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Long only, bonds, portfolio strategy, dividend investing
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Summary

  • Plan that transition from working for a paycheck to dividend and income generation.
  • The spending estimates generally have held up.
  • The Dividend & Income part meets expectations.

I admit this article is probably a little early for updating the SA crowd on what it's like to be retired but I wanted to describe what my transition was like as well as give everyone an update on the Expense and Dividend & Income part of my plan.

Plan that transition from working for a paycheck to dividend and income generation

The last 4 months in 2013 was a transition period where we stopped employment, went on a one-week trip to the beach (notice I don't have to say vacation anymore), repaired our home, placed the house on the market, and then sold it in one week! (at full price). We closed on said house and moved to our "new" home which we have owned from 2006. We renovated and paid for it with some inheritance money. Additionally we enjoyed one extra month's salary by cashing in unused vacation. By retiring mid-year it made no sense to take any vacation so I sold one month's worth and placed the cash in savings. It was used up just like receiving that September paycheck and took care of one month's bills.

Next came transferring the 401K to the simple IRA. 90% of the 401K was already under my self-direction thanks to a policy change in 2006. Over these last 7 years I had already started working on the income portfolio. The remaining 10% came out after retirement which in my case was Duke Energy stock (NYSE:DUK); wherein I sold all of it and created a cash position inside the IRA which is where the transfers come from. For those of you who enjoy a 401K plan where employers match your contributions, (matches up to 6%) the return on the sale is especially sweet.

Next, I started to think about the 2013 Tax Season. The first glaring realization is that paycheck withholdings in 2013 were really based on a 12-month paycheck plan. What I mean is we file Married Joint with 2 exemptions on all twelve months of pay, but since the checks stopped at 8 months, they withheld too much. When it was all said and done, my refund was $3500 and the state was $1750! (with only the standard deduction). I think that with a bit of planning, you can reduce the withholding in your final employment year, if you care to, and bank the cash. One other self-control feature in being retired is spending tax free money, if you use cash from non-tax sheltered accounts, then delay that distribution from the IRA, in this way you can dial-in the tax bill as needed.

The spending estimates generally have held up

Prior to retiring we estimated the monthly expenses based on 15 years of checkbook stub analysis. My electronic checkbook made the work easy enough and once we settled into a more stable situation, the estimates were about spot on "in total". The one big sticker shock is health insurance; our company sponsored plan costs for 2014 increased to $1600/month…I know don't choke! To compensate for the insurance robbery, a state of residence change cut other insurance premiums by ~45% and by not working there are lower costs for gasoline, clothing, household, electricity use, and other items and the current 6 month average is ~$4970/month. Our original estimates were $5000-6000/mo. and this is nicely on the low end. I'll be honest and let you know that ALL the cash from the sale of our old home went right to the piggy bank. Our present home is modest but paid for…no kids and the in-laws left us some money. Little piggy pays for extras such as my new Silverado and tool shed and will be used for any future outside category expense. We have sufficient cash to weather another 2008-2009 fiasco.

The D and I part meets expectations

I put out investment information in my previous article but only mentioned the types of investments. I will continue to not list (other than Duke Energy) specific companies because I could never satisfy everyone's need to comment on my choices. I will be specific in the types in terms of whether it is a stock, mutual fund, bond, BDC, CEF etc. I will say that many of my selections have come from the articles read here at SA and many thank yous are hereby given. The table below is partial data for 2014, there are a mix of types, and I pack and track them in three categories; Monthly, Quarterly, and Other (either semi or annual) period of dividend/distribution schedules. It makes sense for everyone to look at your income in this way and attempt to keep a stable income flow. And yes there are bond funds listed. I keep my conservative mate happy which in turn keeps me happy, besides they actually do generate Income.

Monthly Payers: 59.5% of portfolio

Investment

Yield On Cost

Monthly Income (Mar '14)

Annual Total
(2014 est.)

Fund - High Yield Bond

4.29

209.33

Fund - Tax Exempt Fed and State - State Issue Bonds

4.31

726.25

Fund - High Yield Bond

5.07

777.90

CEF -Taxable Bond - High Yield Multisector

8.85

250.00

Fund - Multisector Bond

3.59

136.81

Fund - Multisector Bond

4.07

39.60

BDC - Financials

7.11

218.75

BDC - Financials

7.89

135.00

CEF-Taxable Bond - World Bond

7.78

286.50

CEF - Muni Bond - High Yield

8.09

47.50

CEF - US Equity - Utilities

6.59

206.25

3033.89

35,865

Quarterly Payers: 34.3% of portfolio

Investment

Yield On Cost

Last Quarterly Income

Annual Total
(2014 est.)

