Aspiring to a 4% withdrawal rate means you will work too long!

music selection:  “Drones” — Rise Against

weigh-in:  211.4 (1.8)

It is very possible to double the normal withdrawal rate of the Trinity study with active portfolio management.  This trick can add several years to an early retirement.  I’m going to review my approach to a high income early retirement.

There is an asset class that can be purchased below its market value and typically yields over 10% a year.  This is the Closed End Fun (CEF).  These funds have a fixed number of shares and trade freely on the market.  Market sentiment can send them to a premium to the underlying net asset value but often sends them to a discount.  You want to buy when they sell at a discount.  I sometimes sell if a holding later trades for a premium.  A couple examples are Virtus Global Multi Sector (VGI) and Calamos Global Dynamic Income (CHW).  VGI sells for a discount to NAV of 7.73% and yields 11.88%.  CHW trades for a discount to NAV of 10.07% and yields 11.07%.  With yields over 11%, you can withdraw 8% annually and still have some wiggle room to buy more shares to stay ahead of inflation.

There is a second asset class, when bought right, leads to long term gains in the 15% range.  This is insurance companies with long histories of profitable underwriting.  Underwriting is measured by the “combined ratio” with a ratio below 100 indicating profitable underwriting.  Since cash is collected upfront and claims are (sometimes) paid later, the insurance companies can invest this money in the interim for bonus return.  This “float” is a source of leverage with a negative interest rate when underwritten profitably.  There are several elite insurance companies that regularly produce a combined ratio around 90.  AFG, WRB, TRV, and AXS are good examples of insurance companies with at least 40 quarters of profitable underwriting.  These can be powerful wealth compounders when bought at fair valuation.  Don’t pay more than 1.3 times book value.  Long term returns in the 15% range give you a big edge over the long term return of the broad US market which historically around 9%.  A good book about the power of this strategy is “The Davis Dynasty.

A third asset class that can provide income in retirement is high yield stocks.  I like MLPs, REITs, and BDCs for this part of my portfolio.  Each of these use a legal organization that exempts them from federal taxes if they pay out substantially all of their cash profits as distributions to shareholders.  The result is sectors that yield over 10% in many cases.  You can live on the distributions at an 8% rate and still have some left over to grow your wealth for future years.

The final asset class that lets you manage a higher than conventional withdrawal rate is, of course, options.  A lot of people think options investing is risky (and it can be when done wrong).  At the raptor, we SELL options.   Usually I write puts on companies I’d be happy to own at the strike price so I have limited downside when a trade goes against me.  Lately, I’ve done very well by writing options on the third asset class above.  Assignment means taking on a high yield underlying that can be held for a long period of time without being a drag on returns.  Covered calls can juice returns.  I target a minimum of 12% annualized for written puts but frequently do much better.  The average for written puts I currently have open at the 17FEB2017 expiry is 28%.  This is clearly a larger number than 8% and especially more than the conventional 4% number that is generally considered safe for retirees.

I hope there is someone out there that finds this useful and is able to retire sooner.

Devour your prey raptors!





The 8 percent safe withdrawal rate

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18 thoughts on “The 8 percent safe withdrawal rate

  • February 14, 2017 at 3:04 am

    I’m curious about whether discounted CEFs offer downside protection in a bear market too. I.e. if I buy $100 worth of CEF assets for $90, and the value of those assets declines 10%, should I expect my CEF to sell for $80 ($10 discount), or $81 (10% discount)?

    • February 14, 2017 at 2:31 pm

      The discounts float with market sentiment. It isn’t a static number. Sometimes the spread gets wider and sometimes it moves to a premium.

  • February 14, 2017 at 7:58 am

    Hey FV,

    As you know I’ve started using options a lot since I had a bunch of free capital come my way via a 401k rollover. I’m trying to see what some other peoples approaches are to options specifically as an income supplement/replacement. Do you primarily just sell a put option on a company you like as long as it meets the minimum return? Also do you use spreads to limit the capital exposure or typically just single puts? Do you stick with a general DTE and delta (say 30-45 days & -30) or does it fluctuate depending on your view of fair value for the company?

    • February 14, 2017 at 2:33 pm


      I usually just write a simple cash secured put. I used to do spreads but it just seemed like too much trouble. For expiry, I like 6 weeks out (8 weeks if there is no weeklies on offer). Six weeks is the sweet spot where time decay starts to accelerate and boosts your gains.

  • February 14, 2017 at 4:36 pm

    What’s your thinking for rebalancing or shifting your CEF allocation?

    Do you just close a position when it’s at a premium and you spot another CEF at a discount? Or do you just take distributions use some of the proceeds to buy CEFs at a discount?

    • February 14, 2017 at 5:46 pm


      There is always something in the CEF space trading at a discount. It is pretty easy to roll out of something you take profits on into something that is attractively priced. Discounts can persist for years though so don’t expect to do much rolling.

