On a fixed income, confused about portfolio allocation

[jqrz]

Hello, i'm in my 30s and on disability. i have 80% in stocks, the rest in cash/bonds, totalling about 300k.

My risk tolerance is fairly high. i've heard that for someone my age, it is better to have an 80/20 allocation because i have at least 10 years to invest. is this true, in general?

I was wondering if i should be more conservative in my investments. My monthly expenses total about 25K a year, which is about 13K more than my monthly (fixed) income, not including investments.

Should I be as conservative as, say, someone in their 70s in my situation who needs the money for immediate income? I am confused, because while I technically probably won't run out of money in 10 years if I continue with my current allocation (even if the market has a long, bad run) - in the worst scenario I will probably have to dip into capital to some extent.

What allocation strategy would best apply in my case? The one commonly recommended for people my age or for investors who are much older than I am? I know these questions sound silly because there is no one size fits all approach for a certain age. Any advice would be greatly appreciated

[haha]

Quote:

Originally Posted by jqrz Hello, i'm in my 30s and on disability. i have 80% in stocks, the rest in cash/bonds, totalling about 300k. My risk tolerance is fairly high. i've heard that for someone my age, it is better to have an 80/20 allocation because i have at least 10 years to invest. is this true, in general? I was wondering if i should be more conservative in my investments. My monthly expenses total about 25K a year, which is about 13K more than my monthly (fixed) income, not including investments. Should I be as conservative as, say, someone in their 70s in my situation who needs the money for immediate income? I am confused, because while I technically probably won't run out of money in 10 years if I continue with my current allocation (even if the market has a long, bad run) - in the worst scenario I will probably have to dip into capital to some extent. What allocation strategy would best apply in my case? The one commonly recommended for people my age or for investors who are much older than I am? I know these questions sound silly because there is no one size fits all approach for a certain age. Any advice would be greatly appreciated

So are you saying that your disability payments total only $13k per year? Do you have any earned income, or can you do something to earn income?

Without more inflow, your situation does not look great to me. It might be hard to live the rest of your life on disability of 13k pa, plus the income from $300k. And I would not have so much money in stocks. For you, it is a form of gambling.

Ha

[GrayHare]

A high equity % is often suggested for someone in their 20s/30s because should their portfolio value collapse they have time to earn it back. If your disability is expected to continue for a long time, you do not have the ability to earn back a large stock loss. So, yes, in that situation I would dial back on the stocks to a lower, more conservative allocation.

[wolf]

If your "situation" were normal, average working person, then equity allocation may be OK.

Right, now, you are spending more than you take in. You have to reduce your expenses (ie. share living expenses, reduce internet, smart phone,
etc.). And if possible, increase your income.

Sorry, do not know your situation. Good Luck.

[Walt34]

Quote:

Originally Posted by GrayHare A high equity % is often suggested for someone in their 20s/30s because should their portfolio value collapse they have time to earn it back. If your disability is expected to continue for a long time, you do not have the ability to earn back a large stock loss. So, yes, in that situation I would dial back on the stocks to a lower, more conservative allocation.

+1. The old "rule of thumb" was your age in bonds (gets more conservative with time) and the rest in stocks +/- for one's risk tolerance. But that's for a person with time to earn more money. I'd tend to be much more conservative given the situation you describe.

[pb4uski]

Since you are not working, an allocation strategy more similar to an early retiree would best apply to your case. You need to have some equities to help keep pace with inflation given you are so young.

I think that the Vanguard Wellesley Income Fund Admiral shares would be a good fund to consider given your longer time horizon. It has a 40/60 stock/bond asset allocation, and the stock allocation is conservative. The income return recently has been in the 3-4% range, which should provide $9-12k a year of dividends. Over the long run the total return has been around 7%.

[Animorph]

If I understand correctly, you need $13k from your $300k portfolio. That's a bit more than 4%, which is high for a long "retirement". You can try FIRECalc to see the range of AA's that might work best for you, though don't use a period longer than 40 years. 80% equities is on the high side, but may be about right for you if you can stand it. A large withdrawal rate requires a bit more equities than a very low rate, and of course carries more risk.

[38Chevy454]

Your age may be in 30's, but your financial situation is more like someone in 60's.

I am confused if you have any other income besides the disability payment of $12K/yr? You say you have approx $25K/yr expenses. But also say in worst case scenario you would have to dip into capital? Can I assume assume you are currently meeting your extra $13K/yr by using income off your $300K savings?

I would say that for a long term strategy, your withdrawal rate is a bit aggresive compared to general theory. Since you are in a annual withdrawal basis (assumption above), even being fairly risk averse, you may want to be a bit less equities. Maybe a 60/40 approx mix as a suggestion? Also, to make sure you have max benefit of your savings, look at fees and invest in low cost funds so you maximize your returns.

