Recession-proof your retirement income

Posted: May 22, 2012 at 2:17 pm

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(MoneyWatch) As a proponent of planning ahead, I've written previously about three strategies you should learn about that will "recession-proof" your retirement paycheck. One of my earlier posts showed how you might have fared if you had used one of these strategies -- drawing down interest and dividends only from a portfolio balanced between stocks and bonds -- during the "lost" decade of 2000 to 2009. Since a few years had passed, I wanted to update that analysis to include 2010 and 2011.

There are two simple, cost-effective ways for you generate a retirement paycheck from interest and dividends on a balanced portfolio. You can invest in one of the following two funds:

- Vanguard's Wellington fund (VWELX), which is invested about 65 percent in stocks and the rest in bonds and cash investments, or

- Vanguard's Wellesley fund (VWINX), which is invested about 40 percent in stocks and the rest in bonds and cash investments.

IRAs and 401(k): 3 ways to generate lifetime retirement income Recession-proof your retirement savings IRA and 401(k): Generate retirement income with just interest and dividends

Of course, there are other low-cost, balanced funds available; most likely your 401(k) plan at work has an investment option that could also could fit the bill.

So let's see how you would have fared if you had invested $200,000 in each of these two funds at the beginning of 2000, and then withdrew just interest and dividends each of the 12 years through the end of 2011.

Vanguard Wellington Fund

By the end of 2011, your initial investment of $200,000 would have grown to $227,266 just on the appreciation of the fund's share price, for a modest total gain of 13.6 percent over the course of 12 years. During your first year -- 2000 -- your interest and dividend payments would have been $7,739, for a yield on investment income of 3.9 percent. Over the next dozen years, you would have received a stream of income with a modest roller-coaster ride, as shown in this graph:

During those 12 years, you also would have received $53,002 in capital gains distributions. You could have used these distributions to boost your retirement savings by the end of 2011 or to fill in the dips in the dividend income stream (or some combination thereof).

The rest is here:
Recession-proof your retirement income

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May 22nd, 2012 at 2:17 pm

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