Best Allocation: Living off just the interest

[Dieter]

It all depends....And remember, this is hypothetical -- 10% of $20M is more than my total retirement accounts are going to be when I retire..... At my levels, probably 20% cash (roughly where my retirement accounts are at now as I'm market timing a bit and shortened my duration / increased credit quality (reduced TBM) / actually have ok options in 401k as of late for "cash" / MM / Stable Value Fund.....)

What is target income? Expect to sell some as bands breached or only live off of income? How much spending flexibility?

If really shooting for income:
3% Yield from Vanguard Dividend Yield Idx Inv
1.99% from VG SCV (or go Mid-Cao Val for 2.21%)
(No idea of VG Intl fund yields -- not listed where I checked....)
2.99% LTT
0% Gold (no gold if want to optimize for income?)
2+%? cash. Not going to do the math.... VG Fed MM yields 1.7%; VG STT yields 2.45%. Creative use of IBonds (2.5%), CDs, diff durations, etc, can probably bump up
Land -- no clue....

2%ish yield on low end ($10M) kicks off 200k/yr.

If need more, sell winner / keep in balance....

If LTT drops below rebalance band (nice yield bump), from winning asset. Which yeah, might be cash if LTT, Gold, Stocks tank all at once. Which might be why the rich per info JHogue posted have more in cash just in case....

[Dieter]

For cash ideas (not all PP pure I'm sure) -- http://www.mymoneyblog.com/best-interes ... -2018.html

(Not MY money blog

And at $20M total portfolio, might also look at Muni Money Market -- don't remember if they included that). Federal / Prime MM from VG better fory at my bracket even in a high tax state.

[jhogue]

For cash ideas (not all PP pure I'm sure) -- http://www.mymoneyblog.com/best-interes ... -2018.html

(Not MY money blog

And at $20M total portfolio, might also look at Muni Money Market -- don't remember if they included that). Federal / Prime MM from VG better fory at my bracket even in a high tax state.

1. mymoneyblog can't be all bad- at least it mentions I bonds as a possible option for Cash.

2. PP investors need to stay away from municipal bonds and their funds and stick with U.S. Treasury debt only. When the market goes south and you really need your cash, that is when the Treasury debt holders will be standing ahead of all the FDIC-insured CD and municipal bond holders. It isn't some doomsday fantasy that Harry Browne made up. Anyone who studies it will realize that the history of banking is a repetitive tale of boom and bust. For more about the perils and illiquidity of municipal bonds, see Puerto Rico.

[banker22]

Why wouldn't you just go 100% global equity index fund with a 2-3% dividend yield?

[KevinW]

The question was whether or not a HBPP or GB should theoretically have a different weighting (primarily in its cash component) as it scales due to its underlying principles since a very wealthy person would be at less risk of liquidating lagging assets to make ends meet during a recession.

No, according to PP principles the 4x25 weights stay the same regardless of the size of the portfolio. The four assets are weighted equally so that any one asset can buffer losses in up to three other classes.

The cash component, coupled with the rebalance band policy, ensures that the portfolio will "buy low" when volatile assets crash. A PP that is underweight in cash has less ability to buy-low, hurting long term growth, and that is true regardless of the size of the portfolio.

(One exception might be a new 401k saver who is contributing >10% to the portfolio each year in cash wages. They might be able to get away with underweighting cash since their cash contributions do the "buy low" part. But that's not true for the $20M scenario.)

I have daydreamed about how I would live off the interest of a multimillion windfall, and what I settled on is:

(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife. Let's say $4 million so each asset is an even $1 million. Barring some kind of cataclysm this is never actually drawn down.

(2) The remainder in a Variable Portfolio of a tax-efficient, dividend-paying, global stock index such as VT. In the $20M scenario this is $16 million, which at VT's current 2.26% yield, pays $362k/year of qualified dividends. That's more than I can envision spending, but if it's not enough for you, blend in a high-dividend fund.

(1) is there so you can sleep at night through downturns, or to bail you out in a black swan scenario. Sitting on $1M each of gold bullion and T-bills should be plenty of sleep-at-night insurance. (2) provides sustainable and tax-efficient income and most likely will grow to a substantial legacy.

[banker22]

The question was whether or not a HBPP or GB should theoretically have a different weighting (primarily in its cash component) as it scales due to its underlying principles since a very wealthy person would be at less risk of liquidating lagging assets to make ends meet during a recession.

No, according to PP principles the 4x25 weights stay the same regardless of the size of the portfolio. The four assets are weighted equally so that any one asset can buffer losses in up to three other classes.

The cash component, coupled with the rebalance band policy, ensures that the portfolio will "buy low" when volatile assets crash. A PP that is underweight in cash has less ability to buy-low, hurting long term growth, and that is true regardless of the size of the portfolio.

(One exception might be a new 401k saver who is contributing >10% to the portfolio each year in cash wages. They might be able to get away with underweighting cash since their cash contributions do the "buy low" part. But that's not true for the $20M scenario.)

I have daydreamed about how I would live off the interest of a multimillion windfall, and what I settled on is:

(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife. Let's say $4 million so each asset is an even $1 million. Barring some kind of cataclysm this is never actually drawn down.

(2) The remainder in a Variable Portfolio of a tax-efficient, dividend-paying, global stock index such as VT. In the $20M scenario this is $16 million, which at VT's current 2.26% yield, pays $362k/year of qualified dividends. That's more than I can envision spending, but if it's not enough for you, blend in a high-dividend fund.

