How to invest long term wealth?

[thtocn]

Our big question is how to invest our long term wealth of 1.2 million to get us to age 80. We also have 500k for living 5years which includes emergency funds. We have never invested in anything other than stocks (individual stocks, stock ETFs and stock mutual funds) which is not conservative.

1. My spouse and I would like to retire this year in November 2016. We are both age 55 at that retirement date.
2. We would like to plan for conservative model.
3. We have 500k we plan to invest in to live on for 5 years. (e.g money markets and CDs)
4. We have zero debt
5. Been tracking budget for 5 years.
6. We do not own a home or real estate nor any other significant asset to sale.
7. We are planning to live overseas in Asia or South America to significantly lower our expenses.
8. Expenses overseas we estimate to not exceed $85k per year.
9. Planning to collect Social security at age 62 ½. – 40k/year total
10. Have pension value of 12k per year for life at 62 (does not rise with inflation)
11. No children and no inheritance and not planning to leave any

Thanks ahead of time for your help!!!

 

[CaliKid]

Since you don't have kids or concern for inheritance I would strongly consider some life only annuities. It's the surest way to maximize what is there for YOUR lifetimes. Any other investment you are guessing; might live to 65 and might live to 115. Thus, with any other investment, you could die early with a ton in the bank or run out of money at old age. In limited circumstances, like yours, I think annuities make sense. Also, I would not listen to the annuity salesperson who probably want you to buy it with one company. I would spread the risk over several companies myself.

Congrats and good luck!

 

[MBAustin]

Welcome, thtocn!

Have you modeled different scenarios of asset allocations in a calculator such as FIREcalc?

Most folks here would recommend a balanced allocation in low-expense mutual funds and/or ETFs. Since you aren't looking to leave an inheritance, a longevity annuity might also be something to consider: https://www.kitces.com/blog/calculating-longevity-insurance-rates-a-longevity-annuity-comparison-to-stock-and-bond-returns/

Also, we have a helpful list of questions to consider as you are approaching your target retirement date in a few months:
http://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

 

[DrRoy]

I am considering similar issues. At present, I am moving some funds from equities to A and BBB rated intermediate term individual bonds, some corporate and some muni. I will also look into preferred stock and closed end income funds.

 

[thtocn]

Appreciate the responses

Hi,

To all: Thanks for the advice!

To MBAustin -I have used Firecalc and it's calculations seem to work out always about 95-98%. The other links are helpful also.

To DrRoy: I suppose you mean purchasing individual bonds. Do you us a tool tool that helps evaluate whether the companies can fulfill their repayment or use the tripe AAA, BBB etc ratings only?

To Calikid: I will look into annuities and nice idea to spread among insurance companies.

 

[travelover]

Since you don't have kids or concern for inheritance I would strongly consider some life only annuities.............

 

[pb4uski]

+1 here... not a fan of annuities.

I'm surprised that Firecalc only worked out to be 95-98%, given what you said I would think it would be over 100%at $85k a year.

Are these monies taxable, tax-deferred, tax-free or a mix? That makes a difference in what you invest in if you care about tax efficiency. It also has implication on any repositioning that you might do.

Your huge cash position hurts you a lot. Most age 55 retirees would be anywhere from 40/60 to 60/40 stocks/bonds but some may be more or less. If your funds are all taxable or tax-deferred or you don't ace much about tax efficiency then Wellington or a good balanced or target retirement fund might work well for you.

 

[thtocn]

+1 here... not a fan of annuities.

I'm surprised that Firecalc only worked out to be 95-98%, given what you said I would think it would be over 100%at $85k a year.

Are these monies taxable, tax-deferred, tax-free or a mix? That makes a difference in what you invest in if you care about tax efficiency. It also has implication on any repositioning that you might do.

Your huge cash position hurts you a lot. Most age 55 retirees would be anywhere from 40/60 to 60/40 stocks/bonds but some may be more or less. If your funds are all taxable or tax-deferred or you don't ace much about tax efficiency then Wellington or a good balanced or target retirement fund might work well for you.

Money is mix 1/3 taxable (which will be needed for the first 5-6 years) and the remain 2/3 tax deferred. I've never heard of Wellington but will look up thanks. Also interesting about target funds because so far I haven't read anything too good about them except for younger folks just getting started.

I will run firecalc again because may I didn't do it properly.

