Author Topic: Invest 100k for sustainable 4-5% income  (Read 4666 times)

choumiko

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Invest 100k for sustainable 4-5% income
« on: June 20, 2015, 09:27:15 AM »
I have 100K that I would like to use to generate income for my parents. Ideally, 4-5% after tax yield should be sufficient for their needs. I saw a recent thread on investing 200k to generate income, but the scenario there doesn't seem realistic and/or sustainable.

One obvious option is to buy a real estate property (apartment, condo, etc.) and rent it out. But I really prefer not dealing with tenants and maintenance.

I am thinking may be a combination of REIT funds and muni bond funds. But given the amount of choices out there, I am really at a loss. Any advice is really appreciated.

 

forummm

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Re: Invest 100k for sustainable 4-5% income
« Reply #1 on: June 20, 2015, 10:02:22 AM »
How long will they need the money? I guess that's another way of asking how old they are.

If they only need the money for about 30 years, then just put it in a diversified portfolio of stocks and bonds (like the Vanguard Target Retirement Fund for the approximate year they turn 65). Just pull the 4% each year from the fund. Done. Easy.

Financial.Velociraptor

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Re: Invest 100k for sustainable 4-5% income
« Reply #2 on: June 20, 2015, 10:51:20 AM »
For moderate (safe) cash yields right now, I like closed end municipal bond funds.  I own NIO and NEA (6.3% and 6.2% yield, respectively) and am researching IQI (6.5%) for future contributions.

Say 6% to make the math easy and assume a 15% marginal tax rate: .06*1.15= 6.9% equivalent yield.  You could do a 20/80 stock/bond AA and index the 20% to VOO to give some inflation protection and potential growth.  Blended cash distributions would thus be .06*.8 + .0191*.2 = 4.78% yield with only 20% subject to 15% qualified dividends rate. 

Well within your target and VERY conservative.

You might try shopping around for a Single Premium Income Annuity (SPIA) as well (ask your banker).  Four percent will be hard to get there but you can get 'close' and Mom and Dad will have a lifetime return that is principal guaranteed by the issuing insurance company.  You can probably find one with a interest rate escalator too.  I put Dad in a SPIA a few years ago and I think he gets 3.75% with one opportunity to reset the rate in the 7 year lockup term if rates rise.  He is very happy as he could not stomach ANY market risk ("It's everything I've worked for my whole life!")

forummm

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Re: Invest 100k for sustainable 4-5% income
« Reply #3 on: June 20, 2015, 11:00:23 AM »
For moderate (safe) cash yields right now, I like closed end municipal bond funds.  I own NIO and NEA (6.3% and 6.2% yield, respectively) and am researching IQI (6.5%) for future contributions.

Do these funds buy and hold the bonds to maturity?

If so, then you get the return minus inflation.

If not, then you might also have asset depreciation to add to the losses from inflation because bonds will decline in value when interest rates rise (which they will because the Fed rate is 0% right now).

Financial.Velociraptor

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Re: Invest 100k for sustainable 4-5% income
« Reply #4 on: June 20, 2015, 11:26:27 AM »

Do these funds buy and hold the bonds to maturity?


NIO usually does NEA always as it must is structured to be AMT free and thus cannot realize capital gains.  That is the point of using a CEF instead of an ETF on munis.  An ETF can be forced to sell at a loss to meet redemptions.  A CEF and sit on its hands.  IQI is new to my radar and I need to dig deeper first.

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Re: Invest 100k for sustainable 4-5% income
« Reply #5 on: June 20, 2015, 11:34:07 AM »
For moderate (safe) cash yields right now, I like closed end municipal bond funds.  I own NIO and NEA (6.3% and 6.2% yield, respectively) and am researching IQI (6.5%) for future contributions.

Say 6% to make the math easy and assume a 15% marginal tax rate: .06*1.15= 6.9% equivalent yield.  You could do a 20/80 stock/bond AA and index the 20% to VOO to give some inflation protection and potential growth.  Blended cash distributions would thus be .06*.8 + .0191*.2 = 4.78% yield with only 20% subject to 15% qualified dividends rate. 

Well within your target and VERY conservative...

