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Input on our situation from people comfortable with equities?
Old 06-26-2018, 01:33 AM   #1
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Input on our situation from people comfortable with equities?

DH and I have a fairly high risk tolerance. Weíve been retired almost 20 months now, and thus far weíve been able to live on executive comp payouts from my former employer. These are winding down so weíll begin drawing from our portfolio soon for living expenses.

As we think through our AA, we definitely donít want to be too conservative because:
1. We are providing our own healthcare and itís expensive. Although we are healthy now at 59.5 and almost 58, one never knows what is around the corner. And costs multiply each year.
2. We enjoy travel and entertainment, and can certainly envision ways to spend more money. We are more concerned with being too conservative and not keeping up with inflation vs taking more risk than we need to for our lifestyle.
3. We have a pension we havenít started yet but can start anytime. It will cover ~20% of our living expenses. We also have a deferred comp plan we can start anytime that will cover another ~20-25% of our expenses if we spread it out over 5-7 years. We expect that this plan will be fully depleted around my FRA. If we wait till FRA to collect SS, it will cover ~33% of our living expenses (ie, SS will replace the deferred comp plan plus a bit).
4. Our living expenses are ~45% discretionary (eating out, entertainment, travel) and could easily be reduced if need be.

We have no heirs. Our only debt is a 3.35% fixed rate mortgage that wonít be paid off until 2044 (ages 84-85). No intention to pay it off/pay it down due to the low rate. We have access to a HELOC that if drawn on, could support 2-3 years of living expenses. It has a zero balance now. We will have access to this until 2024.

Given this background, and assuming you are comfortable with at least a 60/40 AA, I would be interested in your view on our current AA, which is:
63% equities, all in a taxable portfolio
9% balanced funds, AA can vary at discretion of managers, in tax-deferred accounts. Partly in VG Star Fund tIRA and mostly in former employer deferred comp plan balanced fund, which can be paid out over time based on my elected start date and duration. I can start this at any time.
5% cash, representing ~18 months of after-tax living expenses. Possibly a bit conservative but makes me feel better even though itís only earning ~1.8%.
23% real estate trust deeds, all held in a tIRA and historically earning ~8-9%.

Our new Fidelity FA (free) thinks weíre in good shape with the above AA. His recommendation is to start my pension and deferred comp payouts in 2019, supplemented by dividend income from the taxable portfolio. If we do this, we will likely be in a low tax bracket and should only need minimal additional draws beyond the dividend income from our portfolio. He feels that we can be very aggressive in the taxable portfolio since we wonít be dependent on it for significant draws, and the pension, deferred comp, SS, and trust deeds provide some diversification and stable cash flow.

It sounds logical but Iíd appreciate other points of view. Iím asking for input from those comfortable with a reasonably high allocation of equities since that is consistent with our risk tolerance. What are the potential pitfalls you can see with this AA and retirement cash flow sourcing plan?
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Old 06-26-2018, 05:21 AM   #2
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Wow, your situation is really close to ours. RE'd 15 months, same ages. Non cola pension covering 30% of current spending. No mortgage though. AA 59% equities, most of the rest in a ladder of corp bonds. If the market were to rise like last year I would shave the equities down another point or three. We also have a Fido FA. Up to 25% of spending is travel which we could pare back if needed. I think you are good. Carry on.
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Input on our situation from people comfortable with equities?
Old 06-26-2018, 06:46 AM   #3
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Input on our situation from people comfortable with equities?

Scuba; Would you elaborate on the trust deeds? What are they exactly? Where do you go to invest in them? What kind of denominations are you invested in(one or more than one to spread risk)?

Regarding your question on risk tolerance, our tolerance is pretty low, but we have a 53/44/3, equity/fixed/cash AA. We are retired. We are reducing our Equity portion 1% per year until we get to 5o%. We intend to hold there indefinitely. How did you handle the 2007-2009 downturn? You were probably still working then, but if the same downturn were to happen again now that you are retired, could you handle a 40% decline and still sleep well at night? If so then your current AA should work for you. Sequence of returns risk is the threat you need to assess.

