WWYD My Living Expense Money for next 7 Years

[Fleur58]

I am feeling nervous about the economy and questioning my taxable investment allocation.
I am 60, single, retired and living solely on my savings. Retirement age is 66 and 8 months. If I take SS then it will be $2900 a month. At age 62 it is 2K.
I have 1 million in TIRA money to access later.
Expenses are low, mortgage paid off, I get a HC subsidy
For the next 7 years I plan to live on these taxable accounts (take 50K per year):
Investment House 1
Account 1: 209K in SPAXX (Govt MM)
Account 2: 130K (100% equity funds)
Account 3: 105K (60% equity and 40% Bonds)
These funds generate about 10K a year in dividends and cap gains
Investment House 2
102K in a CD Ladder emergency fund.

Should money earmarked for living expenses be invested in equities at all at my age? Given rumblings about an upcoming downturn, how much of my 546K would you advise to be in cash? How would you allocate this money?

 

[Aerides]

We are on the conservative side on this, and have about 3 years expenses in cash equiv. You have $444 throwing off only 10k per year that is about where CD's are now, so you can probably go a bit more aggressive there? You have more than 10 years in very conservative-looking investments given your returns.

 

[Cobra9777]

If I'm reading your post right, you've got $311K in cash currently (MM+CD). With interest, that should come close to covering your whole 7 year timeframe at $50K/yr. That strikes me as very conservative. It's >20% of your overall portfolio. Reading between the lines of your post, it sounds like you want even more in cash. Since you asked WWYD?... I certainly would not add more cash. I'd probably reduce it to 2-3 years max and keep more in equities. If SHTF, you can take SS a little early and keep your money invested through to the inevitable recovery.

 

[pb4uski]

Here is one approach.... carve $232k out of your $1,546k and put it aside in an online savings account or MM that is a substitute for SS from 60 to 66 and 8 months (80 months * $2,900 = $232k). Set up a month withdrawal of $2,900 from that fund.

Invest the remaining $1,314k in a 60/40 balanced portfolio... at a conservative 3% withdrawal rate you can withdraw $39k a year, which when combined with your "SS" of $35k a year will provide much more than the $50k year that you need.

If you decide to limit your withdrawals to a total of $50k a year then the first year withdrawal would only be $15.2k ($50k - $34.8k) and a 1.2% WR... definitely bulletproof.

Assuming no nasty tax consequences of redeployment, invest the remaining $314k in your taxable portfoio in domestic and foreign equities.... the dividend income and LTCG will be tax-free if you manage your income right. Consider Roth conversions up to the lower of your sweet spot for ACA subsidies or the top of the tax bracket one down from the tax bracket that you expect to be in once SS starts.

 

[W2R]

You asked what would WE do, and naturally that depends on the individual. I doubt that anybody else here would agree with what I would do. But hey, you asked! So here is what I would do. Feel free to ignore.

1. I'd cut my spending back to just $40K/year for the next 7 years. I'd take $30K of that that from SPAXX (which would last for about 7 years at $30K/year), and the other $10K from dividends/LTCG.

2. After 7 years SPAXX would be gone and I'd be down to the $102K CD ladder. I'd leave that CD ladder alone permanently and continue to regard it as an emergency fund.

3. I'd have a great retirement, and definitely start spending more once SS kicks in. 7 years will pass before you know it!

 

[pb4uski]

^^^^ do you have an emergency fund that is 6.6% of your total investments?

 

[OldShooter]

I'm a little confused. You say $1M in TIRA, then launch off to talk about taxable accounts that add up to only about 1/3 of your total investable assets. IMO you really need to be looking at the whole picture. If you tell us that the $1M is in MM you will get quite a different set of opinions than if you tell us that it is 100% in emerging market equities. You also have a house of unknown value that should be part of the picture when looking at assets, though probably not in an AA calculation. Finally, what is your goal for an estate? Do you want your last check to bounce or do you want to bequeath money to relatives or charities?


I'd encourage you to look at the big picture instead of just at 1/3 of your money and for only 7 years.

 

[Fleur58]

Thank you all for your responses on my post. You have given me a lot to think about. You know, I like that the SPAXX money stays the same day in and day out, it never loses money and gives off a minor dividend.

My 1 million TIRA is balanced in 60/40 stocks/bonds. I've got some pretty good equity and asset allocation funds like Dodge and Cox Growth, D&I Income; and Vang Wellesley, FMI Growth, TRP Cap Apprec, Fidelity Balanced, a Fidelity Monitor Model G&I portfolio.

My house is worth 400K.

My emergency fund of 102K is approx 6% of my total investments (1.546 M)--is that too much?

I know I am holding a lot in cash but I thought I read in multiple places that one shouldn't be gambling with money needed in 5 years. I have no way to replace it.

