| | | The exact sourcing of the income is only relevant for tax purposes. If your 401k generates $140k of income, then you can choose to hold that in the 401k as cash and instead spend the taxable cash. You would still have the same cash (or CDs) buffer, just located in a different account.
I agree that it is helpful to have some set aside for extraordinary expenses. In the hypothetical scenario I laid out, there was still a $65k gap between the $350k cash and the "bridge" need. At a 6% yield, i.e. $140k income from the 401k, that gap would expand to $140k. Still not $350k, of course, but it might be a number that feels comfortable?
The risk of setting the yield too low is that your reserves might drain too quickly. The risk of setting the yield too high is that it may hold back the total return and make the portfolio more vulnerable to inflation. Personal comfort level varies -- the OFP is set at a 7% yield and the account owner is clearly comfortable with that. My personal comfort level declines pretty rapidly beyond 6%.
I don't have a clear sense of the relationship between yield and total return for portfolios like Chowder is describing. He is great about sharing yield numbers, but the total return numbers are harder to figure out. (They are also only truly meaningful over longer periods of time and I don't know if any of the portfolios have been static for a 10 year time frame.) Analyzing my own investments, there seems to be a 2:1 tradeoff between growth and yield in the 1.5% to 3.0% range. I.e. for every 0.5% that the yield increases, the growth rates decline by 1.0% and the expected total return declines by 0.5%. My guess is that this relationship starts to flatten off beyond 3.0% or 3.5%, but I don't have good data to assess that. The relationship may also be very different for CEFs than for conventional dividend stocks.
Health insurance is a real bear... We get insurance through my wife's employer, so it "only" costs about $25k per year (largely covered by the employer), but we may be forced into the MA health care exchange soon (like you I would try to run that through my SBI for the tax savings). Not looking forward to that, though I *think* I've allowed enough space in our budget. Definitely hopeful that our kids will be out of college and on their own insurance by then! |
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