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Old 06-26-2018, 08:27 AM   #4
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I am only responding to your deferred comp. My deferred comp program forced me into a withdrawal decision about 10 years before I wanted to use this money. It was my last opportunity to change it. The good news is that it grew tax free at a high rate for many years. The bad news is I will end up with overlap on my SS because I will still be receiving the bonus when SS starts. So, for a year or two, I will be in a higher tax bracket which I could have avoided. If I were to do this all over again, I would be more careful about that.

As for your pension, I do not know why the adviser would suggest to take it now. If you do take it now, it leaves more money at Fidelity. But I would look closely to see if waiting on the pension, which I assume increases payout if you wait, is a better return.
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Old 06-26-2018, 08:47 AM   #5
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It sounds logical but Iíd appreciate other points of view. Iím asking for input from those comfortable with a reasonably high allocation of equities since that is consistent with our risk tolerance. What are the potential pitfalls you can see with this AA and retirement cash flow sourcing plan?

Please compute the overall AA of the portfolio (REITs are equities). At first blush, this seems really, really aggressive for retirees.
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Old 06-26-2018, 09:22 AM   #6
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We are in our mid sixties. Retired for 7 years. We have maintained an equity ratio of between 55 and 60 percent since retiring. The balance is mostly short term bonds and some misc. investment opportunities.

This has worked very well for us. The sequence of returns effect has been very positive for our net worth. At the moment we do not anticipate dialing equities back. Perhaps at a future date.

We were originally targeting a lower equity ratio. Our fee for service adviser recommended the current approach. His advice proved solid.
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Old 06-26-2018, 01:23 PM   #7
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Scuba,


I have a question about your deferred comp plan as well. I have only been exposed to deferred comp plans where you had to choose your type of payment at the time of deferral. Choices were lump sum, 5, 10 15, 20 or 25 year annual payments. This could not be changed once elected.


Your plan sounds much more flexible on deferrals - what type of plan is it?
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Old 06-26-2018, 01:34 PM   #8
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Your investments look good to me.
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Old 06-26-2018, 01:49 PM   #9
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I do not adhere to the religion that says that target AA depends solely on age.

Take, as an example, two widows aged 70 supplementing their small social security payments with portfolio income. Both widows' mothers died in their 90s so both are long lived stock. The various formulas might dictate that both should be in 30-40% equities.

Now add that widow #1 has a nest egg of $100K and widow #2 has $10M. Should their AAs be the same? Of course not!

So IMO the AA tail should not wag the planning dog. Some spreadsheet time fitting all your income pieces together should give you an idea of what investment income you want. From that point, I'd start planning a bucket strategy, a short term low risk bucket to meet near-in needs, and a long term bucket that you can tailor based on your risk tolerance and likely need for the money. The resulting AA is a result of planning, not an input to planning. For example, we are 70, with 75% equities and there is a reasonable chance that our short term bucket will outlive at least one of us.
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Old 06-26-2018, 04:15 PM   #10
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Scuba; Would you elaborate on the trust deeds? What are they exactly? Where do you go to invest in them? What kind of denominations are you invested in(one or more than one to spread risk)?....
I'm curious to know too. It sounds like you hold mortgages.... but if they are yielding 8-9% then I would think they would have significant credit risk.
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Old 06-26-2018, 06:56 PM   #11
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We are about the same age as you.
We do not carry a mortgage.
Pensions and SS at age 66 or 67 will cover 100% of our budget.
Our allocation is 70/30.

Given similar circumstances, I think we came to roughly the same AA as you. Factor in the different decision on the mortgage and IMO, we are very close on AA.

I could justify a higher or lower stock AA based on risk tolerance and personal preference. In our case, we also have a high risk tolerance and our AA reflects this. Finally, our 30% is cash and short term bonds. It is enough to carry us to SS and pensions. I am considering letting the stock allocation creep up over time (no rebalancing......maybe).
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Old 06-26-2018, 08:19 PM   #12
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Scuba; Would you elaborate on the trust deeds? What are they exactly? Where do you go to invest in them? What kind of denominations are you invested in(one or more than one to spread risk)?

