How to invest 1.2 Million for ER?

[EddieG]

The more people I talk with, the more confusing it gets, so maybe some specific plans from you all may help clear things up.

I'll try to make this as simple as possible:
1.2 Mil, no debts, mortgage, etc.
Married. ER now at 42/54 y.o.

Goals: Live off the money taking 3-4% (40-50k) a year, adjusting for inflation as years go by.
Have a decent balance to leave upon our deaths, but by no means are we wanting to deprive ourselves just to keep building a huge estate. Principal preservation adjusted for inflation would be fine.

Risk tolerance: Not big risk takers. Looking to keep stock exposure to minimum. Thinking 30-35% in various funds should do the job. We would like the other 65% in safer investments. Bonds, cd's, bond funds, income funds, whatever.

Thinking of going primarily with Vanguard. We will have some help from their advisers about re balancing along the way.

What specific allocations would you recommend when initially setting up a portfolio to meet these goals. Specific funds, especially Vanguard funds to satisfy the allocations would be helpful. Specific strategies on setting up the fixed income would be great. Laddering, Bond funds vs individual bonds? We have an opportunity right now to pick up about 150k of unrated munis through the estate. Underwritten by Ziegler, who has a great reputation in our area. Average rate is 5.0-6.25% federal tax free. Maturities between 1 yr and 17 years. Spread out between about 11 different bonds. Should I bother with these, or just take cash and invest it along with the rest of the strategy?

Any detailed answers would be GREATLY appreciated! I know it's a big question, but I figure there's probably some people out there who would like to help someone set up a great portfolio from the very start.

Thanks,
Eddie

 

[chinaco]

Diversified Portfolio of Stocks and Bonds. 60/40 (S/B) is my target.

You really have a lot of options. Personally, I would stick with low cost mutual funds. From ther the question is do you want to slice and dice or do you want to minimize your effort across the board.


If your goal is to really keep things simple... You could consider one of the new VG Income Funds. They do it all and target a %WR.

 

[EddieG]

Reply

Diversified Portfolio of Stocks and Bonds. 60/40 (S/B) is my target.

You really have a lot of options. Personally, I would stick with low cost mutual funds. From ther the question is do you want to slice and dice or do you want to minimize your effort across the board.


If your goal is to really keep things simple... You could consider one of the new VG Income Funds. They do it all and target a %WR.

Can you give me some fund names or symbols for the ones you're referring to?

Thanks,

Eddie

 

[Spanky]

Vanguard Target Retirement Income Fund (VTINX)

https://personal.vanguard.com/VGApp/hnw/funds/holdings?FundId=0308&FundIntExt=INT

 

[HFWR]

Pssst, VWIAX...

"Vanguard® Wellesley® Income Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation."

Personally, I think 35% stock for RE is a bit light in inflation protection, but what do I know?

 

[unclemick]

The more people I talk with, the more confusing it gets, so maybe some specific plans from you all may help clear things up.

I'll try to make this as simple as possible:
1.2 Mil, no debts, mortgage, etc.
Married. ER now at 42/54 y.o.

Goals: Live off the money taking 3-4% (40-50k) a year, adjusting for inflation as years go by.
Have a decent balance to leave upon our deaths, but by no means are we wanting to deprive ourselves just to keep building a huge estate. Principal preservation adjusted for inflation would be fine.

Risk tolerance: Not big risk takers. Looking to keep stock exposure to minimum. Thinking 30-35% in various funds should do the job. We would like the other 65% in safer investments. Bonds, cd's, bond funds, income funds, whatever.

Thinking of going primarily with Vanguard. We will have some help from their advisers about re balancing along the way.


Thanks,
Eddie

I know you have this posted also over at Bogleheads(aka Vanguard Diehards) where assuming I don't post - you'll get some ;real serious; answers.

Two things for chuckles - But with an element of truth:

Psssst - Wellesley! (4.32% current yield Norwegian wise)

Or - axe I say axe(New Orleans speak) those Vanguard Advisors - what's wrong with Vanguard Target Retirement Funds assuming you can select 'the one' and why do you need them(advisors)?

heh heh heh - couldn't resist. I see some posters have beat me to it.

 

[FinanceDude]

We have an opportunity right now to pick up about 150k of unrated munis through the estate. Underwritten by Ziegler, who has a great reputation in our area. Average rate is 5.0-6.25% federal tax free. Maturities between 1 yr and 17 years. Spread out between about 11 different bonds. Should I bother with these, or just take cash and invest it along with the rest of the strategy?