Stock - Consumer Staples

5.45

1442.10

Don't Ask - it will be gone in 2015 (see below)

1.23

100.07

BDC - Financials

8.54

645.00

Stock - Telecom

5.46

1183.23

CEF - Conservative Allocation for G&I

8.24

390.00

CEF - US Equity - Utilities

7.12

555.00

Stock - Banking

3.34

192.00

Stock - GAS MLP

8.41

218.75

Stock - Tech

3.81

135.00

Stock - Consumer Discretionary

3.86

210.00

Stock - Banking

7.52

75.00

Stock - Financials- insurance

4.32

91.25

Stock - Energy

9.42

1284.36

3200.68

23,162

Other Payers: 6.2% of portfolio

SYMBOL

Yield On Cost*

Annual Total
(DEC '13)

Annual Total
(2014 est.)

Fund - Foreign Large Blend

2.22*

179.30

Fund - Large Blend

11.15*

589.99

Fund - Foreign Large Blend

2.7

373.14

Fund - Small Growth

9.32*

303.59

Fund - Mid-Cap Growth

9.26

450.33

Stock - Utilities

3.32

401.76

Fund - Mid-Cap Value

5.67*

392.66

2,691.04

2,691.04

*Yield includes the year end LT and or ST gains.

So far in 2014 the low month has been $3767 to the March high of $6235…love those quarterly paying peaks. Taking the latest annual dividend estimates I am looking for approximately $62,000 in total deposits. Of this amount 14% is totally tax free by way of a state municipal bond fund. I use it for two reasons: 1. It allows me to control the taxed IRA distribution amounts and 2. It keeps the total taxable income at tax time below the $73,800 income limit which in turn allows for NO FED TAX on LT capital gains. So far in 2014, I have racked up ~$20,000 in gains trying to shed the canners in our joint non-tax sheltered account.

Other information: Excluding the Piggy Bank I am 7% cash in all the IRAs, Roths, and non-taxed accounts. 50% is in the non-taxed and I fund that pile with the totally tax-free state muni bond fund which allows finer control over the IRA distributions. The "DON'T ASK" fund was my wife's from her mom's estate. While it pays next to nothing, it does have a large gain hanging on it so we are slicing it up and selling as fast as the tax pain can be absorbed. BTW if you are in your late 50s to 60s, expect to inherit stuff from the family. In my wife's case she is already forced to withdraw from her mom's IRA due to the age requirement. This can mess up the annual income reported. For us this year, we will withhold enough extra tax to cover some state taxes due.

Summary

  • If you can control the date of retirement and not be thrust into it like some recent SA articles then plan ahead. I started full-time employment when I was 30 and immediately started down a savings path that changed many times. The realization that 55 would come and go and I would have to continue working made me aggressively increase the amount invested to increase the portfolio size in the next 5 years. They say market timing means everything and 2009-2013 was a good time to enter the market, get low YOC stocks, reinvest the dividends and distributions, and continue to max out the 401K contributions.
  • In the first year you no longer work for somebody, know ahead of time what the tax implications will be. In my case Duke Energy informed me of some left over, POST-TAX, cash that would be issued as company stock. Without thinking about it I ask them to sell it and send the check. Well Murphy's Law kicked in and I received a tax statement on the gains of that sale - one day - after filing my 2013 taxes so a second filing was necessary…dang it. I do hate taxes and now keep track of them by using spreadsheets. I have calculations based on 2014 rates and deductions that provide instant updates to my Fed and State liability.
  • For those of you who wonder about this article not discussing the Return, Gain, Future Dividend Growth and Total Return of my portfolio I left out a couple of more items. My former company is holding my "retirement". The cash balance has not yet been rolled into anything. It is growing at the ripe old rate of 3%, compounding monthly, and I plan on using it when and if my current investments fail to meet my needs. The rollover would add 30% to the portfolio for income generation, so much for inflation fears. By law I can wait until 70.5 years old.
  • And lastly let's mention Uncle Sam and our money held in his trust. My Social Security is available in 18 months but I am waiting until 66 which is full retirement. When the checks start coming, my wife and I will receive ~50% of what we currently generate each month. Ask yourself how large your portfolio has to be to receive a $2800/mo. check, let's say an effective YOC of 5.1% and your talking around $650,000! And don't they throw in automatic COLA increases?

Anyways this is the plan. I will provide another update at the end of 2014 specifically addressing the tax issues created or cured this year.

Source: Inside Year 1 In Retirement: Update 1

Additional disclosure: To clarify the "I have no position" statement. Duke Energy is only listed here because I was an employee until I retired. Some of the utility funds may invest in DUK stock, but I am not providing any endorsement of this company as a potential investment.