 

[DrRoy]

To DrRoy: I suppose you mean purchasing individual bonds. Do you us a tool tool that helps evaluate whether the companies can fulfill their repayment or use the tripe AAA, BBB etc ratings only?

I take a look at the fundamentals of the company, the stock performance, and the estimates of future earnings.

 

[samclem]

I'm not sure I understand the artificial distinction of the <5 year money and the >5 year money. It's one pot, and managing it that way can have important benefits. It's okay if you want to have a higher cash/bond allocation now and go to slightly higher equities later (to reduce "sequence of returns" risk), but doing it smoothly makes more sense than having an artificial distinction.

Observations:
1) Longevity risk (outliving your assets, especially if we have a long period of low returns on assets) is a problem most of us are concerned about, and risk to you. The cheapest and most secure way to buy an inflation-protected (well, US inflation--move overseas and you could be in for a much different ride) monthly check that you cannot outlive is to delay taking your social security until at least your full retirement age, and waiting longer increases the check even more. There's not universal agreement on this point, but you should definitely explore this and understand what you are giving up by claiming SS before full retirement age. This is much more cost effecive than buying any commercial annuity product. There are many good threads on this forum on this subject.
2) If you do decide that you want annuities (I'm not generally a fan due to the high costs and loss of flexibility), you should strongly consider spreading this purchase out over several companies >and< over time. We are at historically low interest rates now, and it makes annuities very expensive for what you get. Delaying the purchase entirely until rates improve, or at least spreading the purchase over many years may significantly increase the size of your monthly checks. But, again, I wouldn't buy annuities for a long time, if at all.
3) In your shoes, I'd build a simple asset allocation of very low-cost mutual funds or ETFs. I'd put about 1/2 in stocks and 1/2 in bonds (or CDs right now, as bonds are not paying much at all). Every year I'd rebalance, buying stocks when they go down, selling when they have gone up to maintain the 50/50 allocation. There are some small tricks about doing this in a tax-efficient way, and you should read a few of the books recommended in the FAQ section until you are comfortable. There's also the option of using a Target Date fund or other balanced product that will handle all of the rebalancing for you. Don't rush into anything--read here, on the Bogleheads site, and do NOT waste your money on a financial advisor until you at least know enough to make it worth the money and have found a fee-only advisor who will not take a huge hunk of your pile. If you do move overseas, this will change the investments that you can choose from and introduce some complexities in your financial affairs--nothing insurmountable, but you should plan ahead so you don't get invested in the wrong thing and have to sell, with tax consequences.

 

[pb4uski]

+1 with all that samclem said, especially on deferring SS... in effect buying a very cheap inflation adjusted annuity and doing it yourself and not letting an FA get their grubby hands on your hard earned money.

 

[CaliKid]

+1 here... not a fan of annuities.

Let me clearly state I don't sell annuities and have no personal interest. My point is that when you don't have any need or desire to die with any money a life only annuity is BY FAR the best option. There is no other option to MAXIMIZE what you can spend every month you live and never worry about running out of money. If I didn't have kids I would put 80% in annuities. You can firecalc, spend 4%, blah, blah, blah but in the end there is always the risk of running out of money but NOT with the annuities. I think annuities are wrong for a lot of people but they are not wrong for all people.

 

[eta2020]

You can firecalc, spend 4%, blah, blah, blah but in the end there is always the risk of running out of money but NOT with the annuities.

I wonder what would happen to Immediate Fixed Annuity during 10 year period of 5% annual nflation

1000 bucks in 1970 bought what 2123 bucks bought on 1980.

 

[CaliKid]

I wonder what would happen to Immediate Fixed Annuity during 10 year period of 5% annual nflation

I am 99% sure they are inflation protected. It's like creating a pension for yourself.

 

[pb4uski]

While it is true that you will still receive annuity benefits, the problem is that the spending power of those benefits becomes less and less and there are few COLAed annuity alternative available. If one doesn't want or need to leave a legacy I can see possibly buying an annuity, but not at 55 years old and not with interest rates this low.

 

[pb4uski]

I am 99% sure they are inflation protected. It's like creating a pension for yourself.

Better rethink that...most annuities are fixed payments... very few have benefits that increase with inflation like SS does which is why deferring SS is the equivalent of buying an inflation adjusted annuity.

 

[samclem]

You can firecalc, spend 4%, blah, blah, blah but in the end there is always the risk of running out of money but NOT with the annuities.