Unrated munis are common in Wisconsin, since most smaller issues don't want to pay toget rated (costs as much as $250,000) and also due to Wisconsin's HIGH property tax payment rates (97% +). If the bond is backed by the taxing authority of the municipality,it's a pretty decent deal. Is the issue exempt from state taxes also, and is ther AMT exposure? These are things to find out.

I like muni bonds, and have used them for years. However, I think you should stay on the short side of the ladder.........

 

[justin]

You will have a serious risk of depleting your nest egg taking an inflation adjusted 4% on a portfolio that is only 35% stocks. There is a good chance the 42 year old (you or your DW) might need to depend on the portfolio for 4-5 decades.

Even though you may view volatility risk as the primary risk to avoid, you can't ignore the longevity risk (outliving your money) and the inflation risk (having the real value of your fixed income portion decrease over time due to inflation). You will have to establish a portfolio allocation to manage all these risks.

If you bring at least $500,000 to vanguard, they'll give you a free financial plan, so maybe they can help with an eye to volatility risk, taxes, and long-term cash flow needs.

I'd personally pick an allocation more like 50/50 or 60/40 (stock/bond) to manage all the risks I'd be facing. Either that, or accept a lower withdrawal rate (like 3%) with a 35/65 portfolio. Run FIREcalc and see what effect changing the stock/bond mix has on portfolio survivability.

 

[ats5g]

You will have a serious risk of depleting your nest egg taking an inflation adjusted 4% on a portfolio that is only 35% stocks. There is a good chance the 42 year old (you or your DW) might need to depend on the portfolio for 4-5 decades.

Even though you may view volatility risk as the primary risk to avoid, you can't ignore the longevity risk (outliving your money) and the inflation risk (having the real value of your fixed income portion decrease over time due to inflation). You will have to establish a portfolio allocation to manage all these risks.

No offense to Justin, but stocks don't hedge either longevity risk or inflation risk. A greater allocation to stocks has resulted in a larger SWR simply as a result of the realized equity risk premium. What if the erp is smaller going forward [just like the 1800's]? Having said that, I agree with Justin that you might want to tone down the withdrawal % to closer to 3%.

If I were going to hedge inflation risk, it'd be with a lot of TIPS, especially if social security was going to be a small % of my retirement income.

- Alec

 

[justin]

No offense to Justin, but stocks don't hedge either longevity risk or inflation risk. A greater allocation to stocks has resulted in a larger SWR simply as a result of the realized equity risk premium. What if the erp is smaller going forward [just like the 1800's]? Having said that, I agree with Justin that you might want to tone down the withdrawal % to closer to 3%.

If I were going to hedge inflation risk, it'd be with a lot of TIPS, especially if social security was going to be a small % of my retirement income.

Sure, if you're willing to accept real returns of sub-3%, go TIPS. I'm assuming most of the 1.2 million is an inheritance and will be held in a taxable account, which would make TIPS not such a good choice either.

Historically, stocks would have allowed you to have a higher withdrawal rate. I'd probably pick something yielding a decent dividend, like VVIAX (Vanguard value index admiral shares) with a 2.6% yield and favorable tax treatment, versus TIPS (the vanguard fund version yielding 2.2% real) with unfavorable tax treatment versus VVIAX.

The hope w/ a high dividend payer (like VVIAX) would be that the dividends would increase at least as fast as the rate of inflation. Historically, that has been true.

Longevity and inflation risk are handled indirectly by a higher equity holding that should, over time, increase the size of the portfolio.

TIPS aren't a fail-safe hedge against inflation either. Over a 5+ decade span of time, risk of US government collapse is non-zero. Hey, it happened to Rome a while back.

 

[FinanceDude]

TIPS aren't a fail-safe hedge against inflation either. Over a 5+ decade span of time, risk of US government collapse is non-zero. Hey, it happened to Rome a while back.

If any of our future Presidents is an AVID fiddler player, I'm moving to Canada..........

 

[unclemick]

Not to worry -

'God Looks After Drunkards, Fools And The United States of America.'

Buck up - have faith in your parachute! Heck - be stone simple something like VG Balanced Index(aka the Bogle 'Policy Portfolio' like a pension fund).

Stand up! Hook up! When the light turns green, jump! When you hit the ground - go find life and grab it by the scruff of the neck!

Remember the clock ticks on!

heh heh heh - Folgers 1/2 Caff.

