Asset allocation with $8 million

[njhowie]

Not many comments cover inflation here, they should. Over 30-40 years even 2% inflation takes a huge toll. Historically of that time frame, stocks is the only way to insure you beat inflation with limited downside if you can resist any bad sell decisions in market declines. SPX index’s with low/no fees help also. Maybe try and Russell 1000 index to get a little smaller cap exposure helps also. Just a thought, similar situation here.

Starting with $8 million and annual expenses of $160k, even if inflation was above historical norms, there would be no chance of spending all of it (or even most of it) simply putting the entirety into treasuries and CDs today. I believe the scenario did not even include the additional income from Social Security.

See the quote in the reply just before this one.

 

[thefist]

Congrats Foxtails for being in such a good financial position! And as a recent 53yo early retiree, you've coaxed me off the bench for my first post here.

I'm a bit late to the party, but I have to jump on the fee-only planner AND CPA bandwagon. (no, I'm not one) You've received a lot of different advice here, much of it excellent, but it needs sorted out. At your asset level, you're accredited and also a 'qualified purchaser' (>5MM assets), which can enable different options for you due to high net worth. And your taxes could be quite high with those assets if not deployed properly. I've got a couple opinions, but they'll just muddy the waters and many have already been said. Get the right planner and tell them you want simple, tax efficient, and low fee.

Good luck!

 

[RunningBum]

Regarding a couple of recent topics:

I invest in International as a hedge in case something bad happens primarily to the US economy. I know if the US takes a hit, the world will take a hit, but depending on what it is, perhaps not as bad. More diversification. Everyone is fine without diversification until the area they are over invested in takes a bigger hit, then they aren't. May never happen, but it could.

And LOL at the suggestion that someone with $8M and no financial stresses should take on investment real estate. I know it can be a good investment, but OP doesn't need big winners, just a solid plan and no headaches. Real estate doesn't pass the test on the latter. Why on earth would they do this?

 

[Rdub]

Here is my 2 cents worth... I am 49 and my wife is 43. I retired nearly 2 years ago and my wife about 5 years ago. Rough numbers for us is a NW around $12m and spend of about $220k/year. Our real estate holdings (primary home and rentals) represent about 33% of our NW. Our rentals net ~$85k/year leaving $135k covered by other investments. Our ~$8M in investments are split between taxable accts (~$6.5m) and tax-free/deferred accts (~$1.5M). Our total current allocation is ~64% equity (7.5% intl and 56.5% domestic), 34% Bonds (22% CA muni bonds and 12% other bonds) and 2% cash. I am fairly conservative, live in a high tax state and have a mix of taxable and tax free accounts. I look at both asset allocation and asset location and manage my portfolio as efficiently as possible. Efficiently primarily meaning low cost funds (eg Vanguard index funds) as well as tax efficiency with asset location. To me, a proper asset allocation let's me sleep well and keeps me from panic selling. A proper asset location helps me keep more of my money.

 

[Foxtails]

Starting with $8 million and annual expenses of $160k, even if inflation was above historical norms, there would be no chance of spending all of it (or even most of it) simply putting the entirety into treasuries and CDs today. I believe the scenario did not even include the additional income from Social Security.

See the quote in the reply just before this one.

This does not include SS nor a pension which would be about $455k lump sum today. We are still deciding what to do with the pension - lump or annuity. At this point we are waiting because it’s sort of a safety net for us. At 65 at current estimates it will be about $750k or $4,100/month with 100% survivor. No COLA adjustment though.

 

[Retired Expat]

If you did nothing but bonds or CD’s at 2-3% so your money keeps pace with inflation you could pull out $200k (in today’s money) a year for 40 years. No investing required. If you did anything to improve upon that it is gravy and it is a veritable certainty that you would do much better than that based on any historical analysis.

But for me and my situation is kind of similar, 40% is in stock funds, 30% is in bonds, bond funds or other long term income investments, 25% in rent producing real estate 5% in cash/MM


You and your husband are completely covered!

 

[2177V]

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.

My recommendations:

Step 1: Google "Recovery time after a stock market crash" and/or "Recovery time after a bear market". Add the number of years of recovery time to the number of years for the crash itself or bear market to determine the duration of a "rainy day" fund.

Step 2: Sounds like your annual budget is $210,000 per year based on $160K + $30K + $20K = $210,000. (It wasn't clear to me if the $50 was included in the $160K)

Step 3: Determine your total funds in CD: Sounds like 42% x $8,000,000 = $3,360,000.

Step 4: Divide $3,360,000 / $210,000 = 16 years of income living off your CDs alone. This is the duration of a rainy day fund. I would subtract 1 or 2 years for inflation so it sounds like you have a 14 years "safety net". Compare your safety net to the rainy day duration in step 1.

