Help for a Dear Friend

[Vincenzo]

Hi All,

I have a friend who is talking about retiring next year at the age of 70. Although she's not terribly sophisticated in matters of investing, she's done pretty well for herself. I've taken a look at her asset allocation and it scares the heck out of me. She understands my concerns, but is overwhelmed to the point of not doing anything about it. So I offered to advise her on what to do, which I'm happy to do. But I wanted to get other peoples' opinions. It's one thing taking care of DW's and my portfolio - if I screw up I have to answer only to myself (and DW). But if I screw the advice I give to my friend, that would be really bad.

My friend's asset allocation is 80% individual stocks and stock funds and 20% mostly cash and some muni bonds (gasp!).

A little more than a quarter of her net worth is in retirement accounts, some in a 403b (I think) in Fidelity stock funds, some in, what she described as, a variable annuity that only her employer contributes to (TIAA-CREF) - pretty much a stock fund - and a little bit in a MM. She's going to be getting advice from an accountant on how best to start tapping into her retirement accounts.

I'd advise her to sell all of her individual stocks (which are in taxable accounts) and put the bulk of it in a mixture of short-term bonds and TIPs with Vanguard, and maybe a little bit in a fund like Wellington or Windsor. But she says that the dividends on those individual stocks, combined with the interest she's getting on her cash accounts, and her social security, are allowing her to completely sock away her current salary. So, in other words, she can live completely off of the dividends, interest and SS. But I told her that if the stock market tanks, she's in a deep load of trouble. She can't recover the way a 20-40 year old can.

Any advice please?

 

[bpp]

How many individual stocks? Just a handful, or dozens or more? She'd probably take a big tax hit selling all of them...

 

[Nords]

My friend's asset allocation is 80% individual stocks and stock funds and 20% mostly cash and some muni bonds (gasp!).
I'd advise her to sell all of her individual stocks (which are in taxable accounts) and put the bulk of it in a mixture of short-term bonds and TIPs with Vanguard, and maybe a little bit in a fund like Wellington or Windsor. But she says that the dividends on those individual stocks, combined with the interest she's getting on her cash accounts, and her social security, are allowing her to completely sock away her current salary. So, in other words, she can live completely off of the dividends, interest and SS. But I told her that if the stock market tanks, she's in a deep load of trouble. She can't recover the way a 20-40 year old can.

It sounds like she's found an asset allocation that works for her, and it sounds like she won't be needing it for more than 40 or 50 years tops.

If the market "tanks", she's only in "a deep load of trouble" if the dividends are cut on her stocks. If she's holding a diversified portfolio then there wouldn't many, if any, dividend cutters. She's probably already found out how badly the portfolio would tank during the 2000-2002 market and she might already know how it affected her income, if at all. If she's holding stocks whose dividends are being raised, then her income might even be keeping up with inflation.

She might be able to use Financial Engines for free, but in any case it's worth the fee for her to enter her holdings and take a look at volatility & overlap. Maybe the stock/muni funds have high expense ratios, but if she's holding a lot of individual stocks then her overall ER might be one of the lowest around.

Other than you being unable to sleep at night, I'm not sure that I see the problem. She can run her expenses and that portfolio through FIRECalc and probably come up with some pretty good success rates. Heck, her expenses might even go down in retirement. If she's not concerned about the volatility then I'm not sure it's a problem.

There's a poster on M* who's 94 years old and holding a similar portfolio, except that it's 100% stocks. (I don't know if he's even receiving SS.) Sambro's keenly aware of what he's doing and he's just fine with it.

 

[unclemick]

Amen Nords

Norwegian widow 1948 - RR 9 when I was getting off the kindergarten bus. Don't know if she was 100% stocks BUT: when I got old enough to mow lawns her cash(dividends) was always good - unlike some of the other neighbors checks/or 'wait till payday promises.'

heh heh heh heh heh

 

[Vincenzo]

It sounds like she's found an asset allocation that works for her, and it sounds like she won't be needing it for more than 40 or 50 years tops.

