Author Topic: How to get 6k a month off $1MM portfolio?  (Read 27090 times)

starguru

  • Pencil Stache
  • ****
  • Posts: 744
How to get 6k a month off $1MM portfolio?
« on: May 30, 2015, 01:24:11 PM »
Hi all

I am seeking the collective wisdom of this especially intelligent group. I'm trying to help my father.  He has been on private disability insurance the past few years, but that runs out later this year. 

Basically cutting through all the jibber jabber, is there a way to get 6k a month out of $1MM in investments?  Stretching my brain, it doesn't seem possible, since the 4% rule would indicate you can get 40k a year, which is 3.5k a month. 

Any creative ways to stretch it?  Or what's the best way to stretch it and minimize risk, while understanding that there might not be ideal solutions.

Thanx in advance.

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1824
Re: How to get 6k a month off $1MM portfolio?
« Reply #1 on: May 30, 2015, 01:30:27 PM »
How old is he, and will he be getting social security anytime soon?

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #2 on: May 30, 2015, 01:37:02 PM »
How old is he, and will he be getting social security anytime soon?

Yes, normal SS kicks in, but don't include that in the calculations.  The question is whats the best way to generate 6k a month with $1MM, understanding that the best way might still result in portfolio depletion.

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1824
Re: How to get 6k a month off $1MM portfolio?
« Reply #3 on: May 30, 2015, 01:41:50 PM »
If SS kicks in within 5 years and will give him $2,000 a month, that makes things a lot easier.  That is why I asked.

ender

  • Walrus Stache
  • *******
  • Posts: 5419
Re: How to get 6k a month off $1MM portfolio?
« Reply #4 on: May 30, 2015, 01:44:08 PM »
How old is he, and will he be getting social security anytime soon?

Yes, normal SS kicks in, but don't include that in the calculations.  The question is whats the best way to generate 6k a month with $1MM, understanding that the best way might still result in portfolio depletion.

How old is he? Health?

Why does he need 6k + social security?

Timeframe? 20 years? 50+ years? etc.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #5 on: May 30, 2015, 01:45:43 PM »
If SS kicks in within 5 years and will give him $2,000 a month, that makes things a lot easier.  That is why I asked.

Sure. SS kicks in this year.  Let me put it this.  He wants 8k a month, and will get 2k per month for SS.  So how to get 6k a month on $1MM? 

Its a complicated situation.  There are def expenses he can trim, but its delicate and Im working on it.  Ive explained to him what the 4% rule says he can afford, and, well, Im working on it :).

So Im keeping this purely academic, trying to find the best losing scenarios.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #6 on: May 30, 2015, 01:47:46 PM »
How old is he, and will he be getting social security anytime soon?

Yes, normal SS kicks in, but don't include that in the calculations.  The question is whats the best way to generate 6k a month with $1MM, understanding that the best way might still result in portfolio depletion.

How old is he? Health?

Why does he need 6k + social security?

Timeframe? 20 years? 50+ years? etc.

He has cancer, which is currently stable, not improving, not getting worse.  It could tank, it might not, no way to know.  Seeking clarification on how long we want this to last, but lets assume 20 years.

I appreciate all the replies!!

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1824
Re: How to get 6k a month off $1MM portfolio?
« Reply #7 on: May 30, 2015, 01:49:53 PM »
Firecalc shows a success rate of 38% over 30 years for a $1,000,000 portfolio and a 6% withdrawal rate.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: How to get 6k a month off $1MM portfolio?
« Reply #8 on: May 30, 2015, 01:51:15 PM »
Basically cutting through all the jibber jabber, is there a way to get 6k a month out of $1MM in investments?
Yes - at least, for a while.  If you can get a guaranteed 2% return on that $1MM you can withdraw $6K/mo for ~16 years.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: How to get 6k a month off $1MM portfolio?
« Reply #9 on: May 30, 2015, 01:51:44 PM »
Going higher than 4% means you're going to incur some sort of risk.  Of the top of my head, here are a couple strategies to get 6K/month and their associated risks:
1) Withdraw 7.2% per year without adjustments.  Risk: longevity risk (i.e. strong chance of running out of money before 30 years)
2) Withdraw 7.2% per year but drop inflation adjustments.  Risk: inflation, plus longevity risks
3) Invest in higher yielding bonds in the income portion of a portfolio.  Risk: the companies or governments whose debt you're buying default
4) Invest in high-yielding stocks.  Risk: with companies that yield this much, there's business risks, inflation risks, liquidity risks, probably more
There are some starting points for you.

ender

  • Walrus Stache
  • *******
  • Posts: 5419
Re: How to get 6k a month off $1MM portfolio?
« Reply #10 on: May 30, 2015, 01:58:43 PM »
He has cancer, which is currently stable, not improving, not getting worse.  It could tank, it might not, no way to know.  Seeking clarification on how long we want this to last, but lets assume 20 years.

Does he have adequate insurance to cover medical expenses?

Are you willing to "bail him out" if things go south financially?