Yes I was concerned with liquidating more of this money out of equities to less volatile investments that I can live with in case this downturn happens. I gather you all would think this is not a good move because of the gains I would potentially be missing out on.

My goal for my estate is to leave money to my 2 sons and 2 grandchildren.

I did my first 10K Roth Conversion this year.

 

[OldShooter]

... I've got some pretty good equity and asset allocation funds like Dodge and Cox Growth, D&I Income; and Vang Wellesley, FMI Growth, TRP Cap Apprec, Fidelity Balanced, a Fidelity Monitor Model G&I portfolio. ...

@Fleur58, Standard & Poors publishes semiannual reports on US mutual funds that you should read. The "SPIVA" report documents the fact that a very small fraction of actively managed mutual funds (like yours) outperform their benchmarks over any time period. Over 10 years, for example, typically only about 5% (1 out of 20) outperform. The "Manager Persistence" report documents the fact that outperformance is basically due to luck and not skill; an outperfoming manager last year is no more likely to outperform again this year than any other manager. This is why a large number of us on this board (maybe the majority, I have no way to know) invest in the benchmarks (aka index funds) with confidence that our portfolios will outperform almost all active managers and that while there will be outperforming managers in any period there is no way to identify them ahead of time. The reports are here: https://us.spindices.com/search/?ContentType=SPIVA


Investing guru Kenneth French explains this situation in a couple of short videos:


https://famafrench.dimensional.com/videos/is-this-a-good-time-for-active-investing.aspx


https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx

I know I am holding a lot in cash but I thought I read in multiple places that one shouldn't be gambling with money needed in 5 years. I have no way to replace it.

Yes I was concerned with liquidating more of this money out of equities to less volatile investments that I can live with in case this downturn happens. I gather you all would think this is not a good move because of the gains I would potentially be missing out on.

My goal for my estate is to leave money to my 2 sons and 2 grandchildren. ...

Well, start with the fact that volatility is not risk unless you are forced to sell a volatile asset at a low point. Avoiding this situation is done by exactly what you are doing --- holding some low volatility assets to tide you over rough spots in the markets. Conventional wisdom and history seem to indicate that something between 60% and 40% equities is the sweet spot, with the actual allocation chosen based on the person's tolerance for volatility.


All that said, you should consider whether the cost (in reduced income) for zero volatility is worth it. In our case we hold SAMBX, which is a somewhat complicated asset that yields 4% but comes with the risk of some future volatility. It has been rock solid since we bought it four years ago. At this point we could take a 6-8% hit and still be ahead of what we would have earned in MM or t-bills. And history says that type of hit would probably be temporary. So that is our tradeoff. Yours will probably be different.

 

[Another Reader]

First thing I would do is dump SPAXX with its' 0.42 percent expense ratio. You can buy short term treasuries directly at auction every week at no cost through Fidelity. Right now, I would do a mix of 4 week, three month, and a few six month notes, with varying roll dates. That's what I am doing with a yield in excess of two percent.

 

[jollystomper]

To the OP, I am your age and will be expecting the same amount from SS. I am married and our cash needs (beyond my non-COLA pension) we projected at starting around the same level, for us $52K/year. Our decision has been, given our investment mix which is a somewhat different from yours, to go very conservative and we have six years of that yearly amount, $310K in cash, in high-yield savings and CDs. We do not want to be forced to touch our investments during any downturns. For now our dividends and capital gains are still being reinvested.

We will review this periodically (perhaps twice a year), if it is looking like we have too much cash we will invest and reduce the amount. Again a very conservative approach but one that allows us to sleep at night.

 

[RunningBum]

I don't get the idea of an emergency fund in retirement at all. An emergency fund is to protect against job loss, or to keep from having to tap retirement accounts if you have a major unexpected expense. You don't have a job to lose, and you can tap your retirement accounts at any time. Nearly all of your investments look to be very accessible, so in effect it's all an emergency fund. In fact, tying up your emergency fund in a CD ladder with penalties for breaking make that probably the least accessible money you have.

What's your view on the purpose of this emergency fund? When might you use it?

Cash can certainly be part of an AA strategy. A lot of people have money in a CD ladder for near term living expenses, so they don't have to sell stocks in a down market for living expenses. That makes sense to me. Emergency fund does not.

 

[Dtail]

First thing I would do is dump SPAXX with its' 0.42 percent expense ratio. You can buy short term treasuries directly at auction every week at no cost through Fidelity. Right now, I would do a mix of 4 week, three month, and a few six month notes, with varying roll dates. That's what I am doing with a yield in excess of two percent.

If you want less "work", you can switch to FZDXX (need to start with 100k minimum) which has a 1.96% net yield. With MM type funds, the net yield counts in the end.

