Substantial Windfalls

[Mountain_Man]

Hello Retire Early people,

I will be receiving a substantial windfall over the next year. This will bring my assets to such a level that a 4% withdrawal rate will more than cover our family expenses.

I am worried about making the proper strategic and tactical asset allocation. Would invite input on specific investment strategies, funds and other ideas.

Some areas of concern include:
1. The eroding value of the dollar
2. The emergence of China and India etc. as economic powers
3. The impact of natural or man-made disasters
4. The possibility of a severe US recession
5. The rapidly rising costs of college (2 kids) and health care

The combined wisdom on this board is tremendous. Hope some of you can help. Thanks in advance.

Mountain Man

[MooreBonds]

I'll start working on a few thoughts...but in the mean time: have you verified that any windfall you'll be receiving has either had ALL gift/estate/income/personal property/whatever-else taxes paid, so you can focus on how to invest the net and not the gross?

One of my suggestions would be to consider a fixed income stable with some preferred stocks (check out the current thread on this topic in this forum).

[BigMoneyJim]

My first question would have been have you already been saving and already have a long term plan, but I see your post in July says you had substantial assets saved already, mostly in after-tax investments distributed about 30% stock, 40% bond and 30% cash. I'm not sure the 4% rule works with that mix, but I haven't run it through FIREcalc to check. Also you said you were in your mid-30's, so your planned withdrawal period will be closer to 60 years than the 30-year period most often used in historical comparisons.

You were also then considering a couple of move-and-buy-or-build options. Plus you said you have two young kids.

I don't have much to offer tonight except to bring out these details. Congratulations and/or condolences for your windfall.

[Mountain_Man]

No tax issues that I can foresee. Part of the windfall is long term capital gain from the sale of a company where I was a minority owner. Part is an inheritance below the estate tax threshold as far as I know.

We recently sold the big city condo and bought a nice home in a quiet suburb for the same money. It's tough adjusting to life outside the city. Still dreaming of the mountain home.

Plan is to invest the total pot in a well diversified portfolio and build the dream mountain home when we can do it without jeopardizing financial independence. Financial independence is our top priority after good health. Since I tend to worry, I will continue to work until I have the cash to build the dream house and feel my family is very well protected.

So back to the immediate issue - What to do with the substantial windfall?

Thanks Peter76 and BigMoneyJim for your early thoughts.

Off on a business trip for several days - look forward to reading any more responses late next week.

Mountain Man

[brewer12345]

No tax issues that I can foresee. *Part of the windfall is long term capital gain from the sale of a company where I was a minority owner. *Part is an inheritance below the estate tax threshold as far as I know.

We recently sold the big city condo and bought a nice home in a quiet suburb for the same money. *It's tough adjusting to life outside the city. *Still dreaming of the mountain home. *

Plan is to invest the total pot in a well diversified portfolio and build the dream mountain home when we can do it without jeopardizing financial independence. *Financial independence is our top priority after good health. *Since I tend to worry, I will continue to work until I have the cash to build the dream house and feel my family is very well protected.

So back to the immediate issue - What to do with the substantial windfall?

Thanks *Peter76 and BigMoneyJim for your early thoughts.

Off on a business trip for several days - look forward to reading any more responses late next week.

Mountain Man

*

No doubt you will get plenty of responses. In short, you should invest in a diversified portfolio that will grow over time, throw off some income, and not move entirely in the same directiion (up or down) all at once. To get there, you need to do some reading and bone up so that you feel comfortable with the choices you make. If you simply adopt someone else's approach without doing the research, you run the risks of copying an approach that doesn't match your needs/risk tolerance, and you are apt to panic when the bad times come (and they always do). If you have done the reading and gotten comfy with your approach, you are more likely to pick a suitable portfolio and stick with it.

Personally, what I would do is this:

20% bonds - 3/4 short/intermediate domestic, 1/4 unhedged foreign bonds

20% international equity - 3/4 EAFE, 1/4 developing

5% commodities

5% REIT/real estate

5% timber

20% S&P 500/large cap domestic equity

10% mid cap domestic equity

15% small cap domestic equity

Rebalance annually.

[wzd]

You have to understand what is meant by risk, and pick your own mix. One thing I recently tried to get a second opinion was to take the risk assesment survey at http://www.ifa.com/. You have to register, but I did not get excessive followup calls or email.

For me, it came back within 5 points of where I thought I should be. The risk assessment leads to a model portfolio that they recommend (DFA based). I just replace the fund names with category names and take that as one more input in my planning.

Don't take this as an endorsement of ifa.com. I have not looked at them that closely, but they are on my list to investigate if I ever switch to a financial advisor.

Wayne

[charlie]

If BMJ's summary is correct, you are pretty risk
adverse. As you plan to continue working for
awhile and your windfall will be invested in a
taxable account you might consider a mix
of Total Stock Market, Total International and Intermediate Term Tax Exempt to suit your risk
tolerance.

All of these funds are tax efficient. To spice
up your overall portfolio, you might consider
adding REIT, Small Cap Value and Emerging
Market in your sheltered account ..... but not
everyone has the stomach for rebalancing
these more volatile funds even though in the
aggregate they tend to reduce overall portfolio
volatility.

As for rebalancing your taxable account, that is
an open question you and your accountant
need to discuss because of the tax consequences.

As for me, at age 70, all of my taxable account
is in Wellesley Income because I need the income
and modest growth it provides. That fund and
other balanced funds do the rebalancing for you.

In my IRA I use a 60/40 coffeehouse approach
with the 40% fixed income mostly in floating rate
CDs that are indexed to inflation. I don't use a
balanced fund because RMD will have a reverse
DCA effect. By using the slice and dice approach
I can manage withdrawals more efficiently.

Good luck and congratulations on the windfall.

Have a good life,

Charlie