This isn't looking too good if you want certainty, especially since expenses are non-negotiable...


starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #11 on: May 30, 2015, 02:02:41 PM »
Basically cutting through all the jibber jabber, is there a way to get 6k a month out of $1MM in investments?
Yes - at least, for a while.  If you can get a guaranteed 2% return on that $1MM you can withdraw $6K/mo for ~16 years.

How do you do the math on that?  Are there any bond funds that return 3%?

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #12 on: May 30, 2015, 02:04:33 PM »
He has cancer, which is currently stable, not improving, not getting worse.  It could tank, it might not, no way to know.  Seeking clarification on how long we want this to last, but lets assume 20 years.

Does he have adequate insurance to cover medical expenses?

Are you willing to "bail him out" if things go south financially?

This isn't looking too good if you want certainty, especially since expenses are non-negotiable...

 
He has insurance and his medical costs are a significant % of his spending.  Child support is another significant expense. 

I am aware this situation is not good, and have been trying to work with him on the expenses that have leeway.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 6760
  • Location: Fayetteville, NC
Re: How to get 6k a month off $1MM portfolio?
« Reply #13 on: May 30, 2015, 02:07:17 PM »

Sure. SS kicks in this year.  Let me put it this.  He wants 8k a month, and will get 2k per month for SS.  So how to get 6k a month on $1MM? 

Its a complicated situation.  There are def expenses he can trim, but its delicate and Im working on it.  Ive explained to him what the 4% rule says he can afford, and, well, Im working on it :).


Not that you want to tell him this, but if he's old enough to get on SS in 2 years, he's old enough to be an adult and learn the difference between "I WANT" and "I can have".

Sit down and help him with the math.  Lay out the scenarios and let him choose.   If he wants to spend too much and run out of money, that's his choice, but since he's got better options to choose from it's on him.

And, for God's sake, never put a really bad choice in front of people who think with their emotions instead of their logic.    Those really bad choices seem to act like magnets.

And yes, I've had to have a similar kind of discussion over health choices with my mom.  It wasn't fun but she was refusing to face facts and the consequences of doing that were going to be unpleasant for her.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #14 on: May 30, 2015, 02:25:40 PM »

Sure. SS kicks in this year.  Let me put it this.  He wants 8k a month, and will get 2k per month for SS.  So how to get 6k a month on $1MM? 

Its a complicated situation.  There are def expenses he can trim, but its delicate and Im working on it.  Ive explained to him what the 4% rule says he can afford, and, well, Im working on it :).


Not that you want to tell him this, but if he's old enough to get on SS in 2 years, he's old enough to be an adult and learn the difference between "I WANT" and "I can have".

Sit down and help him with the math.  Lay out the scenarios and let him choose.   If he wants to spend too much and run out of money, that's his choice, but since he's got better options to choose from it's on him.

And, for God's sake, never put a really bad choice in front of people who think with their emotions instead of their logic.    Those really bad choices seem to act like magnets.

And yes, I've had to have a similar kind of discussion over health choices with my mom.  It wasn't fun but she was refusing to face facts and the consequences of doing that were going to be unpleasant for her.

You are preaching to the choir.  I have had 3 conversations about this.  I need to be delicate on what I mention here, but let's just say he is not the only factor on the spending.  And Im not afraid to suggest to him that he face that one head on. 

I have explained to him its either

1.  Reduce spending
2.  Increase income.
3.  Run of out money.

His health issues are not habit related, just back luck -- nothing he can do on those.   


starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #15 on: May 30, 2015, 02:29:03 PM »
One interesting possibility -- he currently owes ~145k on a mortgage at 5.25%.  I asked him about refinancing that, but he says with no income he can't refinance.  So, does it make sense to pay off the mortgage?  It would reduce his monthly spending by $1400.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: How to get 6k a month off $1MM portfolio?
« Reply #16 on: May 30, 2015, 02:36:14 PM »
Basically cutting through all the jibber jabber, is there a way to get 6k a month out of $1MM in investments?
Yes - at least, for a while.  If you can get a guaranteed 2% return on that $1MM you can withdraw $6K/mo for ~16 years.
How do you do the math on that?  Are there any bond funds that return 3%?

Think of it as a mortgage payment in reverse.  E.g., over how many years would you finance a $1MM mortgage at 2% to have the payment be $6K/mo?  I used Excel's PMT function and Excel's "What-If Analysis" tool to do the calculation.  Does that make sense?

VWINX or VASIX are a couple of conservative funds.  For strictly bond funds, go to https://investor.vanguard.com/mutual-funds/all-vanguard-funds and select the appropriate options.  E.g., "Bond" for Asset Class and "2nd box from the left" for Risk.

Bearded Man

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: How to get 6k a month off $1MM portfolio?
« Reply #17 on: May 30, 2015, 02:41:30 PM »
Put it all on an REIT like SNH, if you can stomach the risk...

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: How to get 6k a month off $1MM portfolio?
« Reply #18 on: May 30, 2015, 02:42:34 PM »
Think of it as a mortgage payment in reverse.  E.g., over how many years would you finance a $1MM mortgage at 2% to have the payment be $6K/mo?  I used Excel's PMT function and Excel's "What-If Analysis" tool to do the calculation.  Does that make sense?

