My AA and risk reduction plan

[fh2000]

I have been on this forum for 6-7 years reading posts daily and learned a lot from you. Thank you.

Our status:
DW (56) and I (62) are still wo*king. But I am ready to quit soon in few months, and DW will likely resign at the end of this year. We will be paying the full cost of COBRA beginning 2019, then ACA after that if it is still here, while doing some Roth conversions. We will take SS both at age 70.

We have no debt, no pension, no future education cost anymore. Our current spending is around $65K/yr, Our estimated spending after retirement: $130K/yr (to include healthcare, travel, tax) for 35 years. There is a lot of room to cut if necessary.

Our AA is the following:
Cash: $330K

Bond in pretax: $660K
Stock Index in pretax: $940K

Muni bonds in taxable: $200K
Individual stocks in taxable: $1.6M
Total portfolio: $3.7M

In addition, we have 2 paid for homes with equity: $1M.
We have no LTCi. Our backup plan is to return to home country where Universal healthcare and nursing homes are much cheaper.

I also have a big capital loss ($300K). This can be used to offset future capital gains.

Planning for the worst, an unlikely 50% market downturn: my cash and bonds position will not move much (?), stocks will be cut in half. Total portfolio will have $2.46M remaining. If this happens, we will reduce retirement spending down to $120K/yr and this is still 100% in FIRECalc. We will spend down $330K cash first, then $200K Muni bonds position. This will give us 3-4 years for stocks to recover.

I am looking for opinions if you see huge risks with this plan.
Thank you.

 

[VanWinkle]

I have been on this forum for 6-7 years reading posts daily and learned a lot from you. Thank you.

Our status:
DW (56) and I (62) are still wo*king. But I am ready to quit soon in few months, and DW will likely resign at the end of this year. We will be paying the full cost of COBRA beginning 2019, then ACA after that if it is still here, while doing some Roth conversions. We will take SS both at age 70.

We have no debt, no pension, no future education cost anymore. Our current spending is around $65K/yr, Our estimated spending after retirement: $130K/yr (to include healthcare, travel, tax) for 35 years. There is a lot of room to cut if necessary.

Our AA is the following:
Cash: $330K

Bond in pretax: $660K
Stock Index in pretax: $940K

Muni bonds in taxable: $200K
Individual stocks in taxable: $1.6M
Total portfolio: $3.7M

In addition, we have 2 paid for homes with equity: $1M.
We have no LTCi. Our backup plan is to return to home country where Universal healthcare and nursing homes are much cheaper.

I also have a big capital loss ($300K). This can be used to offset future capital gains.

Planning for the worst, an unlikely 50% market downturn: my cash and bonds position will not move much (?), stocks will be cut in half. Total portfolio will have $2.46M remaining. If this happens, we will reduce retirement spending down to $120K/yr and this is still 100% in FIRECalc. We will spend down $330K cash first, then $200K Muni bonds position. This will give us 3-4 years for stocks to recover.

I am looking for opinions if you see huge risks with this plan.
Thank you.

You appear to be set to me and you have used conservative figures for returns vs liberal spending figures. I think you will find a happy medium in both expenses and withdrawal.

You SS at 70 can be taken at any time if your plan goes south and requires more guaranteed income. The lowest SS payment might be more beneficial to take earlier, but there are many SS calculators to check this.

I would likely reduce the AA in retirement to more like 50-60% in stocks including getting rid of some of your individual stocks(using capital losses to offset any tax consequences).

Your control of income in the pre 65 years would help your health care expenses if ACA is still around(something similar will likely be around)

Best of luck to you and congrats on doing a great job saving.

VW

 

[pb4uski]

You look to be all set. I would focus between ER and 70 on structuring your taxable portfolio to provide minimal income with low or no dividend stocks so you can maximize low-cost Roth conversions to reduce the tax torpedo which RMDs start. Given you large capital loss you should have plenty of leeway to to that and still provide funds for living expenses.

 

[MrLoco]

You have more than enough assets to pull the trigger. The one thing that would concern me is the $1.6M in individual stocks. With individual stocks you are taking market risk AND individual company risk. And this accounts for 43% of your portfolio. Are these all large cap well established companies or some very volatile small cap stocks as well?

One idea might be to trim some winners and at the same time offset the huge carryover capital loss you have?

Good luck in whatever you decide.