[seraphim]

+1 for Pb4uski's advice; but still work to reduce expenses, and find another form of income, if possible

As others have advised, a high risk tolerance is untenable for your position. Personally, I'd assume no more than a 2.5% draw from your investments, but gives an excellent chance your portfolio will not be reduced over time. That leaves you about $5500 shy of your expenses.


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[rothlev]

Quote:

Originally Posted by pb4uski Since you are not working, an allocation strategy more similar to an early retiree would best apply to your case. You need to have some equities to help keep pace with inflation given you are so young. I think that the Vanguard Wellesley Income Fund Admiral shares would be a good fund to consider given your longer time horizon. It has a 40/60 stock/bond asset allocation, and the stock allocation is conservative. The income return recently has been in the 3-4% range, which should provide $9-12k a year of dividends. Over the long run the total return has been around 7%.

#1

[jqrz]

Quote:

Originally Posted by 38Chevy454 Your age may be in 30's, but your financial situation is more like someone in 60's. I am confused if you have any other income besides the disability payment of $12K/yr? You say you have approx $25K/yr expenses. But also say in worst case scenario you would have to dip into capital? Can I assume assume you are currently meeting your extra $13K/yr by using income off your $300K savings? I would say that for a long term strategy, your withdrawal rate is a bit aggresive compared to general theory. Since you are in a annual withdrawal basis (assumption above), even being fairly risk averse, you may want to be a bit less equities. Maybe a 60/40 approx mix as a suggestion? Also, to make sure you have max benefit of your savings, look at fees and invest in low cost funds so you maximize your returns.

I don't have any other income besides the disability other than what i get from my investments. I recalculated and figured that i have approx $30K/yr expenses. By 60/40 mix, you mean 60% equities and 40% in bonds or cash? I have some of my money tied up in high fee investments (compared to say Vanguard) so i know i'll need to change this. Thanks for your reply

[pb4uski]

Yes, 60/40 would refer to 60% stocks/equities and 40% bonds/fixed income asset allocation.

[Tortoise]

Your asset allocation is much too aggressive for someone who is supplementing living expenses from their portfolio. I would consider 60/40 too aggressive. Pb4uski mentioned buying Vanguard Wellesley Income Fund Admiral shares. I have seen other people use a mix of 50% Vanguard Wellesley and 50% Vanguard Wellington funds. Wellesley is 40/60 and Wellington is 60/40, with annual expense ratios (ER) of 0.25% and 0.26%, respectively. Their 10-year average annual returns are 7.32% and 8.33%. A 50/50 mix of the two funds would have an average annual return of 7.83%.

Even with this more conservative mix, you still have the chance of losing money. You won't always have positive returns. Both funds took a nose-dive in 2008. You can see that in their performance graphs at

https://personal.vanguard.com/us/fun...tExt=INT#tab=1

https://personal.vanguard.com/us/fun...tExt=INT#tab=1

Management costs will compound over the years. You could get lower fund costs with a combination of Vanguard Total US Stock Market with ER of 0.05% and Vanguard Total Bond Market with ER of 0.08%, but it would then be up to you to rebalance to your desired asset allocation every year.

Due to the risk of outliving your portfolio at your current withdrawal rate, I would follow the advice of some of the others here and figure out ways to either increase your income, decrease your spending, or some combination of both. You are currently withdrawing 4.33% of your portfolio for living expenses. FIRECalc will show you the probability of this working out for the rest of your life, which is hopefully many many years.

FIRECalc: A different kind of retirement calculator

Another Vanguard fund that you might want to look at is the Managed Payout Fund.

https://personal.vanguard.com/us/fun...FundIntExt=INT

From the website, "The Managed Payout Fund is designed to give you regular monthly payouts that can help you manage a portion of your retirement expenses. The fund is intended to supplement your other sources of retirement income. The Managed Payout Fund targets an annual distribution rate of 4%. To accomplish this, the fund’s portfolio managers aim to adjust the fund’s overall asset allocation over time with an emphasis on sustaining its monthly payouts, keeping pace with inflation, and preserving capital over the long term."

The expense ratio for this fund is 0.34%, which is a little higher than Wellesley/Wellington, but still not bad for a managed payout fund.

If you do decide to move your portfolio to Vanguard, try to do it in a way that will minimize taxes. Do not cash out your existing funds without first knowing the tax implications. If your annual income is as low as you say it is, you might not have to worry about capital gains taxes, but I would call Vanguard and discuss what you want to do before moving any money.

And no, I am not affiliated in any way with Vanguard or any other brokerage firm.

Remember that the only guarantees in the stock market are that no one knows what it will do in the short term. And people can only guess, based on past history and the makeup of the stock market, that it will increase in value over the long term, where long term is on the order of 20 to 30 years.