Even simpler: =NPER(2%/12,-6000,1000000)/12 gives the answer in years.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #19 on: May 30, 2015, 02:43:53 PM »
Put it all on an REIT like SNH, if you can stomach the risk...

How to asses risk on a REIT like that?  The chart shows some volatility over the last 20 years. 

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #20 on: May 30, 2015, 02:46:04 PM »
Think of it as a mortgage payment in reverse.  E.g., over how many years would you finance a $1MM mortgage at 2% to have the payment be $6K/mo?  I used Excel's PMT function and Excel's "What-If Analysis" tool to do the calculation.  Does that make sense?

Even simpler: =NPER(2%/12,-6000,1000000)/12 gives the answer in years.

Hrm? How can that work?  I don't understand how thinking about this as a loan figures it out.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #21 on: May 30, 2015, 02:52:33 PM »
Think of it as a mortgage payment in reverse.  E.g., over how many years would you finance a $1MM mortgage at 2% to have the payment be $6K/mo?  I used Excel's PMT function and Excel's "What-If Analysis" tool to do the calculation.  Does that make sense?

Even simpler: =NPER(2%/12,-6000,1000000)/12 gives the answer in years.

Hrm? How can that work?  I don't understand how thinking about this as a loan figures it out.

Hmm, so if I use this formula (only partially understanding it), and assume he can pay off his mortgage and still have 1MM (which might be possible), he needs 4600 a month.  So if i assume 3% interest and put that in, i get that his money should last 26 years and change, is that right?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: How to get 6k a month off $1MM portfolio?
« Reply #22 on: May 30, 2015, 03:12:53 PM »
Even simpler: =NPER(2%/12,-6000,1000000)/12 gives the answer in years.
Hrm? How can that work?  I don't understand how thinking about this as a loan figures it out.
In a real mortgage you owe the bank the principal amount, e.g. $1MM.  If you are paying 2%/yr interest on a monthly basis, after 1 month you owe the bank $1,001,666.67.  Then you make your first monthly payment (e.g., $6090.34) and you now owe the bank $995,576.33.  This continues for 16 years until you make your final payment and owe the bank $0.

In the OP's situation, if that $1MM returns 2%/yr on a monthly basis and he withdraws $6090.34 each month, that can continue for 16 years until he makes the final withdrawal and the investment is down to $0.

Quote
Hmm, so if I use this formula (only partially understanding it), and assume he can pay off his mortgage and still have 1MM (which might be possible), he needs 4600 a month.  So if i assume 3% interest and put that in, i get that his money should last 26 years and change, is that right?
Yes, exactly!

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #23 on: May 30, 2015, 03:27:48 PM »
Even simpler: =NPER(2%/12,-6000,1000000)/12 gives the answer in years.
Hrm? How can that work?  I don't understand how thinking about this as a loan figures it out.
In a real mortgage you owe the bank the principal amount, e.g. $1MM.  If you are paying 2%/yr interest on a monthly basis, after 1 month you owe the bank $1,001,666.67.  Then you make your first monthly payment (e.g., $6090.34) and you now owe the bank $995,576.33.  This continues for 16 years until you make your final payment and owe the bank $0.

In the OP's situation, if that $1MM returns 2%/yr on a monthly basis and he withdraws $6090.34 each month, that can continue for 16 years until he makes the final withdrawal and the investment is down to $0.

Quote
Hmm, so if I use this formula (only partially understanding it), and assume he can pay off his mortgage and still have 1MM (which might be possible), he needs 4600 a month.  So if i assume 3% interest and put that in, i get that his money should last 26 years and change, is that right?
Yes, exactly!

So that VWINX fund mentioned above seems pretty good, and offers 2.88% yield. 

So how accurate is this NPER analysis in the context of market fluctuations.  Noone knows the future, but its certainly possible that markets will experience some sort of 10-20-30% drop over the next decade or two.  How can that affect this analysis?

MDM

  • Senior Mustachian
  • ********
  • Posts: 10090
Re: How to get 6k a month off $1MM portfolio?
« Reply #24 on: May 30, 2015, 03:41:52 PM »
So how accurate is this NPER analysis in the context of market fluctuations.  Noone knows the future, but its certainly possible that markets will experience some sort of 10-20-30% drop over the next decade or two.  How can that affect this analysis?

Excellent question!  This is the heart of the "4% Safe Withdrawal Rate" calculation: see https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

You're right, nobody knows the future and there are an infinite number of possible monthly market returns over the next 20 years.  One can do Monte Carlo analysis by specifying a mean and standard deviation for returns, or one can use the historical record of returns (and inflation).  The latter is what was done to determine the "4% SWR". 

I believe you can have www.cfiresim.com do either, although I haven't used its Monte-Carlo option.


brainfart

  • Stubble
  • **
  • Posts: 185
Re: How to get 6k a month off $1MM portfolio?
« Reply #25 on: May 30, 2015, 04:13:54 PM »
What's daddy's current asset allocation? This is a desperate situation and it calls for desperate measures. Like increasing risk by moving to 80/20 or 90/10. Sell the house and invest the money.  Move to another country where medical treatment is cheaper, but it's probably impossible to get insurance coverage for someone with preexisting conditions at that age.
Maybe even take some money and have your own business, do some risky but potentially rewarding leveraged trades, or other unconventional investments.

