Morningstar posted about safe retirement withdrawal rates. This latest piece added a different element from what they usually cover which is that while the 4% rule is based on a 30 year time horizon, shorter time horizons allow for a higher withdrawal rate.
Yes that certainly seems obvious but it lends itself to the depletion or bridging strategy that we talk about here frequently. Maybe someone retires at 65 and plans to live off one piece of money like maybe in a taxable account while the bigger rollover IRA has time to grow. Maybe this is bridging Social Security at 70 or RMDs at 75 or something else.
This idea resonates with me as probably being my path. Most clients are quite a bit older and so my practice income will likely be quite a bit lower in ten years or so. I expect it will still be a meaningful contributor to our needs but maybe not sufficient for everything. I would expect that we'll sell our short term rental property maybe ten years or so for now and then use that money for as long as it will last and then start taking from my IRA. Maybe we could get ten years of that and just bank my RMDs without actually needing to spend that money.
Products and strategies are continually evolving to make this path a possibility.
In previous posts we've looked at using small allocations to crazy high yielders like YieldMax or some GraniteShares funds. It is very important to realize these types of funds are going to erode quickly.
YSPY sells puts on the S&P 500 and it has eroded by more than 1/4 in a year and the distributions have gone from around $0.19 to just under $0.03 lately. Maybe that can be modeled in to do whatever the end user needs or not but the bigger point is to understand the expected erosion factor of the NAV and the distributions.
LifeX has a small suite of treasury-centric funds that deplete in three years, five years and ten years. They are all about a year old so now they deplete in two, four and nine years respectively. Here's how they work using the nine year product with symbol LDDR.
Putting $150,000 into LDDR would pay $1621 as you see and deplete in nine years. Maybe $150,000 is one third of the bridge account value at the start. There are a lot of higher yielding ideas, some of which we've looked at before, without being crazy high like YSPY having a trailing yield above 30%.
I think the other $300,000 could be put into a mix of higher yielding equity income and fixed income that could survive a 10% withdrawal rate for ten years. I think the mind set needs to be willing to let it deplete but unlike LDDR, there would be a good chance that it would survive.
There aren't too many derivative income ETFs with ten year track records. XYLD and SPXX are two that I know of.
They are not great funds but ten years later, taking out all of the respective 9% and 7% yields leaves a very useable piece of money. The S&P 500 has compounded at 15% for the last ten years which probably isn't sustainable going forward. Some scenarios from Copilot for lower SPY returns;
Where this strategy is willing to deplete, the investor could sell a little to meet the income need and still end up with money left over after ten years even if it is less than the $300,000 they started with. Being willing to deplete all $300,000 in ten years and ending up $125,000 left over seems like a pretty good outcome.
But I think products have figured out how to generate a little more yield than some of these older products. Again I'm not talking about yielding 30% but more like 9-12% even if they might not quite keep up with their distributions. A slow erosion in this context like you see above with XYLD would be fine as opposed to incinerating the NAV of a crazy high yielder in three years. The YieldMax Tesla (TSLY) is down 88% price only in less than four years. That's what I mean by incinerating NAV.
Most of us know about JP Morgan Premium Income (JEPI). It did very well in 2020, 2021 and 2022, it pays out about 8% but on a price basis it has meandered for the last few years. If a higher yielder can generally keep up with its distribution but that's it, that's ok for this purpose. JP Morgan has a similar fund with symbol ROCY which seeks to have distributions be returns of capital which can allow for deferring taxes. ROCY also yields about 8%. JEPI and ROCY have some mechanical differences to look into if this interests you but in terms of the respective portfolios they are different.
I believe owning both inside a domestic equity sleeve would offer some differentiation but ROCY is too new for a backtest to add value. A small slice to autocallables probably fits here. There are risks to these of course to be explored but I don't believe they are obvious NAV incinerators.
A few other yieldy equity funds with a little less yield and that are simpler include YieldMax DDDD which targets twice the yield of SCHD so a little over 6%. There is a fund from Pacer with symbol QDPL that targets 4x the yield of the S&P 500 but has been paying more than that. Some of the newer S&P 500 covered call funds have tended to get better upcapture than the older funds.
On the fixed income front beyond LDDR, I would be inclined to include some catastrophe bonds and a couple of holdings that are less yieldy. Backtesting this isn't that productive but Copilot has thoughts based on the following.
I asked "It is very income centric and looking back for the limited time available it yields about 11% but compounds negatively because LDDR is designed to do so. If we start it today with $450,000 and take out 12%/yr, how much might be left over after ten years if the S&P 500 compounds at 5% and intermediate treasury yields float between 4.5% and 5.5%?"
Short answer:
If your income‑centric portfolio continues to yield ~11% but has slightly negative price return, and you withdraw 12% of the initial balance each year ($54,000), you would likely end up with ~$350k–$420k after 10 years, depending on how much the negative compounding from LDDR drags the total return.
Ok, cut that in half, starting with $450,000 and willing to deplete over ten years but ending up with $175,000-$210,000 would be a very good outcome.
I also input a version without LDDR and asked the same question.
Removing LDDR changes the math dramatically. An 11% cash yield with slightly positive net total return (even +0.10% to +0.30%) turns the portfolio from a “slowly shrinking annuity” into a “nearly self‑funding withdrawal engine.”
With a $450,000 starting value and a fixed $54,000 annual withdrawal, the portfolio is likely to finish year 10 with ~$525k–$600k under realistic assumptions.
The version without LDDR would be more sensitive to equity market changes though. Testfol.io has those numbers even if for just a brief period.
If you sub in ROCY for JEPI, the portfolio would be more tax friendly. SPYI also has some tax advantages as does MSFO. I did not include an autocallable fund but several of them seem to defer taxes as well. LDDR mostly returns capital as you can see and what little income there is should avoid state taxes. If someone wanted to pay no tax now, they could probably cobble enough funds together that return more capital than some of the ones I've used. Closed end funds tend to do that but I think a lot of CEFs and crazy high yielders would increase the sensitivity to broad market declines dramatically.
If markets compound at closer to normal rates, cool but these will not keep up if all the distributions are taken out of the account. Keeping up with the market is not the problem we are trying to solve with this. We are trying to bridge to something like RMDs or just delay taking from a presumably bigger account, the IRA. Maybe this scenario has $800,000 in a rollover IRA that is allowed to grow untouched for ten years. At 5% CAGR for ten years it would grow to $1.3 million and if the CAGR was 10% $2.07 million.
All the better if there is money left over in the bridge account.
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.