[Brat]

Another possibility for the OP is Vanguard's real estate index fund which has a current yield of 3.8% VGSIX Fund Quote - Vanguard REIT Index Fund;Investor Fund Price Today (VGSIX:MFD) - MarketWatch or put some of your money in Realty Income https://www.google.com/search?newwin...08.Vv0R1AP0gRc
which has a current dividend of 4.8% paid monthly. As much as I love O I would never put more than 15% of my investments in any one stock.

[modhatter]

I can relate to your dilemma. Two or three years ago I was trying to obtain similar information as you. As it turns out, there is little to nothing available on this subject of any substance. I have a son who has a disability only he does not receive disability. I will probably try and obtain it for him (but have no guarantees he will be able to get it), but up until this time I was not able to have him apply do to the fact that I had been paying him a salary out of a company that I owned and he had shares in due to the death of his father.

I can tell you this, the normal "safe" withdrawal rates do not apply to you with such a long time horizon. Even the old 4% withdrawal rate is no longer recommended. It has shrunk to 3-3/2%, and that is for people who are looking at 30 years in retirement. I eventually did find a source, and I wish I could remember where now, but it basically came up with a formula that stated my son (who is in his early 30"s) could not withdraw more than 2% from his portfolio when looking at a possible 60 yr. retirement (so to speak)

Now for you, that would only mean a withdrawal of about $6,000 a year from your $300,000 portfolio. It would be safer also, to make sure that your entire portfolio generated at least an overall cumulative dividend rate of 2 - 2/12% yearly. Next, I would recommend you cut your expenses. Don't know where you live but that is a very big factor. So a move might be in order if possible.

Last, you are allowed to earn approx. $1000 a month to supplement your disability income. I don't know what your disability is, but there might be some sort of work you do do from home, possibly from your computer to earn that needed $900-$1,000 a month. This is really the only way you are going to make it. I would start spending your days on line trying to come up with some kind of job that you would be able to handle with your disability to earn that extra $1,000 a month, as well as cut your expenses. If you don't you will someday in the near future probably run out of money and find your self having to live on disability alone, which will make life very hard for you.

It is such a bad time for trying to generate income right now, as bonds and CD's are paying squat, so you are left with more risky investments like preferreds (who often times cease paying their divs when bad times roll in) Stocks can do the same. There are a handful of companies that maintained their dividends during the last big financial drop we had, which are the ones you should probably be looking at. The last thing that you want to happen is to be caught in a situation where your portfolio drops by 40 or 50%, and you are forced to withdraw your capital from it at that time.

I would personally chose (and this is not based on any professional advice) that you split your investments 50/50, and try and put a diversified portfolio if you can that would lend about 3% income from it, while still being able to secure the needed growth that you need. If you know little about stocks and bonds, I would first read a couple of books on the subject, and then perhaps talk to an investment advisor at Vanguard, explaining your situation and your objective to them, and pay them to select a portfolio make up for you that might make sense. You will have to pay them an hourly fee, since you don't have enough money to qualify for free advice, but in the end, if you don't know enough about the subject to chose wisely, it probably would be money well spent.

I would also suggest you consider living in a two bedroom unit, and renting out the other room, and sharing utilities. We all like our privacy I know, but if you make up strong house rules, and chose wisely, you will probably adjust.
It is better than running out of money. Just some thoughts for you to consider from someone who is going through the same problem as you. You should be devoting 100% of your time right now to come up with a workable plan, before you start depleting your portfolio further. IMO

[Starper]

Suppose the OP depletes the portfolio at some point. Aren't there government programs that will pay for food, shelter and health care in this case? Especially if it happens when he is already in his 60s?

I am new on this forum and don't mean to be argumentative, but the general assumption seems to be that once you've spent your money you are on your own, yet there are so many people out there who depend on the government 100% and don't even have to live with roommates. At least this is the case in cities like NY and Boston.

[Brat]

Those that I am aware of have long standing severe disabilities and are on SSI. They, or their guardians, still must figure out where to live and what to eat with the resources they have.

[Starper]

I know that some disabled people get ssi, ebt, also free housing and Medicaid. Medicaid can also pay for a retirement home, though it may be for a shared room.

[Teacher Terry]

Lists for disabled, low income housing, etc are very long. Many people wait years to get an apartment & some never do.

[Walt34]

Quote:

Originally Posted by Teacher Terry Lists for disabled, low income housing, etc are very long. Many people wait years to get an apartment & some never do.

Indeed. It is not a place you want to be. On this and a couple of other forums I've read posts by people who had to temporarily seek government assistance. All found the process humiliating and degrading, and did so only out of desperation. They got out from it as soon as they could.

But if one is 30 years old, paralyzed by a hit & run driver, and have a net worth of $10k, you're going to run out of options quickly.