 

[Milton]

Over a 5+ decade span of time, risk of US government collapse is non-zero. Hey, it happened to Rome a while back.

The Roman Empire lasted 1,100 years (~625 BC to ~476 AD), and the Byzantine Empire about the same (~330 AD to ~1453 AD).

The American Empire began ~1950. Although it looks to be in decline (cf. Paul Kennedy and Gore Vidal), who knows what the future holds? Even if it lasts only half as long as the British Empire (which was preeminent for about 300 years, or ~1650 to 1947 AD), that would still be sufficient for all of us currently posting.

 

[youbet]

Have a decent balance to leave upon our deaths, but by no means are we wanting to deprive ourselves just to keep building a huge estate. Principal preservation adjusted for inflation would be fine.

Based on this statement, I think you would get some clarification by going to FIRECALC, entering your scenario and observing the ending portfolio value graph. Vary your AA inputs and resubmit a few times and note how the graph changes in terms of both average ending value and range of ending values.

Note that it is unlikely that the ending portfolio value for any period will be very close to the average ending portfolio value of all periods tested, even for AA's heavy in fixed. Variation is high.

When you ask for "principal preservation adjusted for inflation would be fine," historically there have been no/few practical AA strategies to guarantee this. More likely, your ending portfolio value will be significantly more or less than you began with, in real dollars.

Only living through a decade or two or three or four of retirement will tell you which result you'll get! That's what makes this all so much fun!

 

[haha]

TIPS aren't a fail-safe hedge against inflation either. Over a 5+ decade span of time, risk of US government collapse is non-zero. Hey, it happened to Rome a while back.

Under that circumstance, how secure would VVIAX be?

Ha

 

[ats5g]

Sure, if you're willing to accept real returns of sub-3%, go TIPS. I'm assuming most of the 1.2 million is an inheritance and will be held in a taxable account, which would make TIPS not such a good choice either.

Historically, stocks would have allowed you to have a higher withdrawal rate. I'd probably pick something yielding a decent dividend, like VVIAX (Vanguard value index admiral shares) with a 2.6% yield and favorable tax treatment, versus TIPS (the vanguard fund version yielding 2.2% real) with unfavorable tax treatment versus VVIAX.

The hope w/ a high dividend payer (like VVIAX) would be that the dividends would increase at least as fast as the rate of inflation. Historically, that has been true.

Longevity and inflation risk are handled indirectly by a higher equity holding that should, over time, increase the size of the portfolio.

First, that's a great point about allocating more towards equities if you money is mostly in taxable accounts. However, stating (correctly) that, historically, higher allocations to stocks [like over 50%] provided a better chance of not running out of money does not necessarily lead to the conclusion that this will be so in the future. This was historically true, in the 1900's in US Stocks, because the real return for US stocks was so much higher than the real returns for US bonds. However, this may not be as true in the future. See Bernstein's Retirement Calculator from Hell - Part II. Even people like Dimson, Marsh, and Stanton are inferring a worldwide equity risk premium of 3-3.5% over Tbills. If the real returns from stocks are closer to that of bonds/TIPS in the future, any greater longevity and inflation risk afforded by stocks in the past would be lessened.

TIPS aren't a fail-safe hedge against inflation either. Over a 5+ decade span of time, risk of US government collapse is non-zero. Hey, it happened to Rome a while back.

Well that's just a dumn argument, not too mention a straw man. Stocks would do just as horribly in that scenario. No one is saying that TIPS are a fail-safe hedge against inflation, just a much better hedge against inflation that stocks.

- Alec

 

[justin]

The American Empire began ~1950. Although it looks to be in decline (cf. Paul Kennedy and Gore Vidal), who knows what the future holds? Even if it lasts only half as long as the British Empire (which was preeminent for about 300 years, or ~1650 to 1947 AD), that would still be sufficient for all of us currently posting.

I don't think anyone knows whether we are a Roman, Byzantine, or British empire just yet. We (the US of A) might go down in the history books as a short-lived empire. Or we could slowly slide from prominence on the world stage. A few decades out, the populace burdened by ever increasing taxes to service our debt at ever increasing interest rates, we could potentially collapse or decline in importance. I personally don't believe this event is likely or probable in my lifetime. But it isn't impossible.