Regarding the child support issue, I assume the children are not newborn quadruplets. So for how long does he have to pay child support, and for how many children? 5, 10, 15 years? Is there a legal way to make a lump sum payment to each of them? Talk to their morther(s): "look, I might run out of money, let's reduce the monthly payments a bit so I will be able to pay for longer, and I promise to split the rest evenly and fairly among my offspring once I die".

And the most important question... sorry to be so mean and heartless... what's his life expectancy? Does he really have another 25 years? What do the survival statistics say?

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: How to get 6k a month off $1MM portfolio?
« Reply #26 on: May 30, 2015, 04:42:46 PM »
The math gets a lot better if he can cut his spending by $1k/mo.

Let's say he pays off the mortgage, cutting $1400/mo. Let's say he cuts his spending down to $8k-$1.4k (mortgage)-$1k = $5.6k per mo, of which $3.6k would come from the portfolio of $855k. For a 75/25 AA, cFIREsim gives a 70% success rate for 30 years and 90% for 20.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #27 on: May 30, 2015, 04:45:51 PM »
What's daddy's current asset allocation? This is a desperate situation and it calls for desperate measures. Like increasing risk by moving to 80/20 or 90/10. Sell the house and invest the money.  Move to another country where medical treatment is cheaper, but it's probably impossible to get insurance coverage for someone with preexisting conditions at that age.
Maybe even take some money and have your own business, do some risky but potentially rewarding leveraged trades, or other unconventional investments.

I don't know his AA.  I think its not very intelligently invested.  He is old school, its probably too conservative.  My mother had the foresight to get good disability policies many years ago, so since the cancer he had a very generous tax free yearly income.  That is ending hence the questions.  I think he values my input on this problem though, which is why I am here.  My job is to get the best outcome I can for him, realizing it could involve running out of money. 

Quote
Regarding the child support issue, I assume the children are not newborn quadruplets. So for how long does he have to pay child support, and for how many children? 5, 10, 15 years? Is there a legal way to make a lump sum payment to each of them? Talk to their morther(s): "look, I might run out of money, let's reduce the monthly payments a bit so I will be able to pay for longer, and I promise to split the rest evenly and fairly among my offspring once I die".

Child support is another 7-8 years.  I don't know how to talk about my half-brother's mother, so Ill just say Im not sure how rational she is so I assume no progress can be made on this.  He is 10 (maybe 11, to give you context, I am 37, and my brother is 34). 

Quote
And the most important question... sorry to be so mean and heartless... what's his life expectancy? Does he really have another 25 years? What do the survival statistics say?

Well, the average life expectancy for his form of cancer (multiple myeloma) is 10 years, and he was diagnosed 6 years ago.  Its a weird cancer; some are cured via stem cell transplant, some go quicker, etc.  Right now he is on chemo as long as it keeps working.  He said to assume 20 years, and then i just got  a text that he expects not to make it 10 years. 

And then I just facepalm, since what the fuck are we doing with this entire exercise?    His assets will last 10 years at his current spending. 

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #28 on: May 30, 2015, 04:49:58 PM »
The math gets a lot better if he can cut his spending by $1k/mo.

Let's say he pays off the mortgage, cutting $1400/mo. Let's say he cuts his spending down to $8k-$1.4k (mortgage)-$1k = $5.6k per mo, of which $3.6k would come from the portfolio of $855k. For a 75/25 AA, cFIREsim gives a 70% success rate for 30 years and 90% for 20.

The big question in my mind is should he pay off his mortgage.  I think he has $1.5MM (he asked me specifically about 1MM; I have no idea what he intends for that other 500k).   But I could probably convince him to pay off the mortgage if it makes sense.  I dont know how to figure which is better between

generate X monthly income on Y portfolio
vs
generate X-1400monthly income on Y-145k portfolio.

My intuition tells me its a wash.

Again, thanx for all the insights. This community is just awesome.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: How to get 6k a month off $1MM portfolio?
« Reply #29 on: May 30, 2015, 06:21:49 PM »
It's kind of a tossup. The interest rate is so high that I think it's less risky to pay it off. Real returns on a balanced portfolio are unlikely to exceed the interest rate on the mortgage. And due to market volatility, in a withdrawal scenario you are losing due to being on the other side of the DCA equation. Volatility is great when you're accumulating but kills you while spending down.

But put it into cFIREsim. Using a 12 year period (I was guessing that's how long he has left on the loan given the figures you provided), and the 75/25 AA, the $145k portfolio with a 1400/mo drawdown (not inflation adjusted, since his payment isn't) fails about half the time.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28254
  • Age: -999
  • Location: Seattle, WA
Re: How to get 6k a month off $1MM portfolio?
« Reply #30 on: May 30, 2015, 06:30:04 PM »
I'd pay off the 5.25% mortgage in this situation, especially since it sounds like his AA is more conservative.