You can absolutely run out of money with an annuity if the monthly check isn't adjusted for inflation.

Exercises left to the reader:
1) If a couple, both age 55, buys an inflation-adjusted joint-life annuity with $700K today from a highly rated company, what will they receive every month beginning right now?

2) But wait--our couple will be moving to Brazil, so they'll need to match that nation's changes in cost of living, maybe for 40+ years. How much will that annuity cost? From a well-rated company?

To the OP--why are you only planning for income to age 80? With two of you of age 55, the average age the latter will die is 92. There's a very significant chance one or both of you could live well beyond that. Unless you've got inside information, age 80 is not nearly long enough as a planning window.

Later edit: +1 to what PB4uski wrote.

 

[CaliKid]

Vanguard has the type of thing I am talking about. Took 20 seconds to find.

https://investor.vanguard.com/annuity/guaranteed-income

From website:

Whether you want your income payments to increase with inflation.

 

[eta2020]

Better rethink that...most annuities are fixed payments... very few have benefits that increase with inflation like SS does which is why deferring SS is the equivalent of buying an inflation adjusted annuity.

Correct. Such annuities are rare and pay pretty much nothing.

You will get several times better dividend yield from S&P 500 index unless you are 90 year old at the time of the purchase.

BTW 1000 bucks from 1970 = 5620 bucks from 2010
S&P 500 dividend yield is 25% higher in 2010 versus 1970 in real purchasing power.

So annuity and you loose 5/6 of you money or S&P and you gain 25%

And that number is after financial crisis by 2014 you have gain of 120% in purchasing power in S&P 500 dividend.

 

[pb4uski]

Vanguard has the type of thing I am talking about. Took 20 seconds to find.

https://investor.vanguard.com/annuity/guaranteed-income

From website:

Whether you want your income payments to increase with inflation.

Yes, I know that but there are less than a half dozen insurers nationwide that offer them and Vanguard has a couple of them.

 

[eta2020]

But you know OP has no kids and no plans to leave anything behind.

In a light of this annuity may be good choice for OP since it guarantees you leave this world with everything spend. There is no other investment with such guarantee.

In general it makes insurance company happy because they are in business of making money.

 

[CaliKid]

But you know OP has no kids and no plans to leave anything behind.

In a light of this annuity may be good choice for OP since it guarantees you leave this world with everything spend. There is no other investment with such guarantee.

In general it makes insurance company happy because they are in business of making money.

No question the insurance company "wins" on average. it's insurance. By definition that's how it works. However, if you live to 105 you'd be darn happy with some annuities! Again, not for everybody. I just can't imagine being healthy and 85 or 90 and realizing that firecalc wasn't right 35 years ago. Oh crap.... If I had no kids to leave anything to an "expensive" annuity would seem MUCH smarter to me.

 

[samclem]

Even in this case, an annuity starts to make more sense only if:
1) The annuitant is old (because mortality credits make the monthly checks a lot higher than they would be for a 55 year old)
2) Interest rates are higher

Waiting to buy one of these things makes a lot of sense for this couple for the reasons above. Plus, they'll know more about their life situation, have a better idea of their health status/likely longevity, and it reduces the number of years they'll need their insurance company to survive. Buying one eventually might be a good idea, buying one now is almost certainly not.

Otar's book/approach make a lot of sense. If you are getting older and starting to slip into his "red zone" (looks like your assets won't be able to match your lifelong spending reqmts), then it's time to consider an annuity.

 

[samclem]

If I had no kids to leave anything to an "expensive" annuity would seem MUCH smarter to me.

Price out an inflation-protected annuity for a 55 year old couple and then make the case. If you don't have the numbers, you don't really know, right?

 

[eta2020]

No question the insurance company "wins" on average. it's insurance. By definition that's how it works. However, if you live to 105 you'd be darn happy with some annuities! Again, not for everybody. I just can't imagine being healthy and 85 or 90 and realizing that firecalc wasn't right 35 years ago. Oh crap.... If I had no kids to leave anything to an "expensive" annuity would seem MUCH smarter to me.

I am convinced I will have several times higher income if I just buy 60/40 VTI/VXUS and spend dividends..... if I live to 105. 1.2 million dollar portfolio can generate about 25k in dividends and it will grow faster then inflation. So I will have more and more money every year.

This is what I saw in my 30 years of buy and hold

I may have a lower income first 7-10 years but thereafter it will be higher then annuity.