Recently FIRE'd...with big decisions to make

[StaceyR]

I'm just beginning to settle into my early (59) retirement with the wife (57) not far behind. I was targeting 62 but a recent inheritance has allowed us to move up our time-table. At present we're fairly conservative with most of our nest egg in rollover IRAs and a lesser amount in Roth IRAs, all in a Fidelity managed account split 65/35 stocks/bonds. The remaining 20% is split between Fidelity non-managed low cost index funds and high yield savings.

My question is this: Based on current market conditions how should we allocate this sudden cash infusion that will increase our investment portfolio by nearly 50%? We don't plan on filing for SS for five to ten years so we'll need to draw from investments or cash for living expense and post-COBRA HI costs (a big concern and another question for later). My first thought is to beef up the low cost index funds but I'm concerned the stock market is ripe for a correction. It would be painful to go big there just before that happened. Sitting on the sidelines gets us a whopping 1.05% in "high interest" savings. Better than nothing but losing ground none the less.

Any helpful advise from those here wiser and more experienced than I (okay, everyone) would be appreciated.

 

[Whisper66]

Here's what I would do as one idea....

Step 1 - decide how much cash (or other very liquid assets) you need available to sit out a market downturn, ie...avoid having to sell stock during a low point. Don't forget to include the impact of any other income you have coming in during that time. For us, I chose to protect against a 3 yr downturn. Others may choose longer (maybe 5 yrs). Whatever you choose, get that amount of assets in very liquid form, I have ours in short term bond funds or cash. CDs, individual bonds, money market funds are also good choices.

Step 2 - decide what overall allocation you want in the longer term. Many retirees who are uncomfortable with the current high value of the market might choose something like 40/60, 50/50. Say you choose 50% equities, 50% fixed assets. Go buy investments of fixed assets that when added to the money from Step 1 gets you the 50% (or whatever) fixed assets you picked. I'm personally much higher risk at present (currently 85/15) but it's a personal choice. Most of my fixed assets besides the ones in step 1 are in an intermediate term bond fund.

Step 3 - fill with equities. When to invest ....there's no right answer. I personally just look for dips in individual funds that I want and jump in at a 10-20% dip of that fund. I wouldn't wait for an overall market dip....but again personal choice.

Whatever investments you choose, pick highly diversified, low cost items ... for ideas see Bogleheads' Lazy Portfolios or similar type advice.

 

[Blue Collar Guy]

i read somewhere that new found money such as yours , was best to add 25 % of it immediately to your desired asset allocation and dollar cost in the balance the rest over a 2 year period. this was to minimize down turns, that being said, 85 % of the time ur better off dumping it in your asset allocation immediately, but im the nervous type so i dont want to be in the 15 % that gets nailed in a downturn, i believe ric ferri was the guy that wrote the article about this

 

[eroscott]

i read somewhere that new found money such as yours , was best to add 25 % of it immediately to your desired asset allocation and dollar cost in the balance the rest over a 2 year period. this was to minimize down turns, that being said, 85 % of the time ur better off dumping it in your asset allocation immediately, but im the nervous type so i dont want to be in the 15 % that gets nailed in a downturn, i believe ric ferri was the guy that wrote the article about this

This guy just did an article on this subject.

Link: What to Do With a Lump Sum in Retirement - Can I Retire Yet?
April 17, 2017 By Darrow Kirkpatrick

 

[Ready]

History suggests that adding it all at once has proven to be more successful. But that being said, I still couldn't bring myself to do it at this point in time after one of the longest bull runs in market history. I'd probably dollar cost average in over a three year period of time and hope for the best.

 

[DrRoy]

History suggests that adding it all at once has proven to be more successful. But that being said, I still couldn't bring myself to do it at this point in time after one of the longest bull runs in market history. I'd probably dollar cost average in over a three year period of time and hope for the best.

I recently read a study that said the vast majority of the time (I think it was 85% but not certain) it is best to invest all at once at the AA you are comfortable with. If that is too hard to do, I would suggest putting in 50% of the new funds, and the rest monthly over 6-12 months.