(1) is there so you can sleep at night through downturns, or to bail you out in a black swan scenario. Sitting on $1M each of gold bullion and T-bills should be plenty of sleep-at-night insurance. (2) provides sustainable and tax-efficient income and most likely will grow to a substantial legacy.

My thoughts exactly. Can you be my financial advisor?!

[Kbg]

(1) Conventional 4x25 PP for "money I can't afford to lose," meaning more than enough to buy a sensible house and support a bourgeois lifestyle indefinitely, in the event of strife.

All Power to the Soviets! Beware peasants with pitchforks. :-)

[KevinW]

Ha, glad you guys appreciated that.

[Kbg]

Actually, I just finished reading an 800 pg book on the Russian revolution (A People’s Tragedy). Pretty depressing...and perhaps we are fooling ourselves here. If civil war breaks out you have some major decisions to make and you don’t have the option to fence sit. Heaven help you if you pick the wrong side. Even if you pick the right side bad luck may be terminal.

Financially, you have to flee early, have a bunch of money located elsewhere and be able to land safely there or in another safe place where you can access your money.

[Mark Leavy]

Actually, I just finished reading an 800 pg book on the Russian revolution (A People’s Tragedy). Pretty depressing...and perhaps we are fooling ourselves here. If civil war breaks out you have some major decisions to make and you don’t have the option to fence sit. Heaven help you if you pick the wrong side. Even if you pick the right side bad luck may be terminal.

Financially, you have to flee early, have a bunch of money located elsewhere and be able to land safely there or in another safe place where you can access your money.

Outstanding Reference - thank you Kbg. I can't seem to get a digital version, so I put a reminder in to have a paperback sent to an Amazon Locker I will be near in a couple of weeks.

[Kbg]

Mark,

The book is widely recommended as one of the best on the subject, but it was a heavy read more in the academic style(ish) so be prepared for that. The title is excellent for his general thesis...I won't be a spoiler so I'll stop there. I'm not sure of the author's politics but he pretty much debunks any idea of Lenin and Trotsky being the "good communists" whose program was derailed by Stalin.

[Kriegsspiel]

KGB, have you ever read Secondhand Time by Svetlana Alexeivich? I haven't yet, but I believe the transition from Socialism to oligarchy was no picnic either, as the oligarchs Stolichnayevery one of the assets the Soviets had left for themselves and left the common people to plant potatoes in every scrap of land.

[Kbg]

KGB, have you ever read Secondhand Time by Svetlana Alexeivich? I haven't yet, but I believe the transition from Socialism to oligarchy was no picnic either, as the oligarchs Stolichnayevery one of the assets the Soviets had left for themselves and left the common people to plant potatoes in every scrap of land.

Nope...thanks for the tip! I'll get this one as it would be a good "round trip" after just finishing A People's Tradgedy.

We (the US) have been blessed/lucky as a country in that we have two characteristics that are rather exceptional in comparison to many countries.

1. While the British get slammed a lot for their colonial legacy (and often deservedly so), if one had to be colonized they generally left a legacy of excellent institutions and democratic habits after they got the boot. Not so much for other European colonizers.

2. We haven't had any ruthless tyrants willing to kill to rise to the top supported by equally ruthless followers.

And it's kbg not KGB. :-)

[Kriegsspiel]

And it's kbg not KGB. :-)

[mathjak107]

Hello Everyone,

I am curious on opinions of what the proper allocation would be for someone's goal of living off of JUST THE INTEREST of their investments (i.e. not touching the principle) with $10 or $20 million.

Surely, in that situation having access cash would not be as important since you would not need 25% to pay your monthly bills if the market took a dump. I also would think you would want to be heavier in equities because of the capital gains treatment (as opposed to regular income tax rates).

I would think something like a modified golden butterfly would be ideal (with the only real change being in the size of the cash component):

22.5% Total Stock
22.5% Small Cap Value
22.5% LT Bonds
22.5% GLD
10% ST Bonds/Cash

Thoughts?

there is no such thing as not touching principal . it is all principal ..everything in your accounts on any day is all your money ... are you trying to say if you had a 100k in 1987 and 4 million today that only the 100k counts as principal

whether you get interest or spend dividends or appreciation , it is irrelevant , you are spending your total return in all cases .

plus you have negative real return sequences to deal with when spending down .. you have market returns and interest that can be negative and you can have inflation as the wild card creating negative real returns . so in those years you may spend more then you get ...

all in all there really is no such thing as not spending principal since it is all "your money "

your draw would have to be so small as to be unaffected by sequences which to me makes little sense ... on the other hand a safe withdrawal rate always assumes what you have can be spent down to pretty much zero .

[ahhrunforthehills]

.

[mathjak107]

the reality is that part of the success rate calculation since it is based on odds of success is actually far higher when life expectancy is entered in to the equation .

while good planning dictates we plan to 90-95 , the reality most of us will not live that long so statistically that ads quite a bit to the success rate

[ahhrunforthehills]

.

[mathjak107]

if we look at the 118 rolling 30 year periods , with a 60/40 allocation , it has ended with more than you started 90% of the time, 2x what you started with 67% of the time and 3x what you started with 50% of the time according to kitces.. if we eliminated the 5 dates the safe withdrawal rate is based on , 1907,1929,1937,1965, 1966 a safe withdrawal rate would actually be 6.50% ....