      • February 14, 2017 at 6:16 pm

        Would you actively close out of a position like JRO now trading at a 7.43% premium (6.72% yield on market, ~cost basis at 10% discount to nav; yielding ~8.05% to cost basis) for something like BTZ (discount at -9.83% to nav, yielding 6.5% to market) or PCI (discounted -2.98%, yielding 9.16% to market)?

        Personally, BTZ doesn’t seem particularly appealing (and has under performed as a separate play), though “return to NAV” could be an argument for return – I do see that you just said this could take years, so I’m guessing you’d agree against it?

        PCI however, despite the relatively small discount, does have some appeal for capturing the capital appreciation.

        Does the difference lie in taxes? Currently, JRO would qualify as a short-term gain here (and I’d personally be exposed at the higher rate). Roughly 6 months holding.

        Just looking to see what your thought process might be for analyzing something like this.

        I provided those examples as personally I use CEF as part of a bond/cash exposure, and typically seek to avoid equity or alternate exposure in these allocations, and the return numbers for these types of funds are obviously a bit different than CHW or VGI.

        • February 14, 2017 at 9:12 pm

          JRO is one of my holdings that I’m considering flipping. It is a little different in that I’m holding it for exposure to variable interest rates, e.g. a hedge against rising interest rates. I’m not ready to sell just yet (and my long term capital gain would be less than 5%). Taxes are certainly a consideration if you are holding in a taxable account. Holding for a few months more to get long term treatment can be worthwhile as any discount or premium is likely to persist for several months.

          CEFs are a good place for your bond/fixed income allocation because you usually get access to some low cost leverage.

          It is hard to find CEFs that are up versus their inception price right now as so many are deeply invested in debt in what has been a falling interest rate environment. Bonds have just been generally less attractive to the public when dividend yields are often higher.

          The main thing is efficient market hypothesis says these funds trading at a discount must “revert to the mean”. It often takes a long time but you can pick up some easy money while earning good yields while you wait. So you always have to weigh the yield you are giving up. It is an opportunity cost. Not so much of a problem if you can replace it with something else with a similar yield. Hope this helps.

          • February 15, 2017 at 3:23 am


  • February 15, 2017 at 5:37 pm

    I think your strategy is great and I am doing the same thing in order to retire earlier. I have never done any options trading, but using cash covered puts for something I wouldn’t mind owning anyway, is something I’ve considered doing for a while.

    I love CEFs. They are nearly perfect investment tools for me. I always buy in at a descent discount and I now have a really nice income floor ($20k ish) built up in my brokerage account using PKO, DSL, UTG, PDT, and HTD. The way I see it, PHO and DSL distributions will probably decline gradually over time, while UTG/PDT/HTD will gradually raise distributions. So this should create pretty reliable income floor from here on out.

    New money has been going into VTMFX as I’m not sure what I want to do next. Maybe add AMLP or AMZA for MLPs, or maybe buy some individual MLPs. Another option would be to buy some Equity-Option CEFs. I will probably stay away from REITs and BDCs for now as I’m already getting screwed on taxes enough. The MLPs and Option CEFs should be pretty tax efficient with how much ROC makes up the distributions.

    I thought about switching out PKO and DSL, for muni bond funds, but even with the taxes they still have a higher total return than any muni CEFs I’ve looked at. So not worth it to trade them out yet. PKO is at a premium now. So I have been looking hard at getting rid of it, but its hard to give up a PIMCO CEF that I was actually able to buy into at a good discount. The PIMCO CEFs do seem to have better total returns than other fixed income options I have seen. So people keep bidding them up to a premium.

    • February 16, 2017 at 1:03 am

      Thanks Chomper. Building an income floor is the way to go. Your withdrawal rate really doesn’t matter if you aren’t eating into equity. Sounds like you have a good plan and will retire early soon.

  • February 16, 2017 at 3:20 pm

    Great post. I do not know if you have ever heard of Seth Klarman of the Beaupost group. He wrote Margin of Safety in the early ’90s in which he described places where a ‘thoughtful investor’ could achieve higher than average returns. The book got rare and sells for a lot of money now (I ‘found’ a free pdf-copy). Your post is better in my opinion! Never thought about CEF before I started following you, and then this article about BIF (how to get Berkshire at a discount) in Forbes really convinced me to start paying more attention to them:
    For writing covered puts, coca-cola is in my opinion almost at a perfect spot to start writing covered puts at strike 40 …

    • February 16, 2017 at 4:11 pm

      Thanks for the kind words! I’ve certainly heard of Klarman. He and Greenblatt are masters of the game.

      KO is a solid company and usually has decent options premiums. It is challenged by recent health consciousness and backlash against sugar but it is nimbly diversifying into alternative products. And it still gushes free cash flow. I think you will do well.

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  • February 16, 2017 at 5:31 pm

    All CEFs should trade at a discount because, compared to buying the assets outright, you are buying them inside a package that costs rents – usually 1-2% a year. That is, the assets are encumbered once they’re trapped in the fund.

