annually. Looking to the May announcement to see if the dividend gets raised.
Tax implications: pays qualified dividends, making it the star of this group, not to mention having the best 5 year return; it almost keeps up with the S&P 500

BXSL
Yield: 9.56%
overall 5 year return: +11.14%
2020: (wasn't around)
2022: dividend payout unaffected, and had bonus payouts too

ARCC
Yield: 9.31%
overall 5 year return: +16.01%
2020: payout unaffected
2022: payout unaffected

HTGC
Yield: 8.23%
overall 5 year return: +44.89%
2020: they had the payout in 2 parts, the standard .32 and a bonus .08, up through Feb 2020. The bonus part ceased until it started to come back in November 2020
2022: unaffected; in fact they had a dividend raise

These 4 are the best high div payers I've found; though it remains to be seen if they will stay that way in 10 years. Another I keep track of:

HRZN
Yield: 11.18%
overall 5 year return: +1.20%
2020/2022: dividend rarely changes; occasionally there's a month here and there with a higher than normal payout

Others like FSK, RQI, QYLD and RYLD don't pass my positive-in-the-last-5-years test.

Also, there will be dividends coming from the growth portion of the portfolio as well, just not as much. ABBV, AVGO, LLY etc are nice payers.

**********

Really great point about starting with a large cash buffer. I need to decide how much. Maybe as much as $200k. I guess that all depends upon how high the taxable account manages to get.

**********

Also worth pointing out is that large purchases like cars will come out of the cash buffer as well. Even larger purchases, like say the downpayment - or outright purchase - of a new condo or house will come out of the growth portion of the taxable portfolio.

[ken-do-nim]

The essential elements of this "4 bucket plan" - cash, dividends, 401k, and ROTH - are well done, but revisiting this subject, some of the points made above aren't necessary. I don't need to specifically take $1.5 million and convert it into high div payers. I simply need to make sure the $3 million portfolio pays a 4% yield, which can be done with DGI stocks paying over that like LYB & VZ, as well as those paying just under it like ABBV and SCHD.

Also, it is highly unlikely the brokerage will reach $3M and the 401k only $1.5M. More likely they will both reach about $2.5M around the same time. Since I will aim to withdraw 10% of the 401k on an annual basis, that means I will withdraw 1/10 / 12 = 1/120 each month, or 0.83%. For $2.5M, that works out to $20,750 monthly. And again, if the 401k has a bad month, I will simply draw that from the cash pile instead of the 401k. So in all likelihood, given a typical year with 3 bad months, I will only draw down 7.47% instead of 10%. Still way above the "4% rule", but I don't intend to switch out of large cap funds. The cash pile is replenished by the $120k per year of dividends, which will have no problem handling $62k of the skipped months.

Right now, barring a 2022 like year, I see myself as about 6 years out from meeting these figures. 8 years should be a given, since then I will be 59.5 and the ROTH can join in as well. The current plan is to use trimming intead of div payers in the ROTH, and go for more like 20% since it's all growth, which also will allow me to lower my 401k withdrawal significantly. Either way, I should be living pretty comfortably in my 60s (except for that elephant in the room - the US national debt - which will crash the market badly at some point)