asset allocation

[medved]

I am interested in your thoughts on asset allocation. I am 52 years old and have roughly $12.5mm invested assets (no debt; no pension). About $10 million of that is in taxable accounts. I am still working. I will probably work a 3-5 more years (though if I get really tired of it I may retire sooner). My current allocation is roughly 70%/30% (equity:fixed income). My plan is to "glide-path" that down to 40/60 over 4-5 years. Ideally I would be at 40/60 when I retire. A complication is that I may not have enough new money to invest in order to accomplish the glidepath solely through new contributions -- so there is some capital gains tax to be paid in order to accomplish the glidepath. But I think it still might be worthwhile, since I think at 70/30 or anything like that I am taking more risk than I need to. (It don't aspire to leave a big estate).

Any thoughts on this would be appreciated.

 

[Senator]

It depends on if that will be your sole source of income, and how much you need to spend.

You can spend the stock money when you retire and stop reinvesting dividends now. With the dividends you can buy fixed income. Only buy fixed income with new money.

40/60 at age 56 is fairly conservative. Some people, myself included, would stick to a 70/30.

 

[38Chevy454]

I agree a 40/60 is pretty conservative. Many people use a 60/40 allocation in retirement, enough of the fixed income side to balance the swings on the equity side; but sufficient equities to help offset inflation.

Bigger question: With $12.5M why are you still working? Unless you have very high expenses, you should be able to retire now and have no risk of money issues for rest of your life.

 

[hnzw_rui]

40/60 at age 56 is fairly conservative. Some people, myself included, would stick to a 70/30.

That's dependent on withdrawal rate, though. At $12.5m investable assets, 2% is $250K. If spending is around that much, then there's really not much need to take risk to make the portfolio last indefinitely.

 

[pb4uski]

I would devote new contributions and income (dividends and capital gains distributions) to fixed income from now until you retire and see where it stands. I think 40/60 is pretty conservative but if you divert all contributions and income/capital gains distributions to fixed income and when you retire withdraw by selling equities I suspect your AA will gradually migrate towards an AA that you can live with.

 

[ERD50]

First step would be to take all your tax-deferred accounts to 100% fixed, as there would be no cap gains to pay (maybe you are already there, you didn't say).

Off hand, I don't think I'd want to pay cap gains taxes to get my AA down from 70/30. As others have said, use any/all divs to buy fixed, make any new purchases fixed.

When you start the withdraw phase, draw down the equities first to get towards your balance point.

You didn't mention expenses, pensions, etc. You're clearly a high-worth individual, but you may be looking forward to high spending in retirement as well. You should plug your #'s into FIRECalc, and use the 'investigate' tab to see how various AA's have done historically. After viewing that, you might feel more comfortable closer to 60/40 than 40/60.

-ERD50

 

[Danmar]

Bigger question: With $12.5M why are you still working? Unless you have very high expenses, you should be able to retire now and have no risk of money issues for rest of your life.

Well maybe because he wants a lifestyle that is a little better funded than the norm. Always surprises me when people assume what a reasonable spending level should be for someone else.

The OP's plan sounds reasonable to me if not perhaps a little conservative. But that is a personal thing. I was in a similar position. Worked till 56 and used a very generous pension as a FI proxy. AA is currently around 60/40 with portfolio 100 % equities.

 

[DrRoy]

First step would be to take all your tax-deferred accounts to 100% fixed, as there would be no cap gains to pay (maybe you are already there, you didn't say).

Off hand, I don't think I'd want to pay cap gains taxes to get my AA down from 70/30. As others have said, use any/all divs to buy fixed, make any new purchases fixed.

When you start the withdraw phase, draw down the equities first to get towards your balance point.

You didn't mention expenses, pensions, etc. You're clearly a high-worth individual, but you may be looking forward to high spending in retirement as well. You should plug your #'s into FIRECalc, and use the 'investigate' tab to see how various AA's have done historically. After viewing that, you might feel more comfortable closer to 60/40 than 40/60.

-ERD50

+1 I think this is pretty close to what I would suggest.

 

[Whisper66]

Just to provide a different perspective -- I'll suggest it doesn't matter too much what your AA is. You've basically won the game so you can play it any way you want.

Basis -- For example, take the ultra safe route and put 100% of assets in fixed income. Run firecalc with 12.5M assets, assume all are in taxable acct (conservative), you retire this year, you and wife both live to 95 yrs old (good luck!), neither of you have any social security or pensions, you aren't planning on passing anything to your kids (mentioned in a post somewhere) ....

Results -- you can spend $253k in today's dollars every year until you and your wife pass at 95 yrs old and still have 95% chance of outliving your money. That's a great position to be in.

