Coward's Portfolio

[cute fuzzy bunny]

Another interesting chart...

[Sam]

Originally Posted by cute fuzzy bunny

I think an early retiree with a seven figure cash/bond portfolio, using it for expenses, would easily land in the 31% combined tax rate.

I cant imagine the benefits of keeping a lot of cash in a tax deferred account, but i'm sure something can be cobbled up...

Even with a 7 figure portfolio, 31% would be the marginal tax rate. The effective rate would be much lower.

I'm not of fan of keeping cash either. The high 31% rate was common to all investments in that chart.

[cute fuzzy bunny]

Yeah, thats a definite screw up.

Chart was produced by an annuity provider...you'd have thought they'd do better in their sales materials...

Go ahead 2B...slow and right over the plate...

Alright, now that the stock guys and the fixed income guys are done showing off their colorful tail feathers...

What you might consider doing as an actionable item, aside from all the AA posturing, is to shift a small amount...5-10% of something maturing...into a large cap value index fund. Pay you a nice tax friendly dividend, give you a little more upside potential, not much default risk, a little volatility risk that goes away when you get into double digit years invested. When you feel more comfortable with that and feel that equities are reasonably priced, move another 5-10% in. When you feel things are overpriced or you start sleeping badly over it, slide 5-10% back out into cash/bonds.

Another option is to move some of the treasuries into a balanced fund like target retirement income, wellesley, or something similar. That'll broaden your bond exposure and give you some nominal equity exposure.

[Alex]

Originally Posted by Geoffrey

I sincerely appreciate all of the advice. I did leave out a few salient facts. I'm 59 years old, will be entitled to social security, and I'll receive a Government pension somewhere in the neighborhood of 20K per year. I figure I need 55-60K per year, adjusted for inflation to maintain a satisfactory lifestyle. My wife and I have no kids, so no need to leave a large stash for others. Although we could spend our reserves down to zero, I wouldn't want to do so simply because I've never felt comfortable without a sizeable cushion -- call it the squirrel reflex. Ideally, I'd like our savings to generate somewhere between 35 and 40K per year, even though (with my pension and SS, I could probably get by with less). Given savings of approximately $1.33M, my question boils down to this -- what is the safest way to generate 35-40K per year, again adjusted for inflation. Or, what's the ultimate coward's portfolio for someone looking to beat money market returns, but doesn't have the stomach for very much risk.

Geoffrey, I think you are in great financial shape based upon your income needs, congratulations! In the past the lowest risk strategy is to have at least 20% of your stash in equities. This lowers your risk and increases your returns, improving your odds of keeping pace with inflation over the years of your retirement. Now, a few of the other members here have suggested that you do nothing, if that makes you feel better, then go ahead and do that. You'll probably be OK with that strategy. Personally, I prefer the lowest risk and highest potential return. To do that, you need diversification into multiple asset classes.

PS - if you elect to diversify, which I highly recommend, I would use Vanguard's Total Stock Index Fund or ETF (75%), and Vanguards FTSE ex-usa Index or ETF (25%). this gives you broad diversification at very low cost.

[modhatter]

A conservative approach to investing a portion of your portfolio in stocks would be to buy Dividend stock funds like DVY. They throw off dividend income in the 3.50% range now, and higher should the value drop. They generally don't decline as much in a down market due to the higher dividends, and you will always have income from them, and never have to sell them to produce income for yourself.

You generally lose money in stocks when you have to sell them for income when in a down (bear market) With a higher dividend stock index fund, you would not have to do this. So you could split up your portfolio into Tips, maybe a mix of some reits and bonds, as well as your CD's. Have to be careful though, or you'll have to much income and owe to much in taxes.

If I were you, especially with a pension, I would think about using Ray Lucia's Buckets of money approach. Very conservative. He has a book out called Buckets of Money.

[ats5g]

Originally Posted by Geoffrey

I sincerely appreciate all of the advice. I did leave out a few salient facts. I'm 59 years old, will be entitled to social security, and I'll receive a Government pension somewhere in the neighborhood of 20K per year. I figure I need 55-60K per year, adjusted for inflation to maintain a satisfactory lifestyle. My wife and I have no kids, so no need to leave a large stash for others. Although we could spend our reserves down to zero, I wouldn't want to do so simply because I've never felt comfortable without a sizeable cushion -- call it the squirrel reflex. Ideally, I'd like our savings to generate somewhere between 35 and 40K per year, even though (with my pension and SS, I could probably get by with less). Given savings of approximately $1.33M, my question boils down to this -- what is the safest way to generate 35-40K per year, again adjusted for inflation. Or, what's the ultimate coward's portfolio for someone looking to beat money market returns, but doesn't have the stomach for very much risk.

Goeffrey,

I guess I'm a little late to the party, but I thought I'd post some additional thoughts [in no particular order].

I think you need to decide what your risks are. As Nords so eloquently pointed out with his in-laws example, one of the risks of a all MM, short term CD's, or short term bond portfolio is income risk. This is the risk that your income will decline. Remember that income from MM and ST bonds is much more volatile than longer term bonds, which just lock in income/yields for longer periods of time and decline/increase slower than those of MM and ST bonds.

And like any retiree you've got inflation risk, which is partially mitigated by your FERS annuity and SS.

Since you've got a whole bunch of savings bonds already, you probably have a Treasury Direct account, in which you can buy 2, 5 + 10 year nominal T-notes, and 5, 10, + 20 year TIPS. And it is all for free if you buy them at auction.

Using slightly longer term nominal T-notes [like 5 + 10 yr] and longer term TIPS [5,10,+20 years], you could better hedge income and inflation risk without sacrificing credit quality/risk or increasing expenses. This could be an improvement over an all MM/CD portfolio.

I'd keep that G fund for as long as possible as well. If you do decide to do any stock investing, I'd do it in your taxable account not in the TSP. Better tax advantages for stocks: lower capital gains and dividend taxes, and ability to take capital losses when they occur.

Chances are that you've got rather old I bonds and EE bonds with attractive yields, like near 3% real yields on I bonds. I'd definitely keep those for a long time since you're getting anywhere from 2-4% real compounding tax deferred. Kind of like a zero coupon, tax deferred TIPS.

Another idea is to run some scenarios in Firecalc. You can do things like see if just increasing your stock allocation from 0 to 10 or 20% would increase your portfolio survivability substantially. Looks like it could. You can also see if delaying taking SS would increase portfolio survivability. You can use the SSA's SS Benefit Calculator to get your monthly PIA at various ages and the plug those $$'s and ages into Firecalc.

I realize than many ER's favor a stock heavy portfolio, but given TIPS creaping up to 2.80% real and an expected stock return of say 3-4% real, I find it rather hard to recommend large stock allocations. But that's just me.

Also, is there a reason you have a brokerage acct. Unless you're buying stocks/bonds on the secondary markets [NYSE, NASDAQ, OTC, etc.], you can probably do most of your investing directly through the Treasury or someplace like Vanguard without transaction fees for higher MM yields, ST bond funds, and tax efficient equity funds.

- Alec

[riskaverse]

Interesting post Geoffrey. Understand you are not alone in your dilemma.

[blade3colorado]

Agree with R. Wood - what is your age? How many years of Fed service? CSRS or FERS retirement? Grade? In short, if you are a high graded CSRS w/pension versus a FERS retiree, then everything else is gravy. Bottom line is that you have done extremely well with the conservative approach . . . Hmm, just imagine if you had invested in the TSP C, S, and/or I funds . . . WOWZA! Take care.