Muni bond CEFs, which would fall somewhere in the latter half of your enumeration.

Don’t forget TIPS, inflation-protected treasuries. The old I-bonds used to be okay, back when then paid more than 0% above inflation. Of course, the inflation rate calculated is “subject to the monetary meddling of the Feds.”

My favorite strategy has three parts:

1) Diversification – some domestic stocks of big and small companies, some international stocks from both developed and developing countries, some REITs, and some bond funds. Also, put about 10% in something with fixed returns (bonds/CDs), more if the market is low, less if it’s feeling bubbly. (Also, have my house paid off, maintain marketable skills, develop frugality skills, and other forms of diversification no one talks about.)

2) Assume an expected growth rate for each part of the portfolio. Keep track of what it would look like if the investment grew steadily at this rate and compare that to the actual values. Withdraw funds from the parts of the portfolio that are worth more than expected. (In other words, sell high.)

3) Choose a percentage (between 4 and 7%) to withdraw each year. Do not calculate the number at the beginning of retirement and then adjust that withdrawal amount for inflation each year. Just pick a percentage, and always withdraw that percentage of the portfolio. (Actually, I’d withdraw 1/12 of that percentage each month.)

This means some months you will withdraw too much money for your needs, and some months, too little. Use the extra money in the good months to buy bonds/CDs, and then sell bonds/CDs when everything else is plummeting.

have you heard of preferred stocks? For example BAC-J – the bank of america J series preferred shares. They pay very good dividends

Since I’m a mutual fund junkie, here’s my take:

Why not just put your money in a “balanced” mutual fund that invests around 60-65% stocks and 35-40% bonds. These funds came about in the 1930s and were designed to be a person’s only investment plan. They still fill the bill today.

Some of my favorite balanced funds are:

Vanguard Wellington. Has great long term returns and with a cheap .27% expense ratio, it’s hard to go wrong. If you have 100K, you can get the Admiral share class, which has a .15% expense ratio.

Dodge and Cox Balanced: Has been around since 1931 and has a cheap .53% expense ratio and also has great long term returns. This is a team managed fund, so you normally don’t have to worry if a manager leaves like you do with other mutual funds.

T. Rowe Price Capital Appreciation. Has a reasonable expense ratio of .70%. Hasn’t had a losing year since 1990, and at that it was only around 1.5%. Has great long term returns.

Oakmark Equity Income: Has a slightly annoying expense ratio of .83% but it’s 10 year track record puts it in the top 2% of balanced funds. The managers have been there long term.

If you can get into a “load” fund without paying a load…. American Funds Income Fund of America is worth a look. It has pretty smooth returns despite investing a sizable portion of it’s bond portfolio in junk bonds. This fund focuses on yield, (hence the investments in junk bonds), so it does mostly dividend paying stocks and bonds.

Also, if you want a pure bond option.. there’s always Loomis Sayles Bond. This is a “multisector” bond fund. It can invest sizable portions of assets in foreign bonds, as well as junk bonds. This is one of the few bond funds that manages to get capital gains as well as high income. The expense ratio is annoyingly high at .97%. However, if you have 100K, you can get the “institutional” shares for a much more reasonable .66%. The returns on this fund are excellent.

@Jan – Debt is still senior to equity, so stocks are the riskiest of all. Currently, I consider stocks not achieving much return to be a fairly large risk (on top of that).

@Debbie M – I’m a little bit worried about TIPS when those who pay the inflation adjustment also get to adjust the inflation itself. Now if there was a tip that was indexed to gold or oil..

@Baglady – I know them (theoretically), but I always figured they were more complicated to acquire and deal with in terms of taxes.

@mysticaltyger – Our current budget is: Housing $700 + car(argh) $100 + food $75 + misc. $125. I’d like to cut housing (we have a big unused room) and obviously I’d like to ditch the car. I think I could do it for about $600/month (RV or boat, no car). I actually owned OAKBX at some point, but I was accumulating too many funds. IT was a mess. Of course now I have even more stocks.

@steve – you gotta share you book list at some point (the keepers).

I would agree with mysticaltyger in some sense. “Due dilligence” is worth something and if one can find a fund that consistently (1-3-5-10-longer) overperforms the market by, say, 2%, and one understands why this is the case (I think the latter point is VERY important) then it’s worth paying management expenses. I would even say that it’s crazy (or lazy) to pay management fees an index fund when it is possible replicable an index fun with about 20 stocks incurring no fees at all.

For me, if something has complicated tax consequences, I tend to go with the fund. While I enjoy investing, I simply don’t like doing taxes and I’m willing to pay extra management fees to avoid them.

ERE, what’s name of that bias we discussed several months ago? Survivorship bias, I think it was? That’s what compels me to always take a second look at 10-year performance numbers. Sure, that’s a considerable amount of time over which to outperform the market. I’m tempted to make financial decisions based upon those kind of metrics, too. But the mutual fund industry is large enough that there always will be lucky outlasters. If enough people are in the game, how hard / rare is it to flip a coin tails 10 times in a row? Apparently, that’s all it takes to convince people to throw their money at you. ;-\ Seriously, how many mutual fund investors have the capacity to discriminate between the Young and Lucky, and the Old and Skilled? With the mutual fund industry at its current size, why even bother with 1, 3, 5 and 10 year records? Should 20 years be the minimum, to ensure you have more likely found Skill, and not Luck?