 

[ncbill]

Or look at the "rising equity glide path" approach where you rebalance to ~30% equities / 70% bonds to minimize sequence of return risk.

https://earlyretirementnow.com/2017...drawal-rates-part-14-sequence-of-return-risk/

 

[Fleur58]

Thanks for the information links Old Shooter and ncbill.

Another reader--I agree I should dump SPAXX I can do better.

D-tail I would need less work, don't want to buy T bills.

I feel like I need to put my cash to work but not take big risks with it. Maybe a short term bond fund.

All this information has got me looking at my big picture.

Jollystomper--Sleep at night is important. Everything doesn't have to be in the stock or bond market.

Runningbum--You make some good points re the Emergency Fund. I would buy a car outright (used); expensive home repair; healthcare expenses'; roth conversion tax money, maybe use some on grandchildren needs like braces.

This may sound strange but I don't want to make a lot of money on these assets. Ideally I'd do 20K of Roth Conversions a year and have around 17K of investment return to keep me in the 12% tax bracket at around 37K.

 

[Dtail]

Thanks for the information links Old Shooter and ncbill.

Another reader--I agree I should dump SPAXX I can do better.

D-tail I would need less work, don't want to buy T bills.

I feel like I need to put my cash to work but not take big risks with it. Maybe a short term bond fund.

All this information has got me looking at my big picture.

Jollystomper--Sleep at night is important. Everything doesn't have to be in the stock or bond market.

Runningbum--You make some good points re the Emergency Fund. I would buy a car outright (used); expensive home repair; healthcare expenses'; roth conversion tax money, maybe use some on grandchildren needs like braces.

This may sound strange but I don't want to make a lot of money on these assets. Ideally I'd do 20K of Roth Conversions a year and have around 17K of investment return to keep me in the 12% tax bracket at around 37K.

So combining these comments, for effectively no work but one "trade", you can buy FZDXX and gain 0.38% with no extra risk.

 

[OldShooter]

... This may sound strange but I don't want to make a lot of money on these assets. Ideally I'd do 20K of Roth Conversions a year and have around 17K of investment return to keep me in the 12% tax bracket at around 37K.

Just be careful in your thinking. Staying in the 12% tax bracket may not be financially sensible and, by itself, is not a good objective. IMO your objective should be to net the maximum amount of after-tax investment return at your chosen level of acceptable level of risk and hassle. If you can achieve that, it doesn't matter a bit what your tax bracket is. Said another way, if you net more money you really don't care whether the government nets more money too.

 

[pb4uski]

So combining these comments, for effectively no work but one "trade", you can buy FZDXX and gain 0.38% with no extra risk.

Why do FZDXX for a 1.96% yield when you can do VMMXX for 2.09%? Another 0.13% for 0.51% total gain.

 

[Doc0]

Since you have the cash, I would live off the cash and Roth convert as much of the TIRA as I could afford up to age 70. At age 70 I would RMD the remaining TIRA and take SS. Spend down the TIRA, then spend the taxable money, then the Roth. Depending on how long you live and how much you convert, you may not need to touch the Roth. The Roth will pass to your kids and is always available for for braces etc. tax free. The tax bite is low right now, you can Roth convert $50K for only $4370 (9%) per year while living on cash, or 100K/yr for only 15% while living on cash, this is a steal. Living on the cash, as it's consumed will automatically increase your asset allocation toward equities which is desirable as you reach mid retirement and you are bullet proof to a crash over the next 10 years. As long as you're not selling what crashes (eg equities) you don't book a loss and a closed portfolio is immune to SORR. When you hit 70 re-evaluate your need. Between SS and RMD you may have no extra need. During that 10 years the portfolio will continue to grow, Roth money TIRA money and taxable money. By doing this you reduce your later tax bite (when RMD taxes get significant) and the Roth grows unmolested as "emergency money" or "long term care" money or bequeathment money. I would aim for 50/50 bonds/equities in something like VTSMX and VBMFX in all my accounts. The expected return on that is 7% with a risk of 7%. I would re-balance every 1-2 years. If you have legacy post tax money just spend it down as it becomes convenient. I would use Personal Capital to aggregate my portfolio. Personal Capital has a means to look at your allocation and see where it stands compared to the efficient frontier. 50/50 VSTMX/VBMFX is on the efficient frontier.

Have a nice retirement.

 

[Dtail]

Why do FZDXX for a 1.96% yield when you can do VMMXX for 2.09%? Another 0.13% for 0.51% total gain.

I hear ya, but it appeared that his investments were at Fidelity, so just went with that theme.
All our TIRA's are at Fidelity, so even for the extra 13 bps, i wouldn't just open up one account at Vanguard.