 

[Blue Collar Guy]

yes thats what i said

I recently read a study that said the vast majority of the time (I think it was 85% but not certain) it is best to invest all at once at the AA you are comfortable with. If that is too hard to do, I would suggest putting in 50% of the new funds, and the rest monthly over 6-12 months.

however would you like to be the 15 % that lump summed the day before the 1929 crash, the 2000, the 2007, thats why id rather do the plan i read about, also if everyone here was so brave about 85 % better then they would do a withdrawal rate that was only 85 % certain, i know thats not happening

 

[Blue Collar Guy]

this is the link i was referring to

https://portfoliosolutions.com/latest-learnings/blog/6-things-consider-when-investing-lump-sum

 

[Another Reader]

My guess is the managed account is costing you a lot of money. In your shoes, I would look at the fund expenses and management fees. The sum could be a large piece of your 4 percent withdrawal rate. You can duplicate the allocation with low cost funds and self-management.

 

[Scuba]

I second the recommendation to decide how many years you want to have cash available to draw on in the event of a market downturn and set that aside in a short-term bond fund. Personally I would invest the rest in your long-term AA; as others have mentioned that approach usually produces the best outcome and since you'll have multiple years of cash needs set aside to draw on, you shouldn't have to sell any equities at a loss.

Congratulations for being in this fortunate position and enjoy your ER!

 

[DrRoy]

However would you like to be the 15 % that lump summed the day before the 1929 crash, the 2000, the 2007, thats why id rather do the plan i read about, also if everyone here was so brave about 85 % better then they would do a withdrawal rate that was only 85 % certain, I know thats not happening

That's a decision that everyone needs to make for themselves. You should still know the facts around your decision. Also, the implications of a failed WR are quite different than poor investment timing. You can wait out poor timing, but you cannot wait out running out of $.

I second the recommendation to decide how many years you want to have cash available to draw on in the event of a market downturn and set that aside in a short-term bond fund. Personally I would invest the rest in your long-term AA; as others have mentioned that approach usually produces the best outcome and since you'll have multiple years of cash needs set aside to draw on, you shouldn't have to sell any equities at a loss.

+1. I support this also.

 

[target2019]

We would break the decision into 4 stages.
1- invest 25% of the lump sum according to your AA
2- invest 25% lump sum (or DCA)
3 - invest 25% lump sum (or DCA)
4 - invest 25% lump sum (or DCA)

Have the remainder earning 1-2% each year.

Would also need to deal with other sources of cash you have, and invest that to keep the cash allocation as low as practical.

 

[walkinwood]

Agree on a suitable AA first. By "Agree" I mean, a consensus agreement between you and your spouse.

Personally, irrespective of historical evidence, I would dollar cost average into that position over 6 months to a year.

At some point, the market is going to tank while your portfolio is fully funded and at your target AA. I'm convinced it is impossible to predict when that will happen. Remember, you have to make two predictions - when to get out and when to get back in.

For me, rebalancing during a market downturn is the hardest part. In the '08-'09 downturn, I did buy some stock, but couldn't get myself to rebalance to my AA. I hope to do better next time. It really pays off in the long run.

 

[lem1955]

Recent Vanguard research on DCA

i read somewhere that new found money such as yours , was best to add 25 % of it immediately to your desired asset allocation and dollar cost in the balance the rest over a 2 year period. this was to minimize down turns, that being said, 85 % of the time ur better off dumping it in your asset allocation immediately, but im the nervous type so i dont want to be in the 15 % that gets nailed in a downturn, i believe ric ferri was the guy that wrote the article about this

Vanguard has recently published data showing that it is better to invest lump sums as soon as you have them rather than DCA Dollar Cost Average them. If you keep 75% of the windfall in a MM account for any length of time, you are not invested at your planned Asset Allocation. Once you have made up your mind as to what your AA strategy should be, it is best to get there as soon as you can. https://personal.vanguard.com/pdf/s315.pdf

 

[GravitySucks]

I had this DCA or lump dilemma four years ago. I started by DCA planning once a quarter over a two year period, then read an article stating 85% of the time being better off going all in. I then went all in and was lucky enough to catch a good period. Here's the hard part... Four years ago I was reading how the market was overheated and due for a correction. Sound familiar?
Good luck.

