Q.......
Tom,
I am interested in acquiring the 60 day demo version of the Newport AIM Software, but have a question I'd like you to answer before doing
so.
What impact does a regular, period withdrawal of cash from the AIM
Account have on the overall effectiveness and operation of the system? I can't find any direct references to this situation anywhere on any of the related websites. I am retired and if I use this system to manage my investments, I would want to be able to withdraw a fixed amount from the cash balance each month. What numbers in the overall scheme of things would have to be adjusted as a result of a cash withdrawal?
Thanks, MM
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A..........
Hi MM,
I'm not sure I have enough information to advise you safely here. Mr. Lichello's last edition has a new chapter that discusses income for retirees, but probably falls short of what you need, too. The biggest concern is the depletion of your Purchasing Power at some times and the depletion of your cash for living during others.
Here's what I'm doing. First of all, I designed my home economics in such a way that I knew what my "tight belt" needs are. This is the minimum income from which I can pay all regular bills, buy groceries and pay normal taxes. I then bought into some high yield closed-end bond funds that invest primarily in very long term paper. (current yield is about 9% to 10%) Assuming that the market stinks and I'm not making any other money, the bond funds pay for the basics. I manage these bond funds with AIM the same as everything else but keep a very small Cash Reserve for them - about 10% to 12% max.
Next, for the "growth" side of my portfolio, I use a combination of individual stocks and mutual funds. Each is pretty much set up with its own Cash Reserve. In good market conditions, there's surplus Cash Reserve on hand and it's generating interest income from the Money Market funds. I take ALL income from the Cash Reserve side of my portfolio as income for the household. So, when the market's fat and sassy, my income is enhanced by my fat cash reserves. When the market stinks, I have to fall back on my "tight belt" income base. So far in 12 years, I've not had to sell any equity to cover bills. With some very good luck, I won't ever have to.
If you plan to be taking some of the actual base of your Cash Reserve, it is easily done with Newport as they have a "DEDUCT CASH" option in their TRADE window. However, I think you should plan on a few things in advance. Not knowing how much you are going to need, I can't advise directly, but here's a few thoughts.
- Set up your portfolio to generate as much monthly income as you feel is needed for "tight belt" living. I'd suggest managing long term bond funds with AIM as I am doing. The dividends from the bond funds pay monthly and should help considerably to keep any depletion of principal to a minimum. Any money left over is what you have to invest for growth. This doesn't have to be a huge percentage of the total. After all, it's there basically to cover inflation over a long period of time. So, even if 90% of it is set up for income, that leaves 10% dedicated to growth. If it grows "as advertised", in a few years, it will be a much larger percentage of the total. (If you don't have a large enough base that the bond funds can generate enough income on a monthly basis, then you may have to reduce the amount committed to the bond fund and increase your Cash Reserve for them.)
- "vealies" are probably inappropriate for your situation. Let the Cash Reserve build quickly and as large as AIM will take it. This will provide you with more "interest income" so you won't have to draw as much from your stored "capital gains" Cash Reserve. I'd hate to see you depleting your "purchasing power" by periodic withdrawals over a long, flat market.
- Set up about 1/2 of the equity's Cash Reserve as Money Market Funds and let the remaining amount earn a bit more in a very short term bond fund. This way you will earn a better return on the total Cash Reserve and should have enough for AIM's needs under most conditions.
- Pick from the more conservative growth stock mutual funds that have good long term records (beats the S&P 500 regularly for long periods). You don't need a "growth and income" fund since you already have the "income" side covered with the closed-end bond funds. These will generate more Cash Reserve over time because they tend to have AIM selling and rarely buying. If AIM calls for a BUY in these conservative funds, then the market is heavily discounted. Then, you can make the judgement call as to whether you can "afford" the cash being invested in more equity or not.
I hope these basics will help you in designing your budget and investments. As I'm sure you've discovered, the budgeting of expenses is at least as important as managing your investments. The better we can control expenses, the more surplus we have to invest.
Best regards, Tom |