The suggestions provided in others posts do a good job of outlining some ways to save on taxes and get better return than the ultra conservative AA above. I personally would tend toward one of those that felt comfortable rather than the above plan....but everyone is different.

 

[Gone4Good]

With respect to any asset allocation I'd start by answering the question "what am I trying to accomplish with my portfolio?" Knowing the answer to that question goes a long way to answering your AA question.

Why do you want to own any equities at all, or bonds for that matter?

Most folks here own equities because that's the only hope we have of funding an acceptable income stream that keeps pace with inflation. That may or may not be your situation.

We own bonds because we're scared to death of the downside potential in owning equities. Again, that may or may not be your situation.

The tension between those two generally leads us to an AA we can live with (or one we hope we can).

Without knowing your goals it's impossible to say whether a certain asset allocation is appropriate, let alone "too conservative." Only you can answer that.

 

[NgineER]

First step would be to take all your tax-deferred accounts to 100% fixed, as there would be no cap gains to pay (maybe you are already there, you didn't say).



Off hand, I don't think I'd want to pay cap gains taxes to get my AA down from 70/30. As others have said, use any/all divs to buy fixed, make any new purchases fixed.



When you start the withdraw phase, draw down the equities first to get towards your balance point.



You didn't mention expenses, pensions, etc. You're clearly a high-worth individual, but you may be looking forward to high spending in retirement as well. You should plug your #'s into FIRECalc, and use the 'investigate' tab to see how various AA's have done historically. After viewing that, you might feel more comfortable closer to 60/40 than 40/60.



-ERD50

+1
Take your 2.5M tax deferred to 100% fixed income. Should get you to at least to 80:20, but I assume you already have some fixed in your taxable, so this might help with not having to sell equities and still get closer to 40:60.
From a tax perspective and AA, I think you would be better off establishing your desired AA after retirement, since you won't have any earned income and could convert a lot more without paying an excessive amount of taxes.

I would think that you have enough resources to ride out a major recession without having to sell equities to survive.

Invest new money and dividends into fixed income.

 

[garyt]

It depends on if that will be your sole source of income, and how much you need to spend.

You can spend the stock money when you retire and stop reinvesting dividends now. With the dividends you can buy fixed income. Only buy fixed income with new money.

40/60 at age 56 is fairly conservative. Some people, myself included, would stick to a 70/30.

Me too, but I don't have $12 mil! With $12 mil you could basically put it under your mattress and be ok so long as you don't live some crazy lifestyle.

 

[Senator]

Me too, but I don't have $12 mil! With $12 mil you could basically put it under your mattress and be ok so long as you don't live some crazy lifestyle.

That's probably why I don't have $12.5M. Someone decided that I might live some crazy lifestyle if I had that much and limited my means...

 

[rodi]

Well maybe because he wants a lifestyle that is a little better funded than the norm. Always surprises me when people assume what a reasonable spending level should be for someone else.

The OP's plan sounds reasonable to me if not perhaps a little conservative. But that is a personal thing. I was in a similar position. Worked till 56 and used a very generous pension as a FI proxy. AA is currently around 60/40 with portfolio 100 % equities.

I'm confused by how you're both 100% equities and 60/40 AA. Are you considering your pension? Or real estate?

 

[Danmar]

I'm confused by how you're both 100% equities and 60/40 AA. Are you considering your pension? Or real estate?

I notionally capitalize the pension and treat it as a fixed income proxy. Have no investment real estate.

 

[Dash man]

While we have a bit less at about $6.5 M, we chose to stay out of bonds. Our safe "fixed" income is in CDs and 1% savings accounts with a few years of expenses to allow us to ride out any market volatility. The rest is in equities and real estate. Our IRAs are where we keep some REITs and BDCs since they're taxable at normal rates and perform much better than bonds. Our taxable funds are mostly dividend paying stocks/funds/ETFs and some growth stocks. We also have a rental property and three other homes, one of which we are under contract to sell. Our equities are not the high risk variety, but have done very well over time and the dividends provide a nice income.
With $12M I believe you should be able to easily keep at least 50% in equities as long as you don't use an advisor that bleeds you dry.


Sent from my iPhone using Early Retirement Forum

 

[Spanky]

I thought the OP has a FA (financial adviser).

 

[medved]

I thought the OP has a FA (financial adviser).

I do. But I am still interested in the views of other thoughtful people. At a minimum, it can give me ideas to discuss with the financial advisor.

 

[target2019]

I do. But I am still interested in the views of other thoughtful people. At a minimum, it can give me ideas to discuss with the financial advisor.

Help me understand your reasoning. You have an FA, and he makes a significant amount of money from your investments. But you want to hear the views of anonymous persons.