As for how to get 6k out, which is 7.2% annual of 1MM (not sure why someone did 6% WR on cFIREsim earlier, that's only 5k/mo, not 6), I'd suggest real estate. Even unleveraged you should be able to get that above a 7% return if you do it right.

Heck, loan it out as private money and get 8-10% annually.  Biggest risk there is inflation.  You'll have to keep reloaning out some of the principal returned to keep up with inflation, but you should if your return is above the 7.2% you need.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: How to get 6k a month off $1MM portfolio?
« Reply #31 on: May 30, 2015, 06:47:01 PM »
I'd put together a diversified portfolio of higher yielding fixed income vehicles. Perhaps something like this:

(40%) Unlevered Read Estate: Yield 6-8%
(20%) High Yield Closed-End Funds: Yield 6-9%
(20%) Business Development Corps: Yield 8-12%
(20%) CLO Equity/Mez Funds: Yield 11-20%

There's obviously no free lunch, and you'll face some risk of ruin, but if you can dial back spending a bit when the economy goes south, you can probably make it a long long way with a portfolio like this.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: How to get 6k a month off $1MM portfolio?
« Reply #32 on: May 30, 2015, 06:49:50 PM »
I'd pay off the 5.25% mortgage in this situation, especially since it sounds like his AA is more conservative.

As for how to get 6k out, which is 7.2% annual of 1MM (not sure why someone did 6% WR on cFIREsim earlier, that's only 5k/mo, not 6), I'd suggest real estate. Even unleveraged you should be able to get that above a 7% return if you do it right.

Heck, loan it out as private money and get 8-10% annually.  Biggest risk there is inflation.  You'll have to keep reloaning out some of the principal returned to keep up with inflation, but you should if your return is above the 7.2% you need.

A lot of us are using 4% SWRs based on a stock and bond portfolio. I've seen you say a couple times (in response to posts asking for much higher withdrawal rates) that you can achieve higher rates of return with real estate (and I assume that's what you did to get FI). Could you describe what that looks like, and  how the risks and hassles of that approach differ from a diversified stock portfolio? I personally hate the idea of being a landlord. But am interested in a higher yield on my capital.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28254
  • Age: -999
  • Location: Seattle, WA
Re: How to get 6k a month off $1MM portfolio?
« Reply #33 on: May 30, 2015, 06:59:13 PM »
I'd pay off the 5.25% mortgage in this situation, especially since it sounds like his AA is more conservative.

As for how to get 6k out, which is 7.2% annual of 1MM (not sure why someone did 6% WR on cFIREsim earlier, that's only 5k/mo, not 6), I'd suggest real estate. Even unleveraged you should be able to get that above a 7% return if you do it right.

Heck, loan it out as private money and get 8-10% annually.  Biggest risk there is inflation.  You'll have to keep reloaning out some of the principal returned to keep up with inflation, but you should if your return is above the 7.2% you need.

A lot of us are using 4% SWRs based on a stock and bond portfolio. I've seen you say a couple times (in response to posts asking for much higher withdrawal rates) that you can achieve higher rates of return with real estate (and I assume that's what you did to get FI). Could you describe what that looks like, and  how the risks and hassles of that approach differ from a diversified stock portfolio? I personally hate the idea of being a landlord. But am interested in a higher yield on my capital.

Are you willing to listen to an hour long podcast?

I was interviewed here about the pros and cons of real estate versus index funds, and think I laid out a fairly balanced case: http://radicalpersonalfinance.com/78/

It's not for everyone.  But I do think it's one of the two components to the quickest FIRE time (the other being a spouse working towards the same goal).

You may want to listen at 2x speed in your podcast app, to absorb it quicker.

My journal in my sig has links to various RE threads I've started as well.

I'm happy to answer questions (I'm an open book), but that might give you a good base for a lot of what you're wondering.

In the case of this thread though, I was more recommending a passive note strategy, basically become a private investor to lend money to real estate investors (like being the bank, it's secured against property, it's a mortgage you hold as the "bank" and they pay you) at a rate of 8-10%.

It's different than I'd recommend someone who is in the beginning of their accumulation phase and wanting a fast path to FIRE--that will take more work (that I was assuming the older father referenced here wouldn't want to do).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #34 on: May 30, 2015, 07:16:20 PM »
I'd put together a diversified portfolio of higher yielding fixed income vehicles. Perhaps something like this:

(40%) Unlevered Read Estate: Yield 6-8%
(20%) High Yield Closed-End Funds: Yield 6-9%
(20%) Business Development Corps: Yield 8-12%
(20%) CLO Equity/Mez Funds: Yield 11-20%

There's obviously no free lunch, and you'll face some risk of ruin, but if you can dial back spending a bit when the economy goes south, you can probably make it a long long way with a portfolio like this.

If he were good about dealing with spending, we wouldn't facing this question.  The irony of this, and the thought about which I am constantly banging my head, is there should be no problem here.  Between his 1.4-1.5MM portfolio and SS, he should be set, if he could just cut the fucking spending 1-2k a month. 

But he can't, so he says, and so I'm here seeking alternatives.  It really is quite dumb. 

