Retirement This Year - What to do with a windfall?

[CliffordRT]

Hello all -

I've been lurking here for a few years now and have had thoughts for some time that early retirement was in the cards in the near future. As it turns out retirement will occur in March of 2016. My wife and I are in our mid-50's and we have kids in college.

My question is what to do with a lump sum of five million dollars that will come into my hands shortly. I have talked to a financial planner who suggested that my wife and I have won the race and the most important factor is to preserve the principal. He suggested risk free investments such as gov't bonds or CD's to cover our day to day living expenses (This should work based on our expenses). I want a risk free portfolio to the extent reasonable, but I am uncomfortable with what inflation will do to the principal over time.

With the above in mind, I have two questions. 1. Does what my planner suggest make sense, and if her advise is sound, how should I view inflation erosion of the principal? 2. What alternatives to CD's and Gov't bonds are out there to gain a better return. Additional risk is acceptable within reason.

For the record, we own our home, have college expenses covered and will have access to two small pensions. Health insurance is also covered.

Thanks

 

[RunningBum]

Congrats! And welcome to the forum.

http://www.early-retirement.org/forums/f28/how-much-is-enough-for-game-over-won-79914.html is a recent thread which covers this to some extent. The question was asked for an 80-something year old.

Inflation is a concern, plus with such a conservative portfolio you would probably be limiting what you pass on to your heirs or any charitable legacy you could leave behind.

I said in the other thread I'd stick to my 115-age asset allocation in stocks. In your 50s, I might be a bit more conservative and go 100 or 105-age.

Diversification would be a very good thing. For me I'm happy with Vanguard Total (US) Stock Fund, Total International Stock, and Total Bond, and CDs when there is a good rate offer. You may want to include TIPS, govt bonds, an SPIA annuity (though with rates so low I don't know that this is a good time to lock up too much in that), and probably other vehicles I'm not thinking of.

Hopefully you're paying this financial planner for the planning session only, and not by commission or a % of assets. 1% of just the $5M is $50K, for which he probably spends a few hours, some of that spent signing the Christmas card to you. That's a great deal--for him. Not that his advice is bad. Most any plan that doesn't have you doing anything too risky and narrowly focused will almost certainly work. You just don't need his fee to chew through part of your assets every year.

 

[2017ish]

What percentage of your portfolio is that 5 million? (You mention "two small pensions," and that you'd been thinking of E.R. for some time; thus, maybe you've got other investments.)

If, for example, you have another 3 million in equities, you are in a different asset-allocation position than if you only had another $10,000.

 

[Slow But Steady]

Also, is the lump sum net of any tax that may be due?

 

[MBAustin]

Congratulations! I second the concern about inflation and would probably put a significant portion of it into a low-cost balanced fund with 30-40% equities exposure.

 

[CliffordRT]

A few other clarifications: We used a fee only planner, taxes are paid on the five million, about $350 K in tax deferred equity. and the $5 mil is approx sixty percent of net worth.

Thanks for the replies.

 

[eta2020]

No it does not make sense what that advisor is telling you. On a long run cash and its equivalents are most risky investments. (Even though we have bloodbath in equities last 2 weeks)

What RunningBum wrote makes sense.

 

[Travelwanted]

FWIW - Jack Bogle recommends no more than 70% stocks/30% bonds, but no less than 30% stocks/70% bonds.

If you have "won the game", why not consider putting 70% into a bond fund such as VG Total Bond Fund or my personal favorite because of my tax bracket, VG Intermediate Term Tax Free Municipal Bond Fund? The other 30% could go into Total Market and International.

Ultimately you face risk no matter what you choose to do. eta2020 is right, cash has risk.
Inflation can eat you up, plus you will need to spread that kind of cash out amongst multiple banks to be covered under FDIC limits.

 

[RenoJay]

I have a similar portfolio size to you (but am mid 40's, so ostensibly have a longer expected retirement.). I'm about 50% in equities, mostly US and International index funds, 35% in fixed income, 15% real estate and the rest cash. I considered the "safe CD" route, but equity dividends yield as much or more than CDs, so if you can stomach some volatility you can potentially so much better over time and still get your 2%-3% yield. That said, I'd dollar cost average the funds into equities over the span of about 12-18 months.


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[CliffordRT]

I want to thank everyone for their replies. This is a great community.