For a mutual fund investor, seems to me that the risk is even greater by following (what I call) the medium term performance records. Let’s say some MBA scrub lands a job as a junior fund manager and lucky her/his way into a senior fund manager role a few years down the line. So s/he has a good 5-year record, and it’s all Luck. But the manager has bamboozled her/himself into believing it’s more Skill than Luck. By definition, isn’t it actually riskier to now invest with such a manager, falsely embolded by serendipitous outperformance and rising assets under management? It’s more likely that such an individual will overreach and come back to reality, and a mutual fund investor will have been better off investing with some other lucky young turk who hasn’t yet enjoyed the 5 year lucky streak and thus is not as bold and careless with the delusion of SKill.

Regarding taxes, I happen to like doing them, but I always strive to minimize / simplify the accounting work involved. In my 14 year personal investing career, I’ve always found it more complicated to deal with mutual fund distributions (some short-term, some long-term, not so easy to figure out the 1099). With stocks, it’s much easier for me to track it myself, and I have total control over my taxes. I get to decide when to sell shares, and dividend payouts are generally pretty predictable (current financial environment notwithstanding). Life is simpler and more profitable without mutual funds.

Jacob: If your expenses are 12K a year, then you are withdrawing 4.8% from a portfolio of 250K. That might work but it’s really pushing it, especially for a couple in their late 20s or early 30s.

I wanted to make sure I was able to retire with no risk so I figured out what I would need and then invested in TIPS and I Bonds.

For the money I can afford to lose, I like the ETF strategy-Over time investing in the sectors that are down for the moment, making your buy in cheaper. I also like that I can put in stop losses, limiting the down side. In a mutual fund I have to wait to settle up at the end of the day, which might be too late.

Bravo Jacob. Great post! I have been mulling options five and six for some time now. Normal porfolio advice just doesn’t apply to ERE types b/c it is usually aimed at accumulators who will take 30 years to get to retirement (You will never see a discussion of CEFs and other high yield instruments in an asset allocation theory book). ERE folks need income year in year out. If you were to expand on options in 5 and 6 in another post that would be great.

I also have Vanguard Wellington fund. mysticaltyger, I was wondering how it would do in a rising interest era, that I think is coming. It is heavily weighted towards bonds currently.

@tmgbooks – If anything I wouldn’t lock myself into 30 year rates. Change that to short-term bonds.

Finding an employer willing to let one work only 3 days per week might be tricky. Had it been possible for me, I would have given it serious consideration. However, that employment was an all of nothing proposition.

When I was planning my ER in 2007 and 2008, I found a bond fund which struck a balance between the high yield of junk bond funds and the lower risk of investment-grade bond funds.

It is Fidelity’s Focused High Income Fund. It invests in bonds rated in the Bs, some just at investment grade and some just below investment grade, in the low Bs. I get some of the better yield of lower rated bonds without the added risk of bonds rated in the Cs and Ds.

Because I bought most of my shares about 2 years ago when the NAV was depressed, following my ER, my personal monthly dividend yield expressed as the ratio of the DPS and the average cost basis NAV of the shares I own has been just over 8% (about 7% on a current NAV basis). This does not include an unrealized cap gain of about 25%.

Besides my holdings in this fund, I also have holdings in muni bond funds (from my working days), stock funds, and and IRA which contains a stock index fund and an investment grade bond fund.

I’m curious as to why you appear to pass over option 4 – dividend payers. This is the foundation – almost the full extent – of my strategy. Beyond holding 2 years expenses worth of cash, almost everything is in this type of business.

Sure, not every apparently strong company now will be strong and dividend paying in 20 years time. But holding 30 or so companies spread sectorally and geographically mitigates this. And I do keep a watching brief on the portfolio which, one day, may lead to selling off real (dead) dogs and divi suspenders.

If in a decade’s time, utilities, miners, oil companies and big pharma have ceased to be profitable then I suspect we’ll all have more immediate worries than the state of our portfolios.

Your preferred option 6 doesn’t make sense to me – where do you find 10% returns on something that is safe, unleveraged and understandable?

Jacob, I like the idea of having enough securely invested to meet needs and then using the rest for other strategies. Normally you think that the higher the potential return, the higher the risk you need to take on. For instance, bonds right now ( and typically).

But, there are situations where long term risk lowers and long term potential gains go up! This is amazing to me. This happens when you buy and no one else is. Most cannot take advantage of these opportunities because the short term risk spikes. Anyone who can float through this period can actually lower risk, increase potential return.

Real estate, stocks in 2008, are two examples. Price goes down, long term risk goes Dow, payoff goes up.

You can always turn your strategies into a tax deductible Business Firm that keeps acquiring assets of quantity at deeper discounts with investor angel money, until you turn profitable. Much like Warren Buffet in his 20’s.

“I want to be a billionaire; not to spend a billion dollars, just need it to play a game of Monopoly without the jail square.” ~Myself

@jack foley – I find it’s easy to generate a consistent $12k/yr from a $200k portfolio just on yield. Capital gains can easily make that more and capital losses could do the opposite.

The real question you should be asking is whether one should spend all of that income…