 

[Blue Collar Guy]

some what off the topic , but i stand by my decision to dollar cost average, instead of dumping it lump sum immediately in to my asset allocation, this is why i decided to pay off my HUGE mortgage and not invest much till i was done with that cross. i would have made way more money investing in the stock market and keeping the mortgage, second i would have made way more money lump summing it in instead of DCA, but i slept better at night knowing that that house was paid off, the bank dose not foreclose on paid off houses, and i slept better at night knowing i wont get crushed by a market crash, my take home pay was $275 a week(when i retired it was 961),and i had a wife and a child,to take care of, it took a long time to accumulate my stuff, i dont want to hit a home run and risk getting a strike out, ill settle for a base hit, this was and still is my thinking

 

[StaceyR]

...another subject I need to look more closely at

My guess is the managed account is costing you a lot of money. In your shoes, I would look at the fund expenses and management fees. The sum could be a large piece of your 4 percent withdrawal rate. You can duplicate the allocation with low cost funds and self-management.

You are correct there...I just send Fidelity another Quarterly Advisory Fee check. We've always paid them out of pocket to avoid reducing our portfolio but soon we'll be without much income so it will have come from cash savings. That's much more painful.

In our defense we are part of a much larger family plan at Fidelity that allows us access to more investments at lower costs. The additional managed account costs are based on the total family investment and is currently slightly over .5%. We chose this route years ago when our knowledge of investing and time available to educate ourselves was very limited. Also back then knowledge resources (such as this fine site) and investment options seemed much more limited. By "staying the course" at Fidelity at least we avoided rash emotional and uneducated decisions which probably would have had a negative effect on our portfolio.

Now, with FIRE finally a reality for us we hope to learn enough to "take the wheel" rather than leave our portfolio on auto-pilot. With little income to fall back on before SS kicks in 5-10 years from now tending to (and hopefully growing) our investment "garden" now becomes a priority for us. All advice gratefully accepted and considered!

 

[Rambler]

OK it looks like you need some income potential as well as growth. I'd probably keep 10% in high yield savings, 25% in a dividend etf like SCHD, 25% in a broad market etf like SCHB, 10% in something like NRZ, 15% in MAIN, and 15% in PSEC. Do this in a self managed brokerage acct. You don't really need Fido to amaze this for you. The 2 ETFs ensure some growth, NRZ, MAIN and PSEC take the place of higher yield bonds and provide a monthly income stream, and the cash provides a cushion for any cash needs, and as insurance in a downturn (whether for expenses or for buying opportunities). I wouldn't change your other allocation to match this, just keep what you have, but learn to manage it yourself, avoiding lots of buying and selling, which happens a lot in managed accts but doesn't seem to do much better than holding on to good, solid stocks and etfs with low costs.

 

[StaceyR]

I second the recommendation to decide how many years you want to have cash available to draw on in the event of a market downturn and set that aside in a short-term bond fund. Personally I would invest the rest in your long-term AA; as others have mentioned that approach usually produces the best outcome and since you'll have multiple years of cash needs set aside to draw on, you shouldn't have to sell any equities at a loss.

Congratulations for being in this fortunate position and enjoy your ER!

Thank you for the sound conservative advice. We do feel fortunate to be in this position and it certainly will help us enjoy our ER. But first, time to do my schoolwork!

So far I have moved about 20% of the recent inheritance into a non-managed Fidelity (Vanguard clone) super-low expense index fund account. I balanced this by rolling my similarly sized 401k pure stock investment into my moderate-risk managed IRA account. This leaves us with sufficient cash for around 5 years, but is this too much? We've always maintained a fairly substantial cash reserve for emergencies, much more than our dual incomes would dictate. Now, without regular income, the situation is different and that cash reserve amount is no longer enough to weather any prolonged "storms". We need to determine how large a liquid reserve to hold outside of our more long term investments. I'm certain our Fidelity adviser wants us to pour the majority of this substantial lump sum directly into our managed account using the same balance of stocks vs bonds. I, however, see clouds on the horizon and don't want to leave us overexposed to a sudden storm.

Somewhere in between must be a sweet spot...

