Asset allocation with $8 million

[Foxtails]

Hi all,
My DH will be retiring this year. He is 54 and I am 55 and we are trying to figure out the proper asset allocation. He is very conservative with investing and I am moderate but willing to take more risk. What are your opinions about 50% in the S&P 500 index, 5% in a muni bond fund, 3% in a rental property and the rest in CDs. Our expenses will be running about $160k a year with room to cut if necessary. We are budgeting $30k a year for health insurance and our property taxes run close to $20k a year so that’s $50k already.
He tends to want to panic sell and we have done that in the past. I figured if the market fell 50% we would still have $6 million which at a 2.75% swr would still cover us without having to cut much. He also does not want to invest in international stocks because we have lost money on them in the past and they seem much more volatile. I agree with this. Also, since bond funds behave more like stocks if the market is tanking these will go down as well.
Thanks for taking the time to read and any opinions would be appreciated.

 

[DFDubb]

It doesn't really matter, put it all in a money market account if you want. A 2% return on 8MM is your 160k a year needed for expenses. Even if you had to pull a million for a kidnapping ransom, I think you'll be ok.

 

[braumeister]

A 2% withdrawal rate is nearly guaranteed to last you the rest of your life.

However, it would probably help you weather the occasional financial storms better if you put a sizable percentage into a total stock market ETF or fund and another sizable percentage into a total bond market ETF or fund. The rest can go into CDs/money market funds/online savings accounts. The key is to let the portfolio do its thing and mainly leave it alone.

 

[MichaelB]

Hi all,
My DH will be retiring this year. He is 54 and I am 55 and we are trying to figure out the proper asset allocation. He is very conservative with investing and I am moderate but willing to take more risk. What are your opinions about 50% in the S&P 500 index, 5% in a muni bond fund, 3% in a rental property and the rest in CDs. Our expenses will be running about $160k a year with room to cut if necessary. We are budgeting $30k a year for health insurance and our property taxes run close to $20k a year so that’s $50k already.
He tends to want to panic sell and we have done that in the past. I figured if the market fell 50% we would still have $6 million which at a 2.75% swr would still cover us without having to cut much. He also does not want to invest in international stocks because we have lost money on them in the past and they seem much more volatile. I agree with this. Also, since bond funds behave more like stocks if the market is tanking these will go down as well.
Thanks for taking the time to read and any opinions would be appreciated.

FIRECalc gives you the option of modeling different asset allocation mixes. You might want to look at a couple to see how they behave.

The part that's not clear to me is 5% in munis and the rest (42%) in CDs. Do you know what your marginal tax rate is, to see if it makes sense to shift some of that allocation from CD to Muni?

One other comment. Instead of CD's have you considered a ladder of TIPs?

 

[Jerry1]

It doesn't really matter, put it all in a money market account if you want. A 2% return on 8MM is your 160k a year needed for expenses.

And that assumes that you don't even touch the principle. To get a sense of how solid you are, $8M divided by 40 years (you'll both be in your 90's) is $200K. That's with no interest. So, if you can live on $160K, which is 2%, you don't need to take on any risk.

That said, I think your asset allocation makes sense though I would just go with 50% S&P or a total market index and 50% CD's or Treasury Bonds. I might even bring it down to 40% equities. Not sure why you threw in a few smaller allocations (muni's and real estate).

Regarding the $160K. Make sure you're confident on that. Don't forget taxes. If you spend $160K and you draw that mostly from a tax deferred account (401k, IRA . . .), you'll be paying a good amount of tax. You probably have a good amount of already taxed money, so managing taxes will be a task, but you probably have the tools. 5% in a muni fund is not going to do much if that's your tax plan.

Hang around and talk to the folks here and you'll get a better sense of how to move forward.

 

[flintnational]

Congrats on a well funded retirement. IMO, the asset allocation you outline is fine. But, if your husband panic sells stocks, any allocation to stocks might perform poorly. Because as you know, stocks will eventually go down. I would suggest one of two strategies.

1) Have your husband study stock market risk and reward and get comfortable with the inherent risks. Here is a link to the Bogleheads reading list.

2) If your husband cannot get comfortable with stock risk, consider hiring a fee only financial adviser that will help to keep the program on track when markets go down.

 

[RunningBum]

The panic selling in a downturn is the red flag here. That should never be done. One way to avoid this would be to use a mixed fund, which will keep the equity investment balanced, but the fund itself won't take a huge hit in a market downturn. If you had about 3/4 of your investments in VG Wellington (VWENX), which is about 65% stock, that would give you about 50% equities, but without the volatility of an all equity fund. The other 1/4 could go in the muni bond, rental, and CDs or whatever you want for non-equities.

 

[OldShooter]

Well, I think first you have to decide what problem you are trying to solve. Is it simply that you want to make sure you don't run out of money? If that's the case, you're there. You have won the game and don't need to keep playing (in equities).