This suggests you doubt the advice of your FA.

I don't know what your needs are, but that is the beginning point of discussion. If your portfolio can support your needs with 2% safe withdrawal, then S&P500 dividends alone would support the need. Also diversify into tax-free bonds, etc. That will provide more income, and also some ballast against the inevitable stock market correction.

Based on what I see here:

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

I'd stick with a 50/50 allocation or similar.

 

[RunningBum]

If you're seeing a doctor about some medical condition, don't you also google the condition, and ask around about it? You're paying the doctor good money, but doesn't it also make sense to be more informed? Most everyone else you ask may not have the expertise, but may have useful practical experience, plus even the expert can overlook something. Same thing here, don't you think?

Plus, in the OP's other thread, people were critical of him having an FA, that he could follow simple advice here and be just as successful without the fees. But now you're saying he can't even dip his toes into the water of trying to get advice here, while keeping the safety net of having an FA? Does it have to be one or the other? Does he have to drop the FA before he can make any attempt to educate himself?

No wonder there are people reluctant to admit they are using an FA.

 

[pb4uski]

I dunno. Some people prefer belts AND suspenders... nothing wrong with that. To each his own.

 

[Gone4Good]

If you're seeing a doctor about some medical condition, don't you also google the condition, and ask around about it?

+1

Some stuff is too important to hand control completely over to someone else, even an expert.

But this also had me think of a scene in House of Cards . . .

Doctor: "I thought you asked me for a second second opinion?"

Frank Underwood: "I didn't ask for a second opinion. I asked for a different opinion."

 

[target2019]

If you're seeing a doctor about some medical condition, don't you also google the condition, and ask around about it? You're paying the doctor good money, but doesn't it also make sense to be more informed? Most everyone else you ask may not have the expertise, but may have useful practical experience, plus even the expert can overlook something. Same thing here, don't you think?

Plus, in the OP's other thread, people were critical of him having an FA, that he could follow simple advice here and be just as successful without the fees. But now you're saying he can't even dip his toes into the water of trying to get advice here, while keeping the safety net of having an FA? Does it have to be one or the other? Does he have to drop the FA before he can make any attempt to educate himself?

No wonder there are people reluctant to admit they are using an FA.

That's a fair appraisal. I'm not sure a medical analogy works, though. You do have a copay, but medical cost is far beyond that, and is paid by insurance.

I don't think I said he can't ask for advice here. You read a bit more into what I wrote. I can't possibly cross reference this thread to other threads and get the details right. BTW, I kinda stick up for people who have FA at this moment in time. I view it as the person with FA is either starting to question the unseen details, or has already appraised the situation as one of declining value from the FA.

I did answer the question directly, and provided a link so he can examine AA charts and accompanying factors, and respond.

If I had 12,5 I'd like to believe that I had a handful of trusted associates, and together we each became learned about subjects outside of our focus.

Since most of OP's investments are in taxable, I'd place more emphasis on tax planning. OP situation is more complex than anything I've ever had to understand.

 

[ERD50]

...

I don't know what your needs are, but that is the beginning point of discussion. If your portfolio can support your needs with 2% safe withdrawal, ... .

As far as I know (maybe it was posted here, or in some other thread and I missed it?), the OP has not mentioned his desired spending and/or other income (SS, other? I see he mentioned no pension).

The planned WR is a factor - I think someone else mentioned, if it is low enough, and no desire to pass on an estate, it really doesn't much matter what your AA is, at least historically, either extreme can support a low enough WR%.

But he's not sharing (again, unless I missed it) important info, so he shouldn't expect a whole lot from the responses, we are sort of replying in a vacuum. I don't see much value in comparing that advice to his FA's advice, who I assume knows all this?

And I'm not one to be aghast at any high spend plan. It's his money, if he wants to spend a lot of it, that's his choice. But we can provide advice on how to do that, and discuss the risks involved.

-ERD50

 

[rodi]

medved -

The firecalc tool (linked at the bottom of the page) can be very useful for looking at things like asset allocation. One of the tabs lets you input different asset allocations. (The "Your Portfolio" tab). You'll want to adjust the expense ratio UP to reflect the FA fees - it defaults to 0.18% - typical of low cost index funds and no FA.

Members have reported their experimentation with changes to the portfolio AA - and if the withdrawal rate is 3.5% (inclusive of the FA fees, so lower than that net) or lower, anything between 30/70 and 70/30 survived fairly well.

Here are some threads from the past on these experiments.
http://www.early-retirement.org/forums/f36/firecalc-calculator-sensitivity-to-asset-allocation-55655.html

http://www.early-retirement.org/forums/f28/firecalc-aa-and-swr-70336.html