I have done this calculation for my own portfolio to determine if my own safety net is sufficient, insufficient or excessive during my retirement. I realize this calculation may not be perfect for everyone. However, I firmly believe you must have a sufficient "safety net" in retirement before you can take risks in the stock market. Otherwise, you may have a "hard landing".

Using the "maximum" historical bear market or crash is very conservative and i ended up using a number slightly less. This means I am taking a slight risk. However, I have determined that this slight risk is acceptable to me and at least I have a feel of the risk that I am taking based on these calculations. If you are risk adverse, taking the maximum (or even more) may be applicable to your piece of mind.

 

[audreyh1]

This does not include SS nor a pension which would be about $455k lump sum today. We are still deciding what to do with the pension - lump or annuity. At this point we are waiting because it’s sort of a safety net for us. At 65 at current estimates it will be about $750k or $4,100/month with 100% survivor. No COLA adjustment though.

The best thing is to compare it to what a simple annuity would cost today with 100% survivor benefits (i.e. joint annuity) and no COLA. https://www.immediateannuities.com

It might be a lot higher than you can get by buying your own SPIA, so it might be a good deal in which case it would probably be wise to take advantage.

Plus it would give you income diversity, in then sense that you would have a guaranteed income stream in addition to SS, and not just have to rely on your investments. Things like that can help take some of the pressure off of the anxieties associated with living exclusively off investments.

 

[JAGOTI]

I'd do this:


Stocks
15% Domestic Total Stock Market
10% Domestic Small Cap Value ¹
15% World Total Stock Market ²
10% Emerging Markets TSM

Bonds
15% Intermediate Term
10% Tbills / Cash

Real Assets
15% REITs ³
10% Gold

https://portfoliocharts.com/portfolio/pinwheel-portfolio/

 

[53anddone]

Here is my 2 cents worth... I am 49 and my wife is 43. I retired nearly 2 years ago and my wife about 5 years ago. Rough numbers for us is a NW around $12m and spend of about $220k/year. Our real estate holdings (primary home and rentals) represent about 33% of our NW. Our rentals net ~$85k/year leaving $135k covered by other investments. Our ~$8M in investments are split between taxable accts (~$6.5m) and tax-free/deferred accts (~$1.5M). Our total current allocation is ~64% equity (7.5% intl and 56.5% domestic), 34% Bonds (22% CA muni bonds and 12% other bonds) and 2% cash. I am fairly conservative, live in a high tax state and have a mix of taxable and tax free accounts. I look at both asset allocation and asset location and manage my portfolio as efficiently as possible. Efficiently primarily meaning low cost funds (eg Vanguard index funds) as well as tax efficiency with asset location. To me, a proper asset allocation let's me sleep well and keeps me from panic selling. A proper asset location helps me keep more of my money.

Very similar to my approach. Agree - sleep well at night.

 

[youbet]

Completely agree on all points.

When I read the leading post, my first thought was $8 million, $160k expenses - this is a no brainer - what are the longest term non-callable CDs out there? I was still able to get 3.3% for 7 years yesterday and see Fidelity currently has new issue 10-years for 3.25%.

As long as you can get the $160k or more without having any market exposure, then why open yourself to the risk? 30-year treasuries are available today for 3.12%.

If it were me, I would take $5 million and put in to those 3.12% 30-year treasuries (with tax-free income at state level) - there's the guaranteed $160k/year to cover expenses. That leaves $3 million - ladder those in shorter-term treasuries and CDs and be done with it.

I'm not seeing the necessity or justification for putting anything in to equities or bonds in this situation.

Inflation.

 

[njhowie]

Inflation.

http://www.early-retirement.org/forums/f28/asset-allocation-with-8-million-96572-3.html#post2202971

 

[RenoJay]

Personally I wouldn’t write off international funds. They’ve done lousy for a decade which, I think, means they’re due for their day to shine. By many metrics they’re much cheaper than US stocks.

 

[medved]

I wanted to reduce international exposure. My FA convinced me to keep it at about 30% of my equities portfolio. I think he made the right call. I just needed some convincing.

 

[Dash man]

I wanted to reduce international exposure. My FA convinced me to keep it at about 30% of my equities portfolio. I think he made the right call. I just needed some convincing.

Personally, I haven’t seen anything to make me want to invest in international stock/funds. Has anything changed in tax, trade or regulation in economies around the world to make it worth investing?

 

[audreyh1]

I wanted to reduce international exposure. My FA convinced me to keep it at about 30% of my equities portfolio. I think he made the right call. I just needed some convincing.

I'm comfortable with a 20% exposure to international equities. And as I age (say >70 or so) I will probably drop it in the interest of simplification. I don't think it is essential. You give up at little additional long-term gain potential. That's it.

You can look at long term Efficient Frontier type charts and see how much additional return holding international has given investors in the past.

 

[JAGOTI]

$8 million put under a mattress earning ZERO will sustain 50 years of $160k withdrawals.