On the other hand, if you want to leave an estate for your children and/or charities you could do what we have done: We think we will be in good shape while spending about 25% of our assets plus the interest we'll earn. So that, roughly, is our fixed income piece. The rest, 75%, is in equities and our estate splits it into three pieces; two trusts for our sons and one-third split among some charities. That 75% is thus long-term money and best invested in equities. In the unlikely event we overrun the 25%, we'll dip into the equities as necessary.

Your DH might benefit from our portfolio review strategy, too. We look once a year.

 

[Foxtails]

Thanks to all who have responded. Just to clarify we already own the rental and the muni bonds that’s why they are in the asset allocation. As far as panic selling he agreed that if we stayed at 50% or less in equities we would hold tight no matter what happens. During the correction last year at one point we were down over $400k but we just ignored it so I think we have learned our lesson about not selling in a downturn. 50% seems to be the highest percent in equities that DH is comfortable with. I can live with that although I would probably push it to 60% if it were up to me but I understand we both need to be able to sleep at night. The goals are to obviously not run out of money and also to leave a sizable estate for our children and various charities. That is why I am not putting it all in fixed income because I want at least half of this money to continue growing and fixed income is not going to do it for me.

Right now we are in a high tax bracket but that will obviously change when he retires this year. Top right now is either 35% or 37%. Also, about $6.5 million of this is in after-tax dollars. I will look into the latter TIPS someone mentioned. Also we have about $200k in Wellesley currently. I’m not understanding the total bond fund returns. On the Vanguard website the 10 year return for total bond market index (VBMFX) is 3.49%. That’s not much better than a CD but there is a lot a risk with that. Am I missing something or not understanding how the return is calculated?

 

[Dash man]

Your situation is similar to ours, except we are 62 and we plan to spend about $180k/yr. Our asset allocation is about 50% equities, 30% CDs and bonds, 20% real estate. Up through now, our two rentals cover their own expenses and some of our other two homes. That is changing this year as we’re taking one off the market for our kids to live in. Income from stock dividends and interest pays most of our living expenses. Stock value increase (capital gains) have covered the rest, but not evenly over each year. We keep enough in cash/CDs to cover several years of expenses. We ignore market fluctuations for the most part. What goes up, goes down and up again. This is the key to remember as others have noted, that if you panic sell you lose. I do at times sell a losing individual stock for tax loss harvesting or if the fundamentals of why I bought a stock have changed. But never panic sell because of a market swing. That’s why you keep a pot of money to get you through the downturn. If you or your husband can’t stomach it, you have enough to get by on fixed income alone, but you may now see it grow. Our net worth is higher now than when there was a paycheck, and we’ve helped many along the way since the market has done well.

 

[audreyh1]

Hi all,
My DH will be retiring this year. He is 54 and I am 55 and we are trying to figure out the proper asset allocation. He is very conservative with investing and I am moderate but willing to take more risk. What are your opinions about 50% in the S&P 500 index, 5% in a muni bond fund, 3% in a rental property and the rest in CDs. Our expenses will be running about $160k a year with room to cut if necessary. We are budgeting $30k a year for health insurance and our property taxes run close to $20k a year so that’s $50k already.
He tends to want to panic sell and we have done that in the past. I figured if the market fell 50% we would still have $6 million which at a 2.75% swr would still cover us without having to cut much. He also does not want to invest in international stocks because we have lost money on them in the past and they seem much more volatile. I agree with this. Also, since bond funds behave more like stocks if the market is tanking these will go down as well.
Thanks for taking the time to read and any opinions would be appreciated.

50/50 is a fine allocation for whatever size portfolio.

The S&P500 is a large cap company growth index. How about a broader stock index like a Total Stock Market index fund? You'll be fine even without international stocks.

I agree that having part of the non-equity in a broadly diversified high quality bond index fund like makes sense - not just muni bonds and CDs.

Too bad about the panic sell tendency. But hopefully with only half in the equity market that tendency can be avoided.

 

[audreyh1]

I’m not understanding the total bond fund returns. On the Vanguard website the 10 year return for total bond market index (VBMFX) is 3.49%. That’s not much better than a CD but there is a lot a risk with that. Am I missing something or not understanding how the return is calculated?

What you are missing is this: if the equity markets tank, interest rates will drop, and the bond fund will go up in value. You'll even have an opportunity (if you can stomach it) to rebalancing by selling a little of the bond fund and buying some equities on sale. You can't just evaluate a bond fund on current yield.

VBMFX is an excellent choice of a fund to help counter the volatility of equities.

But if you just use CDs instead, it's not the end of the world. You'll have time after a few years to revisit this.

 

[pb4uski]

A couple things. First, with $8 million you would be well served to find a good fee-based financial planner or a CPA with a PFS designation.... avoid any and all FAs that want to manage your money for you and charge you an AUM fee.

https://account.aicpa.org/eWeb/dynamicpage.aspx?webcode=referralwebsearch

If you prefer to DIY, I would probably plunk the whole shooting match of the taxable portfolio in Vanguard's Wellesley Income Fund (a 40% stock/60% bond fund with a good record that has a 0.16% expense ratio).