Despite my frustration with my family, and my tone,  I do sincerely appreciate the advice.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #35 on: May 30, 2015, 07:19:40 PM »
In the case of this thread though, I was more recommending a passive note strategy, basically become a private investor to lend money to real estate investors (like being the bank, it's secured against property, it's a mortgage you hold as the "bank" and they pay you) at a rate of 8-10%.

Arebelspy, I'm not picking up what you're putting down.  How is this done, exactly?

At first I thought you were recommending getting into real estate, as in buying properties and renting them out, and was about to reply that as a 65 year old with cancer, my father has not the stamina for this, but after thinking about it I think you are recommending something else.  Like a Lending Club but focused on real estate?

Sorry, could you make this a bit more clear?

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: How to get 6k a month off $1MM portfolio?
« Reply #36 on: May 30, 2015, 07:37:31 PM »
Are you willing to listen to an hour long podcast?

Thanks, I definitely will listen to it. I listen to hour long podcasts on lots of nerdy topics all the time. After posting, I thought maybe I should start a new thread in the real estate section. I almost never go there because of my general anxiety about being a landlord. Perhaps my fears are higher than they should be. Maybe I'll start the thread after listening and browsing a bit.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1818
  • Mustachian-ish in Live Music Capital of the World
Re: How to get 6k a month off $1MM portfolio?
« Reply #37 on: May 30, 2015, 08:43:46 PM »
FWIW, I just finished the first half of dealing with a parent's finances (parent has Alzheimer's, I now manage the investments). The emotions of all this are tough on all sides, so I empathize with your attempts to fulfill his desires.

It sounds like his wants slightly exceed the reasonable expectation of his investment earnings.  I'm guessing that the best course is to explain this, and prepare two options where he can see the tradeoff:  "Dad, you can have $72k from the $1M, but after 16 years or so, it will run out (previous poster described how to achieve this).  Or you can get a smaller amount that lasts longer, such as $6k that will probably last 20-25 years (or whatever the next option is).  That's the most anyone can promise without lying to you."

I suggest avoiding time-intensive strategies such as real estate.  The transition into end of life is one that raises the stakes for everyone.  You should leave yourself time to deal with further changes, not lock yourself into time-consuming projects that are risky because they're not your existing expertise. 

Be honest, stand your ground; be empathetic, but don't pretend he can get what he wants if that means deluding him.  He may be angry, but then he is likely to come around and respect you for standing up to him is my guess.  In any case, it's the last time you get to do these things together, so I suggest being honest.  Even if he is upset at first, most likely the emotions will bring you closer.  If you stand firm and bring real info, your role as reliable advisor will only grow.

No one can control events, of course.  And few parents want to give up control.  Be patient, do what you can, learn when to stop and wait (like after you have an answer, deliver it...and wait).  The moments of calm waiting may soon be a needed respite.

After a while, you may find things turning out better than you ever imagined.  But you will have to invest in the pain of telling the truth up front IMHO.

Forgive me if this is too personal, or my examples made false assumptions.  Good luck with whatever you do!


cshaw

  • 5 O'Clock Shadow
  • *
  • Posts: 49
  • Location: Idaho
Re: How to get 6k a month off $1MM portfolio?
« Reply #38 on: May 30, 2015, 09:50:58 PM »
About 15 years ago my Dad was laid off and decided to retire early with much too little saved.  Neither he or I was happy with his financial adviser, so I took over managing his portfolio about 10 years ago to try and keep my parent from running out of money.  Back then CDís were paying 6-8% APR (depending on the term) and I had a rolling 5 yearsí worth of funds invested in CDs to counter stock market volatility.  The rest was (and still is) invested in a mixture of index funds, dividend paying funds, and a smaller pool of aggressive growth funds to keep building his account, or at least keep up with the amount of his RMD each year.  Obviously CDs stopped paying decent returns some time back.  I quite literally stumbled upon P2P Lending about that time and have moved out of CDs and into Lending Club notes. I have about 20% of his retirement funds in a Lending Club IRA and have been able to achieve a little over a 9% return for the past 3 years.  P2P Lending is certainly not for everyone, but Iím very hands on and have been happy with the results. 
Just thought Iíd throw that out there for consideration

Roland of Gilead

  • Handlebar Stache
  • *****
  • Posts: 2087
Re: How to get 6k a month off $1MM portfolio?
« Reply #39 on: May 30, 2015, 10:19:42 PM »
Annuity rates kind of suck right now, but maybe they will improve soon if we get an interest rate hike this year.

Right now for $1 mil and 62 year old male you could get a $5,000 a month single payer immediate annuity with a 10 year certain period (if person dies, heirs continue getting paid for the first 10 year period...this would guarantee coverage of child support).

This is about a 6% SWR but realize there is no adjustment for inflation.

With your dad's health problems, I think a better choice would just be a 50% stock/ 50% bond regular portfolio because it probably will produce the same non inflation adjusted return as the above annuity.

Damn annuities suck right now.  No wonder people have pension envy.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28254
  • Age: -999
  • Location: Seattle, WA
Re: How to get 6k a month off $1MM portfolio?
« Reply #40 on: May 30, 2015, 11:09:39 PM »
In the case of this thread though, I was more recommending a passive note strategy, basically become a private investor to lend money to real estate investors (like being the bank, it's secured against property, it's a mortgage you hold as the "bank" and they pay you) at a rate of 8-10%.