 

[fh2000]

You have more than enough assets to pull the trigger. The one thing that would concern me is the $1.6M in individual stocks. With individual stocks you are taking market risk AND individual company risk. And this accounts for 43% of your portfolio. Are these all large cap well established companies or some very volatile small cap stocks as well?

One idea might be to trim some winners and at the same time offset the huge carryover capital loss you have?

Good luck in whatever you decide.

Thank you for your suggestion. I know I carry a big risk on the individual stocks.

The largest portion of the individual stock we own is from our Megacorp ESPP. The next large ones are Berkshire Hathaway and Google. These 3 together valued at $1.3M thanks to the recent run up. We also own MSFT, EBAY, PYPL, CSCO, and ugh GE. These are valued less than $50K each.

I could unload some and offset with my capital loss. I am afraid I am relying a little bit market timing here. I will do that when some of them start showing signs of weakness.

 

[pb4uski]

Diversification risk would be a concern for me.... while Berkshire Hathaway and Google are great companies at one time GM, Chrysler, Bear Stearns and Lehman Brothers were as well and we all know what happened to them.

 

[LOL!]

I could unload some and offset with my capital loss. I am afraid I am relying a little bit market timing here. I will do that when some of them start showing signs of weakness.

GE has shown some signs of weakness.

It would not be market timing to unload now at the peak some of these large-cap stocks and replace with something like a Total US Stock Market index fund or a Total International Stock Market index fund which are basically collections of mostly large-cap stocks. It would diversify, get rid of single stock risk, avoid manager risk, remain tax-efficient, not change your asset allocation, and in no way be market timing.

Instead, waiting for signs of weakness would be market timing.

Also, by selling stocks high and then buying an index fund high, you would be resetting cost basis and thus having a chance to some more tax-loss harvesting if the index fund shares drop in value.

 

[fh2000]

Diversification risk would be a concern for me.... while Berkshire Hathaway and Google are great companies at one time GM, Chrysler, Bear Stearns and Lehman Brothers were as well and we all know what happened to them.

Point well taken, PB. I am also paralyzed as when I should unload them since I own some for a long time. Therefore cost base is low. My worst case planning is to endure a 50% haircut for all of the stocks, and with reduced spending, we can still pull it off, looks like.

 

[UtahSkier]

Hope your plan works as it is very similar to mine... with you having generally better numbers.

Here are some key differences;
1. You are 6 years older than I
2. DW and I have been retired for 2 years
3. Our budgeted spending is $133K for 2018
4. Your portfolio is 200K greater
5. Your equity is 500K greater.
6. I don't bother with Roth Conversions
7. Yes, you are market timing.

I have the $300K cash spending bucket as well to manage sequence of returns risk. The rest of the portfolio is generally allocated according to the Arronson family Lazy portfolio (etf version).

We are already on ACA and this gives us really cheap HI. Not sure why you would want the more expensive Cobra insurance.

To get ACA, I keep our AGI under 65K. I get this number from 25K interest and dividends, 20K capital gains and 20K transfer from IRA/401K. These numbers result in very little Federal income tax and about $3K state income tax.

I model my spending to be $140K and am comfortable with the results

 

[LOL!]

I am also paralyzed ....

This is a good enough reason to go read some books on Behavioral Finance over the next few months:

Your Money & Your Brain, Zweig
Why Smart People Make Big Money Mistakes, Belsky & Gilovich
...

 

[pb4uski]

Point well taken, PB. I am also paralyzed as when I should unload them since I own some for a long time. Therefore cost base is low. My worst case planning is to endure a 50% haircut for all of the stocks, and with reduced spending, we can still pull it off, looks like.

Would you be willing to buy insurance to rid yourself of that concentration risk?

If so, you can make it go away for about your (unrealized gains - $300k)*15%.

$1.6m * say, 50% gain - $800k; -$300k = $500k; * 15% = $75k

Seems to me that $75k in capital gains tax (4.7% of your $1.6m) is not a huge price to rid yourself of concentration risk.... worst case it would be $195k... 12.1% of your $1.6m).

 

[fh2000]

Hope your plan works as it is very similar to mine... with you having generally better numbers.

Here are some key differences;
1. You are 6 years older than I
2. DW and I have been retired for 2 years
3. Our budgeted spending is $133K for 2018
4. Your portfolio is 200K greater
5. Your equity is 500K greater.
6. I don't bother with Roth Conversions
7. Yes, you are market timing.

