LifeX has a suite of funds that tie into the idea of a drawdown strategy. For this post I'm going to use the LifeX 2035 Income Bucket ETF (LDDR) which as the name implies runs for ten years. At this point, I don't know if next year they will come out with a 2036 version or what their future plans are but I would bet there will be more of these regardless of whether they come from LifeX or other providers.
With a ten year window from LDDR, maybe this person is 60, retired and wants to take Social Security at 70 or maybe they are 65 and hope this piece of money lasts until RMDs at 75.
I chose $400,000 in this smaller, maybe taxable account versus an IRA that is sufficient for whenever it needs to be tapped. If this person can holdout anywhere close to ten years, then the IRA has the opportunity to grow significantly.
The weightings used above are just a slight tweak on 50/30/20. There is barely any income these days from the S&P 500, just over 1%. Client/personal holding EMPIX has paid $0.62 so far this year. As of Jan 6 which is the start date for LDDR, $120,000's worth of EMPIX would have paid a total so far of $7359 which might extrapolate out to $8866. NFLY has paid $6 in distributions so far this year so $20,000's worth at the start of the year would have been 1100 shares good for $6600 of income for the first 10 months of the year. It may not extrapolate this way but for the full year it could be $7951. The $80,000 to LDDR. per the LifeX website, is going to distribute $9373/yr on the way to depleting in 2035. VOO now yields about 1.15% so $2700 there.
So with this weighting scheme we get the $400,000 paying an income of $28,944 with only 25% in holdings that should be expected to deplete, LDDR and NFLY. If that figure, combined with any other income streams isn't enough, it would probably make sense to take from the 45% we put in equities.
In terms of trying to plan out what the equities will bring to the table, if over the next ten years the equity exposure compounds at 7%, lower than usual, then whatever amount was allocated to equities (10% or 45% or something else) would have grown in value by 96% total. The scenario might be able to get away with just 30% in equities and put that extra 15% into the yield or depletion sleeves of the portfolio which might add an additional $6000-$7000 of income on top of the $28,944 (less whatever dividends are given up by reducing VOO exposure).
Sticking with our example, putting the entire $400,000 into LDDR seems unnecessary. We've constructed a plausible scenario that assumes below trend equity growth that could have close to $350,000 remaining in ten years (assumes the 30% in VOO grows to $235,000 and the EMPIX just treads water). And again, the weightings could be tweaked even further of course to increase the income potential.
Yes, it would not be too difficult to do what LDDR does and save the 25 basis point fee and we are assuming LDDR will do what it is supposed to. IRL, 30% in to one specialized income fund is a very bad idea, it would need to be spread out. I would not be afraid of 5% in crazy high yielders though with the expectation and understanding that they are going to erode significantly. That's ok in this scenario. The reason I use NFLY in these posts is it is not the most volatile one in the product line and it avoids crazy CEO risk.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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