If the market "tanks", she's only in "a deep load of trouble" if the dividends are cut on her stocks. If she's holding a diversified portfolio then there wouldn't many, if any, dividend cutters. She's probably already found out how badly the portfolio would tank during the 2000-2002 market and she might already know how it affected her income, if at all. If she's holding stocks whose dividends are being raised, then her income might even be keeping up with inflation.

She might be able to use Financial Engines for free, but in any case it's worth the fee for her to enter her holdings and take a look at volatility & overlap. Maybe the stock/muni funds have high expense ratios, but if she's holding a lot of individual stocks then her overall ER might be one of the lowest around.

Other than you being unable to sleep at night, I'm not sure that I see the problem. She can run her expenses and that portfolio through FIRECalc and probably come up with some pretty good success rates. Heck, her expenses might even go down in retirement. If she's not concerned about the volatility then I'm not sure it's a problem.

There's a poster on M* who's 94 years old and holding a similar portfolio, except that it's 100% stocks. (I don't know if he's even receiving SS.) Sambro's keenly aware of what he's doing and he's just fine with it.

Wow, that's totally contrary to the advice that I imagined I'd get. OK, I'll be open-minded about it.

 

[yakers]

For good advice in regards to a 403b check 403bwise.com. Does she have any pension coming, SS? I might not sell stocks that are taxable and produce good dividends. Making sure there is diversification is IMHO as important as the stock/bond mix. But some risk reducers might help. TIAA-Creff is one of the few companies that have decent annuities.

 

[bpp]

Making sure there is diversification is IMHO as important as the stock/bond mix.

Yes. There is a big difference between whether she has 5 stocks or 50. If closer to the former, it might be worth at least making sure that no single stock makes up more than a few percent of her overall portfolio.

 

[Vincenzo]

I really appreciate the feedback I've been getting. I've obviously been thinking about this all wrong. I had been thinking:

20-40 year old : 80% stocks/stock funds - 20% bonds - high risk
70 year old: 20% stocks/stock funds - 80% bonds - low risk

But you're all right. She's had these stocks for decades. She's held on to them through the '87 crash and the 2000-2003 recession. I need to look at this from a different angle.

Thanks a lot for setting me straight.

 

[audreyh1]

The fact that she can live completely off the dividends is the key here.

The fact that she has held these stocks for decades .. she has already been through some major bear market conditions and been OK. And guess what - her dividends didn't change - or actually gradually went up. That's the beauty of being able to live off your dividends:
1. They don't change much even in bear market conditions.
2. They tend to keep up with inflation.

Sounds like she is doing great! Her worst problem is that she might leave the bulk of her estate to her heirs since her draw will be so low.

Audrey

 

[unclemick]

Yep

Maybe just a minor tuneup instead of a major overhaul.

heh heh heh

 

[ats5g]

Vincenzo,

If she does want to rebalance into some bonds later on, she can do this without tax consequences by moving money in the IRA/403(b) from stock to bonds. That way she wouldn't have to realize cap gains in her taxable account.

If she is aware of the risks of stocks and is okay with it, hey, more power to her.

- Alec

 

[LOL!]

Since she has a 403(b) with TIAA-CREF, may I suggest that you encourage her to contact this absolutely superb organization which has helped many retiring folks. They have great info on their web site as well.

While the CREF stock fund is variable annuity, it has been around for decades and has lower expenses than the average stock mutual fund. It has returned 10.5% since inception in the 1950s.

I see no reason to go 80% bonds, 20% stocks if she is comfortable with the risk and currently can live off of the dividends and income from her current investments. I doubt there is any reason to go lower than 60% stocks, 40% fixed income.j

 

[FinanceDude]

Since she has a 403(b) with TIAA-CREF, may I suggest that you encourage her to contact this absolutely superb organization which has helped many retiring folks. They have great info on their web site as well.

TIAA-CREF is "great", as long as you don't want to take your money out..............

 

[bow-tie]

Isn't it age 70 or 70.5 that RMDs start on non-Roth retirement accounts?

She'll have that income stream on top of her dividends, if that is the case.