This is some good shit, Velociraptor!!

forummm

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Re: Invest 100k for sustainable 4-5% income
« Reply #6 on: June 20, 2015, 11:47:43 AM »

Do these funds buy and hold the bonds to maturity?


NIO usually does NEA always as it must is structured to be AMT free and thus cannot realize capital gains.  That is the point of using a CEF instead of an ETF on munis.  An ETF can be forced to sell at a loss to meet redemptions.  A CEF and sit on its hands.  IQI is new to my radar and I need to dig deeper first.

Cool. So does the fund just keep buying new bonds when the old bonds mature? Or does it do a return of capital and fold up?

So OP could use something like this in the bond portion and have another portion allocated to stocks (so that inflation doesn't deplete the portfolio and there is some long term growth).

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Re: Invest 100k for sustainable 4-5% income
« Reply #7 on: June 21, 2015, 09:53:33 AM »
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Cool. So does the fund just keep buying new bonds when the old bonds mature? Or does it do a return of capital and fold up?


When the bond pays out, the CEF usually buys new bonds (else they stop collecting their fees on AUM!) at the prevailing rate so long as it meets the criteria for investment (usually "investment grade").  So over a long period of time, the distribution changes.  Since we are at a fed rate of roughly zero, I expect a modest increase in yield from these instruments but not for several years.  You can expect some unrealized capital losses (remember you are buying to hold forever) until the portfolio catches up with the prevailing market rate.

NOTE: these CEF funds trade at a discount/premium to NAV.  You want to buy them at a discount.  NIO/NEA/IQI are all currently available for attractive discounts to NAV.  Don't buy a CEF for a premium to NAV, that is a dumbo T. Rex move.

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Re: Invest 100k for sustainable 4-5% income
« Reply #8 on: June 21, 2015, 10:04:46 AM »
\
Cool. So does the fund just keep buying new bonds when the old bonds mature? Or does it do a return of capital and fold up?


When the bond pays out, the CEF usually buys new bonds (else they stop collecting their fees on AUM!) at the prevailing rate so long as it meets the criteria for investment (usually "investment grade").  So over a long period of time, the distribution changes.  Since we are at a fed rate of roughly zero, I expect a modest increase in yield from these instruments but not for several years.  You can expect some unrealized capital losses (remember you are buying to hold forever) until the portfolio catches up with the prevailing market rate.

NOTE: these CEF funds trade at a discount/premium to NAV.  You want to buy them at a discount.  NIO/NEA/IQI are all currently available for attractive discounts to NAV.  Don't buy a CEF for a premium to NAV, that is a dumbo T. Rex move.

Are there any downsides to these CEFs? High fees? Other risks? Are they better than holding a low-cost broadly diversified bond fund like one of Vanguards? The yield appears to be much higher.

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Re: Invest 100k for sustainable 4-5% income
« Reply #9 on: June 21, 2015, 10:50:39 AM »

Are there any downsides to these CEFs? High fees? Other risks? Are they better than holding a low-cost broadly diversified bond fund like one of Vanguards? The yield appears to be much higher.

The fees range from moderate to high (.3 to 1.x).  They aren't Vanguarding.  They also use modest 1.3x to 1.4x leverage.  Thus yields are 1.3xish times higher than a diversified bundle of munis but the capital risk is also 1.3xish higher.  The underlying safety (e.g. extremely low default rate of investment grade munis) led to me get comfortable with the modest leverage quickly.

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Re: Invest 100k for sustainable 4-5% income
« Reply #10 on: June 21, 2015, 11:00:26 AM »

Are there any downsides to these CEFs? High fees? Other risks? Are they better than holding a low-cost broadly diversified bond fund like one of Vanguards? The yield appears to be much higher.

The fees range from moderate to high (.3 to 1.x).  They aren't Vanguarding.  They also use modest 1.3x to 1.4x leverage.  Thus yields are 1.3xish times higher than a diversified bundle of munis but the capital risk is also 1.3xish higher.  The underlying safety (e.g. extremely low default rate of investment grade munis) led to me get comfortable with the modest leverage quickly.

Ah, leverage makes those returns make more sense. So they are also borrowing short to lend long I suppose. That increases interest rate risk, and interest rates are almost certainly going up in the near future. Interesting to learn about the options. Thanks for the info.