I like Bernstein's discussion of the Retirement Calculator from Hell, Part III. The main takeaway is "Any estimate of long-term financial success greater than about 80% is meaningless." Even if we can get a 95% or 99% success rate from FIREcalc, there is the practical reality that a 40 or 50 year retirement is a long time with a lot of unknown bad stuff that could happen. It may not ever happen.

 

[twaddle]

The light that burns twice as bright burns for half as long and you have burned so very, very brightly America.

[Sorry, I'm excited about the new Blade Runner release. ]

 

[TexasGal]

Suggestions for a conservative investor, such as myself at age 60 (don't know if this will work for someone your age):

Vanguard Wellesley - VWINX - Current mix is 37.60% stock / 60.12% bonds / 2.28% Cash Equiv. (inception 1970)

--and/or

Vanguard Wellington - VWELX - Current mix is 65.60% stock / 32.90% bonds / 1.50% Cash Equiv. (inception 1929)

--and/or

A Target Retirement fund based on the level of exposure you want to stocks. T. Rowe Price has some excellent target retirement funds that are rated 5-star by Morningstar, and Vanguard's are reasonably good, too.

Also Vanguard is coming out with new Managed Payout Funds. They are so new that I don't think they can be purchased yet, but I am going to keep my eye on them when they do come out. I think these might be worthwhile if you want to operate pretty much on auto pilot.

Managed Payout Real Growth Fund--designed for investors who seek a modest initial current payout, and wish to see their capital and payouts grow in real terms (inflation-adjusted) over time. This fund is expected to sustain a managed distribution policy with a 3% annual distribution rate.

Managed Payout Moderate Growth Fund--structured for investors who want to balance their initial payout stream with maintaining the purchasing power of their future payouts and capital. This fund is expected to sustain a managed distribution policy with a 5% annual distribution rate.

Managed Payout Capital Preservation Fund--geared toward investors who seek a higher payout level to satisfy current spending needs while preserving their capital over the long term. This fund is expected to sustain a managed distribution policy with a 7% annual distribution rate.

Vanguard Managed Payout Funds will feature an estimated expense ratio of 0.34%.

 

[brewer12345]

Under that circumstance, how secure would VVIAX be?

Ha

Does it matter? If the US defaults on its debt, we will all have bigger problems than our account balances.

"Squirrel: its what's for dinner!"

 

[justin]

Under that circumstance, how secure would VVIAX be?

Ha

My guess is that it would be significantly adversely affected. Although I'm sure a majority of the companies in VVIAX obtain a big chunk of profit/revenue from overseas. It would be a good time to have some international investments.

Sure, the whole world will be hurting if the US hits hard times, but I don't know that the US is the be-all-end-all in the global economy like it is sometimes made out to be.

 

[kcowan]

Why not look at convertible debentures? Sometimes you can end up a winner. We got lucky with a 2004 issue of a REIT offering 6.5% plus guaranteed conversion price of $25 and with the stock appreciating, we are getting our 6.5% plus a market value of 51% premium if we convert.

I cannot speak to dumping $1.2 million in the market all at once. I have more than that in the market but it has evolved over 5+ years. I undertstand why you would consider it would be intimidating.

If I were doing it again, I would go with some Vanguard for the easy stuff in equities and then do the fixed income myself with things like the convertibles and pref shares. Then I would create a "play money" portfolio and start buying high growth stocks.

 

[rmark]

draw

This article might be useful

FPA Journal - Guidelines for Withdrawal Rates and Portfolio Safety During Retirement

 

[unclemick]

If I were doing it again, I would go with some Vanguard for the easy stuff in equities and then do the fixed income myself with things like the convertibles and pref shares. Then I would create a "play money" portfolio and start buying high growth stocks.

I may be older but the 'hormones' never die - if football and wild women don't fix the problem - those pesky hobby stocks will always sneak in there.

15% Norwegian widow stocks - for the dividends - Riiiight!

heh heh heh - one fund out of the can is all it takes with auto rebalance/auto deposit to MM or checking. No advisors, no thinking, just have faith - and for Heaven's sake - do not read any stupid books!

Pssst - I forgot to mention the kayaks - and no there's no secret initiation - but some training is recommended.

Simple is extremely tough to do - but it does work. Target Retirement 2015 at 5% variable = 60% of income(the variable part) non cola pension plus early SS the other 40%. The Norwegian widow is lagniappe.

 

[kcowan]

I have to admit that the high growth fun stuff has been worth it. Some of them eventually gain respectability and move over to the other side, e.g. AAPL, AMX, AMOV, ACH - while others just get dumped at a loss.