    A package guaranteed to earn 1-2% less than its assets (with no risk reduction compared to the assets themselves) should sell for at least 5-10% less than the assets themselves (the discounted time value of the fees). You would rather own VTI directly than own a share of my CEF containing VTI shares and charging you 1% rent.

    In practice though, CEFs could save aggressive individual investors money by having a lower cost of borrowed capital for leverage or by executing options strategies more professionally. Of course, these strategies add risk, and to do that you always have the simpler option of increasing portfolio beta (e.g. small caps instead of large).

    I don’t count discount-driven higher dividends as one of the benefits though, because they are offset by lower capital gains potential due to the fees. E.g. as the assets appreciate, that 1.5% fee becomes a bigger cost and reduces your CEF’s resale value by a greater cash amount over time, even if the discount % stays the same. It’s just a standard dividend vs appreciation tradeoff. No new capital is produced in that tradeoff.

    Nonetheless, I’m looking at leveraged and option CEFs as an alternative to inefficiently managing those things myself. I’ll always overshoot a fund’s expenses by getting myself a HELOC or paying transaction costs.

    • February 16, 2017 at 7:45 pm

      All good points Chris B. The overall strategy of an income centric portfolio whether it is with high yield equities, CEFs, or options trading isn’t necessarily to beat the market. It is to front load returns to eliminate sequence of returns risk and thus allow a higher safe withdrawal rate. I don’t expect my CEFs to beat the market long term at all. I do expect to get paid up front though!

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  • November 16, 2017 at 3:44 pm

    The most straightforward exemplar of this strategy is BXMX — a closed end fund run by Nuveen which invests in the S&P 500 index and then executes an options strategy around its holdings, with the idea of maintaining a stable share price while spinning out 6.5% to 7.5% annual distributions; basically, turning all the growth into income at a fairly smooth rate.

    If you peruse Nuveen’s literature and published performance data, you’ll find that buying, holding and reinvesting dividends from BXMX long term yields virtually the same returns as the S&P 500 Total Return index (which equates to buy, hold and reinvest the dividends in the underlying stocks), so the concept validates — even through the effects of the 2009 downturn. The BXMX nominal share price did get a bit clobbered in that downturn, but it has been remarkably stable since then and the total return comparison was not thrown off by the crash.

    The apples-to-oranges piece, however, is inflation adjustment: The traditional Trinity withdrawal strategy is 4% of your retirement portfolio in Year One, with that dollar amount indexed up for inflation every year thereafter, without regard to portfolio value. Using a stylized “buy BXMX and spend all the dividends” withdrawal strategy, by contrast, equates to setting the withdrawal rate at 7% of the Year One portfolio value and never giving yourself a raise. At some points the lines cross — in nominal terms, the BXMX strategy results in a straight line while the Trinity strategy starts lower and progresses higher, at some point crossing the BXMX line. In real terms, the Trinity strategy results in a straight line at a medium level, while the BXMX strategy results in a descending line, starting high and dropping over time, at some point crossing the Trinity line. I don’t think you can start with 7% or 8% *and* give yourself annual raises to keep up with inflation, unless you have some serious pretensions to beating the market.

    I still think you can build some good strategies around these instruments, though: Every year examine recent CPI data, skim the inflation amount off the top of the dividend payout, reinvest the inflation amount in more BXMX, and reap higher payouts next year. It turns a ~7% payout into a ~5% payout or something, in recent years, but provides nominal growth over time. Or set a target allocation of something like 50% VTI and 50% BXMX and spend all the dividends each year, rebalancing from time to time to keep that balance (most years, this will involve selling some low-yield VTI and buying additional shares of higher-yielding BXMX, which will spin out more dividends in subsequent years) — that should give you a withdrawal rate of something like 4.5% of the Year One portfolio that rises automatically over the long term.

    Basically, the opportunity to even-out sequence of returns risk without having to load up on low yielding bonds probably gives you an extra point or something on your safe withdrawal rate over the Trinity strategy, which is a big deal. Probabilistically, you can view this as stealing from those Trinity scenarios in which you die at age 95 a rich man, even if starting with a 5% of Year One withdrawal rate, having doubled your Year One portfolio despite all the withdrawals because of a good sequence of returns, and donating the difference (after deducting 75 bps a year in expenses, above the cost of an index fund, payable to Nuveen) to those Trinity scenarios in which you would bottom out after 20 years if you start at 5% of the Year One portfolio, because of a bad sequence of returns.

    Finally, for people contemplating (semi-)early retirement, spending a flat 7% of Year One portfolio every year might make sense if a good-sized social security or pension payout is in expected in the medium term future. Someone age 60 who expects to take social security at age 70 might not feel that pressed by inflation in just a decade, or might be willing to spend down a bit of principal in the last couple of years, knowing that yearly income will get a good-sized (inflation-indexed) boost once those social security payments kick in. Something like BXMX can probably help such a person execute on such a strategy and sleep soundly at night, sidestepping some sequence of returns risks.


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