Copyright 2019 Tom Madell, PhD, Publisher
Dec 2019. Published Dec 2, 2019.

How I Achieved a Noteworthy Retirement Income Solely with Mutual Funds

How many people are able to leave the working world with a continuing "retirement salary," and additionally, one that exceeds the highest salary they earned while still working? I would guess that very few have accomplished this and most, especially if still working, would be interested in how they too might be able to accomplish this. (I call my after-retirement income my "retirement salary" because I had to earn it by learning how to invest in mutual funds and/or ETFs and how to continue to keep that stream of income viable.)

My Newsletters published online going back 20 years, have described many of the investment strategies which enabled me to do just that. But in this month's article, I will provide a little more details on how I was able to achieve it.

A little background: I am a well-educated, 75 year old male who chose to work in occupations not particularly known for high salaries, namely a counselor, teacher, and writer. Further, having attended school for so long, my cumulative yearly contributions to Social Security were often less than many peoples'. Additionally I retired at age 57 further limiting my eventual Social Security payout. Further, early on, I changed jobs a lot, preventing me from receiving a pension from any of them. (Of course, nowadays people receiving a pension are a vanishing breed. But this article will exclude counting Social Security as part of my retirement salary.)

So how was I able to achieve an impressive income in retirement solely from my mutual fund investments and why do I think most "ordinary" (not necessarily high salaried) individuals can do the same? To retire early and never earn a penny after, and excluding Social Security, I would have to live solely off of any investments I had made during my working years.)

Note: This article is not about investing primarily for income, but instead, for total return, that is, annual gains which include both dividends and growth of the value of the investment But there is no reason why one can't convert investment gains to income merely by withdrawing whatever amount you wish from funds as you go.)

This all started when I was about 40. Up to that point, sure, I had some small bank savings and an IRA that that was pretty modest too, but nothing invested "for real," that is, in mutual funds, stocks, or even a home of my own.

Exactly how my metamorphosis into an investor occurred is hard to recount but it was at least partly brought on upon taking a job that had a retirement-oriented benefit, namely, setting aside a small portion of salary into a limited number of investment choices, some of which could be invested in mutual fund-like accounts. As I recall, it was mandatory but did seem like a good idea so I started slowly to dip a toe into the world of real investing, not just CDs or money market accounts as before.

In those days, I came into some free time, having just gotten a divorce, so I decided to read up on and subsequently also invest in my own non-retirement mutual fund accounts.

My newly established investing was going smoothly for a while, but unfortunately, it turned out that my timing was bad. The stock market soon after crashed in 1987 and I had to re-assess my commitment to stock funds. And then again, a short number of years later, there was a severe bear market crimping my newfound attraction to fund investing altogether. Fortunately, being well-diversified, my losses, while not trivial, were not large enough to totally discourage me and so I continued to invest any extra money in both stock and bond funds.

Subsequent jobs all enabled retirement fund investing and I continued to take advantage of these benefits as well as additional investments on my own and in a 401(k) and my IRA, including eventually a Roth IRA.

What started as relatively small investments which I didn't miss too much, began to grow slowly but surely down through the years. In fact, in the remainder of this article, I will show you how these investments enabled me to earn a surprisingly high "income" over the upcoming years. (I put income in quotes because technically not all of the my gains came as "income" since some of it was earned in my still open retirement accounts which remained untouched and tax-deferred until any actual withdrawal was necessary as a Required Minimum Distribution or needed to pay my current expenses.)

I will only reveal that my yearly "income" (as defined above) is quite substantial. But considering I have not earned anything in the working world since I retired in 2001 and have no other source of income other than my investments, I am sure such an accomplishment can be regarded as rare.

I already have shown in prior Newsletters those particular funds that have grown to be my largest holdings (see the Jan. 2019 and Oct. 2019 Newsletters). But now, to give an idea how these holdings have enabled me to have a retirement free of money worries, here is but one example of the many fund investments I made a number of years ago and how the majority have grown. Of course, not all of my fund investments have done nearly as well. In fact, some did lose money to the point that I closed the investment down. But given time, most fund investments should be able to bounce back unless they are poorly managed or so non-diversified that they have put too much weight into a sector that is failing.

Watch the Money Grow

I began investing in a fund that only invested in growth stocks back in 2005. Quite frankly, before then I might have regarded such a fund as too risky. So let's look at how my first investment in the fund of less than $3000 has grown between then and now. The table shows my actual account history taken from the fund's website.

   Year    Year End Value
of Account
Amount Invested
During the Year
Amount Withdrawn
During the Year
2005 2955 2985 7
2006 8524 5000 68
2007 14,484 9938 4982
2008 11,406 3000 124
2009 22,193 6250 182
2010 31,918 5000
2011 37,468 5000
2012 43,843
2013 57,451 546
2014 64,447 778
2015 65,732 858
2016 68,780 955
2017 86,830 993
2018 82,927 1088
2019 109,525 752
Note: 2019 amounts thru 11-30

Through 2008, my investments in the fund were actually losing money, thanks to the 2007-2009 bear market. But, I continued puttting money in the fund through 2011, mainly made possible by exchanges from my other fund accounts. Since then, I haven't invested any more in the fund. If one adds the total amount invested it comes to 37,173, or about 5300 per year if averaged over the first 7 years. Through 11-30-19, the account is now worth 109,525, or nearly 3 times the amount invested. Additionally, 11,334 was redeemed, bringing the total current "worth" of the investment to 120,859.

You might wonder which fund this was. It is Vanguard Growth Index Investor (VIGRX), one of my 13 currently recommended stock funds (The fund is now VIGAX which is the same fund but converted to Admiral shares.)

Of course, there are very few guarantees that VIGAX will continue its outstanding multi-year performance, as even the best past track record is susceptible to the kind of sell-offs we have had several times since 1986. However, if you are willing to participate to at least some degree with at least some of your money, past history suggests that eventually you will be rewarded. It should be noted too that when investing in stock funds, especially aggressive ones, there likely will be stretches when you won't be able to count on a positive return. That's one reason one should always be well diversified, enabling one to have an alternate source of income from other sources (e.g. bond funds and money market funds) when stock funds don't deliver.

Lessons Learned

-Don't be afraid of investing; it is your best path toward a retirement free of money worries.

-Don't be too afraid of market setbacks or even crashes; if you have enough time ahead of you, the market has always come back and gone on to further reward the holders of reasonably well-diversified ETFs and mutual funds.

-Invest the maximum you are able to in both non-retirement and tax-deferred retirement accounts, if possible; having non-retirement accounts gives you the ability to withdraw funds when necessary while retirement accounts can grow money without taxes and enable you to perform exchanges at appropriate times without incurring capital gains taxes.

-Maintain awareness for the opportunity to transfer funds into stocks in the event of a market setback.

-No one is "all knowing, all seeing." Therefore, swallow your pride and be willing to close out an investment if it is poorly performing for too long. Of course, if the entire market is doing badly, one cannot blame an individual fund unless it is doing significantly worse than market averages.


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