Developing an Income Stream from An Asset

[Packer16]

Wanted to get boards feedback on using a 1 bucket strategy of putting 3 years of expenses in a ST bond fund then put the rest in a risk asset (in the examples mutual funds but could be any find of assets) to generate an income street.  The record since 2000 has been pretty good.  Any suggestions or alternatives would be appreciated.  TIA.

 

Packer

1_bucket.xls

[Uccmal]

Packer, What about taxes?

 

The way I am doing this is to set aside 3 years of living funds in cash. 

 

If the market turns against the greater portfolio I will use the fund.  Otherwise I will keep the fund topped up.  This allows me to smooth it and break market dependence. 

[Packer16]

You are correct.  I will add.  How do you deal with taxes?  Do you buy mainly investments that are capital gains oriented as a result?  TIA

 

Packer

[PJM]

You are correct.  I will add.  How do you deal with taxes?  Do you buy mainly investments that are capital gains oriented as a result?  TIA

 

Packer

 

Similar strategy to Uccmal. I keep cash (term deposits @ 1-2% scattered over a period of time) for 2-3 years of expenses and remaining in risk assets.  I don't believe bonds provide lower risk compared to other risky assets, so am uncomfortable investing in bonds funds (for that matter any type of fund) given the low interest rates.

 

Fortunately I don't have any capital gains/interest income tax in HK, so do not have to worry abt taxes  :)

 

[obtuse_investor]

Very interesting, Packer.

 

I just went through your spreadsheet. It definitely looks like a good set up. I didn't incorporate taxes, but that would be worthwhile exercise.

 

One thought that went through my head was an approach like this should be made "future proof". The best way to do that is to make it "past proof". I wonder if it would survive 1930-1939 like returns. To paraphrase Munger, "tell me where I will die so that I will never go there".

[Uccmal]

You are correct.  I will add.  How do you deal with taxes?  Do you buy mainly investments that are capital gains oriented as a result?  TIA

 

Packer

 

At the moment my gains are all mixed together with my pay check.  So, In Canada your capital gains rate is 50% of your capital gains * your marginal tax rate (say 30%) = 15%.  Once I lose the pay check my capital gains and income (mostly from US and UK dividends) will be used to calculate my marginal tax rate plus interest from cash accounts ( which is zero right now).  The equation is the same.  Since I can manage the capital gains lower by selective trading or buying puts For awhile I should be able to use about 10% as my tax rate. 

 

Using your 140,000 income stream in Can. would cost me 30% on the interest income. Less on the dividends (est. 20%), and 15% on the capital gains.  So my goal for 2015 is to have 60000 from dividends when I dont have a paycheck.  My wife works and we contribute equally to the family.  My tax on 60000 dividends would be very low, contingent again on the total amount of capital gains and income. 

 

For tax and investment reasons I am using a HELOC worth 200 k to smooth my expenses.  I am calling the heloc my 200000 in cash from above.  We can write off debt against investment earnings so here is the final structure: brokerage account generates 30000 dividends today, 200 k HELOC to be used as cash source, and capital gains from investments.  so I need roughly 30 k per year from the Heloc to avoid selling stocks.  In up years it is not an issue.  In down years the Heloc is used to cover the 30 k.  Using debt in this scenario is a non-issue because the house is mostly paid off.  By next year, I will be converting some BAC and AIG to common so my dividends will go up.  Really, I should only need to dip into the Heloc during a market recession, when of course I want to buy stocks rather than sell.  It sets up a firewall. 

 

for 2014:

so: 60000 after tax in expenses

 

30000 in dividends today (pre tax)

Capital gains (0 to 500 k)

Heloc as back up. 

 

2015:

60000 in expenses

 

45000 in dividends?

Cap gains (0 to 500 k)

Heloc as backup.

 

Did that make sense?  I am assuming you are preparing to leave your job, or you wouldn't be setting this up?

 

al

[racemize]

Hi Al, what happens if you pull from the HELOC for multiple years in a row and you have to deal with interest payments?  I guess they aren't enough to be concerned about?