Arebelspy, I'm not picking up what you're putting down.  How is this done, exactly?

At first I thought you were recommending getting into real estate, as in buying properties and renting them out, and was about to reply that as a 65 year old with cancer, my father has not the stamina for this, but after thinking about it I think you are recommending something else.  Like a Lending Club but focused on real estate?

Sorry, could you make this a bit more clear?

Yes, sort of like lending club, but with lending club the notes are completely unsecured.  With real estate, it's secured by the real estate (so if something went wrong you could foreclose, take the property, and sell it). 

Think of the bank: they loan someone money, and get paid every month by owning a mortgage on that house.  You'd do that same thing..loan someone money for a property, and collect that mortgage every month.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

YoungInvestor

  • Bristles
  • ***
  • Posts: 411
Re: How to get 6k a month off $1MM portfolio?
« Reply #41 on: May 31, 2015, 04:32:07 AM »
I wonder, with his condition and life expectancy, if there's a life insurance company that may be offering him a life annuity that might offer that much. Worth getting a quote or two, in my opinion.

It's also worth running the scenario where the house is paid off, to see if the annuity for 855k is sufficient.

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: How to get 6k a month off $1MM portfolio?
« Reply #42 on: May 31, 2015, 05:10:11 AM »
Honestly,

1.  Do you think he will take the advice?

For the investing, I think you are getting some bad advice here.  Do you think he will let you manage his money?  Is that what his goal is here?

First find out what your scope is.  Is he just looking for some comfort and reassurance?  Who initiated the conversation?

I lean towards letting a parent manage their own affairs unless he is specifically asking for help.

I would not do a) real estate, b) reits, or c) any single investment.   He needs a portfolio.  A sensible portfolio that includes stocks.  You need an advisory.  I would recommend two sources at Motley Fool for you to explore -- 1) Motley Fool Pro (goal inflation + 7% over a rolling 3-year period, smart advisors and this will seem to deliver your withdrawal needs.)   2)  Saul's investing discussions at Motley Fool boards (great stock discussion).  You may also want to consult with Rule Your Retirement at Motley Fool.  These have some fees, but the info should be worthwhile.

Best wishes for your family.  Try not to stress over it.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #43 on: May 31, 2015, 05:59:34 AM »
FWIW, I just finished the first half of dealing with a parent's finances (parent has Alzheimer's, I now manage the investments). The emotions of all this are tough on all sides, so I empathize with your attempts to fulfill his desires.

It sounds like his wants slightly exceed the reasonable expectation of his investment earnings.  I'm guessing that the best course is to explain this, and prepare two options where he can see the tradeoff:  "Dad, you can have $72k from the $1M, but after 16 years or so, it will run out (previous poster described how to achieve this).  Or you can get a smaller amount that lasts longer, such as $6k that will probably last 20-25 years (or whatever the next option is).  That's the most anyone can promise without lying to you."


Yes, this might be the way this shakes out.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #44 on: May 31, 2015, 06:01:21 AM »
About 15 years ago my Dad was laid off and decided to retire early with much too little saved.  Neither he or I was happy with his financial adviser, so I took over managing his portfolio about 10 years ago to try and keep my parent from running out of money.  Back then CDís were paying 6-8% APR (depending on the term) and I had a rolling 5 yearsí worth of funds invested in CDs to counter stock market volatility.  The rest was (and still is) invested in a mixture of index funds, dividend paying funds, and a smaller pool of aggressive growth funds to keep building his account, or at least keep up with the amount of his RMD each year.  Obviously CDs stopped paying decent returns some time back.  I quite literally stumbled upon P2P Lending about that time and have moved out of CDs and into Lending Club notes. I have about 20% of his retirement funds in a Lending Club IRA and have been able to achieve a little over a 9% return for the past 3 years.  P2P Lending is certainly not for everyone, but Iím very hands on and have been happy with the results. 
Just thought Iíd throw that out there for consideration

Interesting idea.  I jumped into the P2P thing when I learned about it, but this forum convinced me it might not be that great of a deal, so I've been pulling $$ out as it comes back to me.  Might be interesing to consider for my father's situation, though.

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #45 on: May 31, 2015, 06:02:29 AM »
In the case of this thread though, I was more recommending a passive note strategy, basically become a private investor to lend money to real estate investors (like being the bank, it's secured against property, it's a mortgage you hold as the "bank" and they pay you) at a rate of 8-10%.

Arebelspy, I'm not picking up what you're putting down.  How is this done, exactly?

At first I thought you were recommending getting into real estate, as in buying properties and renting them out, and was about to reply that as a 65 year old with cancer, my father has not the stamina for this, but after thinking about it I think you are recommending something else.  Like a Lending Club but focused on real estate?

Sorry, could you make this a bit more clear?

Yes, sort of like lending club, but with lending club the notes are completely unsecured.  With real estate, it's secured by the real estate (so if something went wrong you could foreclose, take the property, and sell it). 