I have the $300K cash spending bucket as well to manage sequence of returns risk. The rest of the portfolio is generally allocated according to the Arronson family Lazy portfolio (etf version).

We are already on ACA and this gives us really cheap HI. Not sure why you would want the more expensive Cobra insurance.

To get ACA, I keep our AGI under 65K. I get this number from 25K interest and dividends, 20K capital gains and 20K transfer from IRA/401K. These numbers result in very little Federal income tax and about $3K state income tax.

I model my spending to be $140K and am comfortable with the results

I am happy to hear a similar plan with a successful history.

So, our plan is that I quit in few months. Get on DW's health plan until the end of the year. Then she signs on to COBRA.

The reason we are not looking into ACA initially, is if we do Roth conversion meaningfully, it would take us out of the income limit for ACA subsidy. Once COBRA runs out, I will be close to 64 1/2. We will then look into ACA if it is still here and later medicare for me.

 

[Splash]

Before locking in COBRA for 2019 compare with your ACA options and costs.

I retired February 2017 and found ACA Health Insurance options were less costly than Megacorp COBRA for me. Took COBRA for dental and vision. Will self insure those when COBRA ends.

 

[fh2000]

This is a good enough reason to go read some books on Behavioral Finance over the next few months:

Your Money & Your Brain, Zweig
Why Smart People Make Big Money Mistakes, Belsky & Gilovich
...

Good suggestions. I will go check in our local library.

 

[Earl E Retyre]

Total portfolio will have $2.46M remaining. If this happens, we will reduce retirement spending down to $120K/yr and this is still 100% in FIRECalc.

I am a bit surprised that a $2.46M portfolio with $120k in expenses yields a 100% success in Firecalc. That is a almost a 5% withdrawal rate.

 

[fh2000]

Would you be willing to buy insurance to rid yourself of that concentration risk?

If so, you can make it go away for about your (unrealized gains - $300k)*15%.

$1.6m * say, 50% gain - $800k; -$300k = $500k; * 15% = $75k

Seems to me that $75k in capital gains tax (4.7% of your $1.6m) is not a huge price to rid yourself of concentration risk.... worst case it would be $195k... 12.1% of your $1.6m).

That sounds reasonable. Our tax bracket will still be high this year even with my working just few months (waiting for my annual bonus, then give notice).

I am holding my breath and wait for 2019 when DW is out of work place, then start unloading them. Meanwhile, I have been buying puts on the larger holdings as "insurance", but puts keep loosing money so far.

 

[fh2000]

I am a bit surprised that a $2.46M portfolio with $120k in expenses yields a 100% success in Firecalc. That is a almost a 5% withdrawal rate.

I also added 30K/yr Social Security for both of us beginning at 70. We are both in IT with similar earning history.

So, $120K with $2.46M for 35 years, yields results below:

"Here is how your portfolio would have fared in each of the 112 cycles. The lowest and highest portfolio balance at the end of your retirement was $76,590 to $24,139,936, with an average at the end of $6,155,304. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 35 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%."

 

[Tallman4123]

I am a bit surprised that a $2.46M portfolio with $120k in expenses yields a 100% success in Firecalc. That is a almost a 5% withdrawal rate.

My guess is that Social Security at 70 could reduce the portfolio spend by 40% or so. This would account for the 100% success in FireCalc.

Ironically, the OP's worst case numbers (~$2.5 mil and $120k spend) are similar to our current numbers. I am 60 and DW is 52 and we both are now retired. We looked at both ACA and COBRA and COBRA was the better deal both in terms of cost and benefits based on a lack of ACA subsidy. That may change for us in 2019.

 

[fh2000]

My guess is that Social Security at 70 could reduce the portfolio spend by 40% or so. This would account for the 100% success in FireCalc.

Ironically, the OP's worst case numbers (~$2.5 mil and $120k spend) are similar to our current numbers. I am 60 and DW is 52 and we both are now retired. We looked at both ACA and COBRA and COBRA was the better deal both in terms of cost and benefits based on a lack of ACA subsidy. That may change for us in 2019.

You are right, Tallman. I added SS.
Thanks for another data point to show that my numbers (upper end and lower end) would work.

 

[Tallman4123]

You are right, Tallman. I added SS.
Thanks for another data point to show that my numbers (upper end and lower end) would work.

You're welcome. I certainly HOPE the lower end works!