 

[StaceyR]

OK it looks like you need some income potential as well as growth. I'd probably keep 10% in high yield savings, 25% in a dividend etf like SCHD, 25% in a broad market etf like SCHB, 10% in something like NRZ, 15% in MAIN, and 15% in PSEC. Do this in a self managed brokerage acct. You don't really need Fido to amaze this for you. The 2 ETFs ensure some growth, NRZ, MAIN and PSEC take the place of higher yield bonds and provide a monthly income stream, and the cash provides a cushion for any cash needs, and as insurance in a downturn (whether for expenses or for buying opportunities). I wouldn't change your other allocation to match this, just keep what you have, but learn to manage it yourself, avoiding lots of buying and selling, which happens a lot in managed accts but doesn't seem to do much better than holding on to good, solid stocks and etfs with low costs.

Wow! Thanks for this response. I really do have a lot to learn. I'll start with printing out the forum FAQ list of abbreviations.

 

[Rambler]

Wow! Thanks for this response. I really do have a lot to learn. I'll start with printing out the forum FAQ list of abbreviations.

Those are ticker symbols. Except for ETF, which means Exchange Traded fund. These are usually cheaper than mutual funds, and are very easy to trade, and don't kick off capital gains distributions at the end of the year. For me, they make tax planning easier than the variety of mutual funds I still have in my taxable acct. SCHB and SCHD are etfs, the others are individual stocks. Depending on what percentage these would represent after investing the windfall, you may wish to diversify even further. I try to limit any individual stock to less than 3% of the total portfolio. That said, MAIN and PSEC, while individual stocks, they are business development companies, which are invested in many companies themselves. I like to have a bit invested in them because of the high monthly dividend accompanied by growth in the stock price...providing both some income and growth. Bonds these days provide precious little income. So that's why I've put about 4-4.5% of my taxable portfolio into them.

 

[RobLJ]

Investing a nut

The responses using Vanguard and other studies indicating to immediately get to your AA are correct.

However, there is the regret factor you indicate--if the market drops 5-15% after you allocate to stocks. We feel the pain of a loss more than the pleasure of a potential rise.

So, investing 1/3-1/2 (or more) of your AA immediately, then dollar cost averaging over the next 12-18 months might work. If the market goes up, you congratulate yourself on benefitting. If it goes down, not all of your new nut was at risk. And if there is a significant market drop while you are waiting to dollar cost average, take advantage of a market drop of 3-5% increments; otherwise just keep dollar cost averaging as planned.
This is a pyschological "trick" but an effective one--I've used it, knowing it is a trick.

I keep about 7-12% in cash to take advantage of drops, even if this is irrational in terms of long term trends towards market increases. Low cash is 3%, which I hit in 2010. Bad timing! The key is to primarily stay in the market with your AA while you can play mind tricks on a (much smaller) side bet.

 

[Scuba]

Thank you for the sound conservative advice. We do feel fortunate to be in this position and it certainly will help us enjoy our ER. But first, time to do my schoolwork!



So far I have moved about 20% of the recent inheritance into a non-managed Fidelity (Vanguard clone) super-low expense index fund account. I balanced this by rolling my similarly sized 401k pure stock investment into my moderate-risk managed IRA account. This leaves us with sufficient cash for around 5 years, but is this too much? We've always maintained a fairly substantial cash reserve for emergencies, much more than our dual incomes would dictate. Now, without regular income, the situation is different and that cash reserve amount is no longer enough to weather any prolonged "storms". We need to determine how large a liquid reserve to hold outside of our more long term investments. I'm certain our Fidelity adviser wants us to pour the majority of this substantial lump sum directly into our managed account using the same balance of stocks vs bonds. I, however, see clouds on the horizon and don't want to leave us overexposed to a sudden storm.



Somewhere in between must be a sweet spot...

Whether 5 years of cash is too much depends on you and your spouse's risk tolerance. For me, 3 years in short-term bonds and very little in actual cash works. Market corrections on average last 18 months, so 3 years is a lot to hold. When one retires young, inflation risk and longevity risk are real, so for me, holding five years of cash needs which would be 15-20% of our portfolio in short-term vehicles is too much. The opportunity cost is too great. But you may feel differently and there is no one right answer.