If you earn 2% - you can withdraw $160k for over 200 years...

 

[Dtail]

I wanted to reduce international exposure. My FA convinced me to keep it at about 30% of my equities portfolio. I think he made the right call. I just needed some convincing.

20% for me, but still wondering about it, but staying pat for now.

 

[2177V]

Hi all,
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.

I strongly suggest that people google "The difference between a bond and a bond fund"

If you own an "individual bond" and hold it to maturity, you get your principle back plus interest. Regardless of the stock market's up and down. This is because a bond is a "loan" to the government or corporation with a fixed maturity date and interest rate.

For an individual bond, you earn interest and 100% of the principle is returned at the maturity date, provided the government or corporation does not declare bankruptcy...which is why they categorize bonds as AA, A, B and junk.

Granted the value of the bond may flucturate due to market condition but ONLY IF YOU SELL PRIOR TO THE MATURITY DATE. Once you hold it until the maturity date, you get 100% of your principle back. The classical example is a Government Savings Bond which grandparents like to give to their grandchildren.

A Bond fund is a completely different animal because the fund manager has to buy and sell bonds due to buy orders and sell orders. Hence the price of the Bond fund flucturates. Investors are sometimes confused about the behavior of a bond fund versus the behavior of an individual bond.

If you want better security, I suggest buying individual bonds from the government or a AAA rated corporation and hold it to maturity date. I prefer short term individual bonds which reduces the risk but the return is small. A diversified portfolio should have some individual bonds...and not a bond fund to reduce the volatility.

 

[medved]

Personally, I haven’t seen anything to make me want to invest in international stock/funds. Has anything changed in tax, trade or regulation in economies around the world to make it worth investing?

I would certainly never tell anyone how they should invest their money. I don’t have sufficient expertise to do that. But what convinced me to keep an allocation of about 30% of our equity portfolio in international stocks was evidence showing that, on the whole, they tended to outperform domestic stocks roughly half of the time, over a long period of time, and evidence showing that Including international stocks tended to reduce volatility, over a long period of time, compared to an all domestic stock portfolio.

 

[capjak]

Maybe a Three fund portfolio as suggested on Bogleheads author/poster Taylor Larimore? Seems simple as long as you rebalance per your investment policy.


https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005
Per the boglehead post:
"Mathematically certain to out-perform most investors." This was Morningstar's 15-Year Category performance for each stock fund (return) and bond fund (risk) updated on January 01, 2019:

TOP 5% = Vanguard Total Stock Market (VTSMX)
TOP 4% = After tax.

TOP 21% = Vanguard Total International (VGTSX)
TOP 18% = After tax.

TOP 9% = Vanguard Total Bond Market (VBTLX) in last (2008) bear market."

 

[GrayHare]

$8 million put under a mattress earning ZERO will sustain 50 years of $160k withdrawals.

If you earn 2% - you can withdraw $160k for over 200 years...

But that $160k won't buy nearly as much after 200 years of 3.x% inflation, the historical average.

 

[2177V]

$8 million put under a mattress earning ZERO will sustain 50 years of $160k withdrawals.

If you earn 2% - you can withdraw $160k for over 200 years...

If you search bankrate.com for the best CD rates, the First Bank of Indiana is advertising 2.8% interest rate of FDIC insured Certificate of Deposit 1 year. That is pretty good for a guaranteed return of 2.8% with FDIC insurance.

However, you have to be careful about the maximum FDIC insurance since they are capped at $250,000 per depositor.

People may erroneously think the FDIC insurance is $250,000 per account....and they have several accounts with different banks thinking all their accounts are insured up to $250,000 each when it is $250,000 per depositor.

 

[statsman]

However, you have to be careful about the maximum FDIC insurance since they are capped at $250,000 per depositor.

People may erroneously think the FDIC insurance is $250,000 per account....and they have several accounts with different banks thinking all their accounts are insured up to $250,000 each when it is $250,000 per depositor.

That's not completely correct or clear. The standard deposit insurance (FDIC, NCUA) amount is $250,000 per depositor, per insured bank (not per branch location), for each account ownership category.

 

[Koolau]

I guess I think of myself as similar to OP (except the number of millions in my account, heh, heh.) I stay around 30% in stock (primarily S&P 500 and international stock w/o US and some old company stock.) The rest is some esoteric stuff ("old" I bonds, SPDAs, PMs, GIF, etc.) Full disclosure, at almost 72, I'm stating my "horizon" as 28 years, not 30 years. Age has very few advantages, but shorter "horizon" in your planning IS one.

With modest pension and our SS, we do just fine. I've been (gently) criticized here for too little stock in the AA. My feeling is: If you've won the game, why keep playing?

Unless OP wants to spend a lot more, I would suggest (not advise) to stay conservative. OP has already won the game, but YMMV.