Also, just so you know, you'll probably still be paying a boatload of taxes even in retirement. Wellesley yields about 3.4% currently, so just the income from that on $6.5 million would be $220k of income... more than the $160k that you want to spend.

See the attached for an example of how Wellesley, Wellington and a 50/50 mix of Wellesley/Wellington... 40/60, 60/40 and 50/50, respectively, would have weathered 2008/2009... assuming $6.5 million on Jan 2008 and $13,333 monthly withdrawals, inflation adjusted.

https://www.portfoliovisualizer.com...bol2=VWENX&allocation2_2=100&allocation2_3=50

 

[catman2020]

You might want to look at a ‘bucket’ approach. It’s more of a psychological trick than a strictly financial approach. Basically put five years of expenses or so in a money market account. Allow interest and dividends flow into that money market account. So basically you don’t need to look at or worry about your main portfolio since you’ll have a large cash buffer and the income to cover your expenses, basically, indefinitely.

 

[pb4uski]

Another way to view buckets is if your overall AA is 40% bonds and your withdrawal rate is 2% then assuming that interest approximates inflation, you could take 2% inflation adjusted withdrawals for 20 years without touching your equities... so just your bonds could support your spending for the first 20 years and the stocks are left to grow.

 

[audreyh1]

A couple things. First, with $8 million you would be well served to find a good fee-based financial planner or a CPA with a PFS designation.... avoid any and all FAs that want to manage your money for you and charge you an AUM fee.

$8M doesn't need a fee-based financial planner any more than $5M or even $2M does. Need for guidance/help all depends on the individuals, and then there is the challenge of finding a good quality advisor.

Having a fee-based planner do an initial review of plans is probably worthwhile for many folks on the verge of retiring, as long as there is no commitment to turn over assets to be managed.

 

[pb4uski]

I guess my point was that the fee for a fee-based planner would be more of a nit for an $8 million portfolio than for a $2 million or $1 million portfolio.

 

[medved]

I’m at about 50/50 now. I was heavier allocated toward equities but over the past few years have moved toward fixed income. I intend to keep at this allocation, more or less, for the foreseeable future. Like you guys, I could live fine with no equities risk. But I’m comfortable with 50%.

FAs are not very popular on this board, but in the real world many people use FAs and find their advice worthwhile. I’m one of those.

 

[statsman]

Asset allocation with $8 million ...

Would you be agreeable to having you and your husband do a DNA cheek swab to see if we're related?!

Definitely a good situation to have. I hope you are able to find an investment strategy to where you aren't stressing about it all the time.

 

[pb4uski]

Would you be agreeable to having you and your husband do a DNA cheek swab to see if we're related?! ...

I want in on that too.

 

[audreyh1]

I guess my point was that the fee for a fee-based planner would be more of a nit for an $8 million portfolio than for a $2 million or $1 million portfolio.

Oh, yeah I see. Right, when you compute a 1% management fee on $8M, and realize that $80,000 would be skimmed off the top every year, it really puts those kind of fees in perspective!

 

[gwraigty]

Hi all,
He is very conservative with investing and I am moderate but willing to take more risk. What are your opinions about 50% in the S&P 500 index, 5% in a muni bond fund, 3% in a rental property and the rest in CDs...He tends to want to panic sell and we have done that in the past.

I'd go with 25% in stocks, maybe something that pays higher dividends than the S&P 500. For example, SPY - 2.06% vs. SPYD - 4.70%. If you want to juice it up a little more, you can mix in some preferred. PFF and PSK both yield around 5.6%. Maybe something in utilities - VPU - 3.21%.

Increase the amount in muni bonds. 5% is almost nothing. With 8 million, you might want more tax-free income. Decrease the amount in CDs. 42% is too much, considering they pay the least and are fully taxable. Put some in a corporate bond fund/ETF with a composition of mostly investment grade issues.

Whatever you decide, it's not written in stone. You can change your minds as you progress through retirement.

 

[NW-Bound]

Thanks to all who have responded. Just to clarify we already own the rental and the muni bonds that’s why they are in the asset allocation. As far as panic selling he agreed that if we stayed at 50% or less in equities we would hold tight no matter what happens. During the correction last year at one point we were down over $400k but we just ignored it so I think we have learned our lesson about not selling in a downturn...

A $400K loss is only 5% out of $8M. It's nothing!

From top to bottom in 2018, I lost more than $550K. And I did not have $8M. Far less than that. In percentage, my loss was a lot more than 5%.

PS. It's $568,663 after adjusting for withdrawal.

 

[upset264]

Re: the 50% equity allocation. I would build it over time with regularly scheduled purchases. Over three to five years.

 

[DrRoy]

I would put a good bit of the CD $ into an investment grade bond ladder. The returns are better.