Regarding your question on risk tolerance, our tolerance is pretty low, but we have a 53/44/3, equity/fixed/cash AA. We are retired. We are reducing our Equity portion 1% per year until we get to 5o%. We intend to hold there indefinitely. How did you handle the 2007-2009 downturn? You were probably still working then, but if the same downturn were to happen again now that you are retired, could you handle a 40% decline and still sleep well at night? If so then your current AA should work for you. Sequence of returns risk is the threat you need to assess.

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The trust deeds are loans made to borrowers who borrow from private lenders rather than banks. They are not REITís, but private loans. Borrowers typically buy homes that are tear-downs and they renovate and add on to them, selling the homes at a much higher price. Loans are typically a 1-year term. We do have multiple loans outstanding but I wouldnít say weíre diversified as they are all on So CA properties and mostly to the same borrower who has successfully paid off loans on hundreds of properties.

We go through a broker who has been in business for decades and was recommended to us by a very prominent and wealthy local realtor who is also a friend. Typically there is a first deed of trust secured by the property ranging from $150K for a small deal to maybe $500K for a larger project, and some loans will have a second deed of trust which is unsecured. It is the lenderís choice whether to lend only secured loans or also seconds. The advantage of seconds is that they can be a way to invest smaller amounts.

We may not have even considered this had we not been introduced by someone we trust. Many of this firmís clients are 2nd and 3rd generation, and the owner personally checks out all of the properties, lenders and borrowers. During the last real estate meltdown, lenders did have to be patient and accept lower returns for 2-3 years, but no one with this firm lost any principal, including those with second mortgage loans. This firm only brokers to CA residents.

Addressing your question regarding the last downturn, we were definitely still working so that did make it easier, since we were buying low as we continued to invest. As long as we werenít relying heavily on our portfolio for cash withdrawals to live, a 40% downturn wouldnít phase us as weíd be confident it would come back. Thatís why our FA suggested starting the pension sooner vs later - with the pension and deferred comp and dividends, our withdrawals should be very low.
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Old 06-26-2018, 08:29 PM   #13
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I am only responding to your deferred comp. My deferred comp program forced me into a withdrawal decision about 10 years before I wanted to use this money. It was my last opportunity to change it. The good news is that it grew tax free at a high rate for many years. The bad news is I will end up with overlap on my SS because I will still be receiving the bonus when SS starts. So, for a year or two, I will be in a higher tax bracket which I could have avoided. If I were to do this all over again, I would be more careful about that.

As for your pension, I do not know why the adviser would suggest to take it now. If you do take it now, it leaves more money at Fidelity. But I would look closely to see if waiting on the pension, which I assume increases payout if you wait, is a better return.


Regarding deferred comp, the idea floated by both our former paid FA and our new Fidelity FA is to start the deferred comp sooner vs later so that by the time we take SS, it will be fully paid out. Iím 57, soon to be 58, so several years away from taking SS.

The advisor is suggesting taking both the pension and deferred comp sooner vs later to allow our taxable portfolio to grow more aggressively since we wonít be relying on it much except for dividends. The pension does grow 5-8% per year for every year I delay. However, his point is that when the market is doing well, it grows a whole lot more than that, so Iím better off not withdrawing from the portfolio, and when the market is tanking, definitely better to be reducing withdrawals by relying on the pension instead. This made sense to me.
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Old 06-26-2018, 08:32 PM   #14
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Please compute the overall AA of the portfolio (REITs are equities). At first blush, this seems really, really aggressive for retirees.


Because of the trust deeds, we donít hold any REITís in our portfolio, except to the extent that REITís are part of stock index ETFís. So the asset allocation is as stated above.
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Old 06-26-2018, 08:33 PM   #15
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Scuba,


I have a question about your deferred comp plan as well. I have only been exposed to deferred comp plans where you had to choose your type of payment at the time of deferral. Choices were lump sum, 5, 10 15, 20 or 25 year annual payments. This could not be changed once elected.


Your plan sounds much more flexible on deferrals - what type of plan is it?


It is a 457b.
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