Think of the bank: they loan someone money, and get paid every month by owning a mortgage on that house.  You'd do that same thing..loan someone money for a property, and collect that mortgage every month.

But there are no online tools like a LC but for this sort of lending? It's  a really good idea, but if it involves legwork Im not sure it will work for him.  Any more details or resources where I can read about the details?

starguru

  • Pencil Stache
  • ****
  • Posts: 744
Re: How to get 6k a month off $1MM portfolio?
« Reply #46 on: May 31, 2015, 06:08:45 AM »
Honestly,

1.  Do you think he will take the advice?

For the investing, I think you are getting some bad advice here.  Do you think he will let you manage his money?  Is that what his goal is here?

First find out what your scope is.  Is he just looking for some comfort and reassurance?  Who initiated the conversation?


The situation is he thinks he needs to spend this amount of money, and he realizes his assets are short of this goal, and he is trying to work a solution.  He is utterly convinced that he can't cut his spending.  He knows that I am into financial boards and so he thinks I might be able to help him, or get reasonable advice. 

I think he will follow my advice, and even if he doesn't I want to try to at least get reasonable advice to him.

Quote
I lean towards letting a parent manage their own affairs unless he is specifically asking for help.

I would not do a) real estate, b) reits, or c) any single investment.   He needs a portfolio.  A sensible portfolio that includes stocks.  You need an advisory.  I would recommend two sources at Motley Fool for you to explore -- 1) Motley Fool Pro (goal inflation + 7% over a rolling 3-year period, smart advisors and this will seem to deliver your withdrawal needs.)   2)  Saul's investing discussions at Motley Fool boards (great stock discussion).  You may also want to consult with Rule Your Retirement at Motley Fool.  These have some fees, but the info should be worthwhile.

Best wishes for your family.  Try not to stress over it.

Thanks for this.  You say any single investment is bad, but what about the VWINX fund someone mentioned above, or something like it, perhaps a bit more aggressive?  It seems to reduce volatility and have reasonable growth. 

I never signed up for MF since everything I read from them looks like its a sales pitch. Should I reconsider?

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: How to get 6k a month off $1MM portfolio?
« Reply #47 on: May 31, 2015, 06:46:24 AM »
A fund might be fine.  I am not personally familiar with a lot of funds, so I hesitate to recommend anything in particular.  With 1MM, you will want to take some time to research and look at several funds and probably select more than one to spread risk.
I am a big Dave Ramsey listener (although I invest primarily in individual stocks, and he recommends funds).  He will recommend stock funds with low turnover rates (meaning they don't churn their holdings).  If you want to learn about funds, read, read, read.  It is a good way to be lower-maintenance with the money, but of course, someone needs to keep an eye on the investments.

Dave Ramsey will say to find an advisor who has the heart of a teacher (not a salesperson).  If you choose to take advice, then make sure you are not feeling sold in any way.

Motley Fool has a strong sales pitch and I understand completely why that is a turn-off.  However, the places I suggested -- Rule Your Retiement (paid, includes advice on funds, I am not a subscriber but I have heard good things about it from subscribers), Motley Fool Pro  (paid, not inexpensive but a very tiny % of $1M and the guys there are smart and conservative), and Saul's Investing Discussions (a free forum with very smart people, the style there is maximal return and very active portfolio management, they are very successful investors).

Pro only opens for new members 1x a year, it usually comes up in the Fall.  RYR is like $99 and free 30 day trial, so why not check it out and ask your questions to that team? 

Good luck with everything!  Aside from the heath concerns, your dad is not in dire shape financially, he has a large nest egg and that is so much better than so many people.  Hang in there!

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: How to get 6k a month off $1MM portfolio?
« Reply #48 on: May 31, 2015, 06:47:15 AM »
Also, if your dad goes online, see if he will do Mint so he can actually observe his own spending / family spending.  Knowledge is power!  :)

KBecks2

  • Pencil Stache
  • ****
  • Posts: 618
Re: How to get 6k a month off $1MM portfolio?
« Reply #49 on: May 31, 2015, 06:55:00 AM »
Just to encourage you, there are many ways to invest, but it is so important for you and your dad to understand the investments and feel confident in your plan.

For example, I own a Canadian stock called Seaspan (SSW).  This stock currently yields a 7.5% dividend.  Is it a good stock?  I think so, but I could not responsibly recommend it to someone else, and definitely not as a single investment. That's ridiculous.  Would it be good for you? I have no freaking idea, and I am not qualified to do that.  I feel comfortable having some of it in my port but I would not have my entire port made of that stock.  And I have to do the work of following it and making sure I'm satisfied with it over time.  I did not find this stock on my own, I had help, and I am only willing to invest in individual stocks with the help of smart people I trust (some of the Fool services, and from those ideas, I narrow it down more to fit my preferences.)

It can take months for you to get comfortable, that is OK!  Maybe all funds is good for you, maybe you want mostly funds and a small amount of stocks.  What is important to you and your dad?  How much time to you and he have to be involved with managing the funds?
« Last Edit: May 31, 2015, 06:57:52 AM by KBecks2 »