Q: I will be getting about $129,000 very soon. I need about $1,500 a month for living expenses. Ideally, I'd like to invest the money and just draw off the interest to meet my expenses, but this doesn't seem possible at today's interest rates. What is your advice for how I can invest this money to get the return I need?
A: You are absolutely correct that today's interest rates won't come close to yielding the type of income you want. According to the FDIC, the average rate on savings accounts was just 0.11 percent as of late December. On an investment of $129,000, that would yield only $141.90 in income annually. A five-year CD could get you up over 1 percent, and you could probably add another percent on top of that if you shop for the best CD rates. Still, this would leave you at around $2,580 in annual income, or $215 per month - well short of your goal.
The problem isn't just that interest rates these days are unusually low. Even under normal circumstances, your income target would be overly optimistic. $1,500 a month would come to $18,000 in annual income. That would represent a return of nearly 14 percent on a $129,000 investment. CD rates have rarely been that high, and not since the early 1980s. Even stocks have not generally produced returns of that size, and in any case, a heavy stock allocation is risky when you are withdrawing a significant amount from a portfolio, because withdrawals tend to amplify market volatility.
Under the circumstances, there are two things you should consider:
- Rein in your income expectations, ideally to 5 percent or lower. This would mean $6,450 in annual income from $129,000, or $537.50 per month. Even 5 percent isn't a sure thing, but if you withdraw any more than that you will increase your risk of drawing the principle down over time.
- Try a mix of stocks, bonds, and short-term income securities. You'll want to keep the mix pretty conservative because of your withdrawals, but having some stock representation will give you a shot at earning more than today's low interest rates, and also give you a better chance of keeping up with inflation over time.
It's a shame that you can't count on the level of income you had hoped for, but you are doing the right thing by asking these questions in advance. Too often, people fail to plan for a sustainable level of income, and don't acknowledge the problem until their principle has been dissipated to the point where income production is severely compromised.
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