8 Retirement Portfolio Red Flags

bee

8 Retirement Portfolio Red Flags
> Article By David Fabian:
"Investors that are in or nearing retirement have to think differently than those in the growth phase of
their life cycle. If you have been fortunate enough to amass a sizeable nest egg, rule number one is to
not lose it. Rule number two is to not let anyone else lose it for you. Topics such as income needs, risk tolerance, asset allocation, security selection, and choosing the right advisor to implement a coherent strategy are crucial decisions. This will likely be driven by a mix of your personal investment philosophy, market outlook, and other exogenous factors.
Remember that every household is unique and should be treated accordingly. You may think that you want the exact same solution as your neighbor. However, they may have completely different factors that influence their investment strategy and may not be appropriate to meet your goals.
No matter what your situation is, these red flags come up repeatedly when I am doing portfolio reviews for prospective clients. I urge you to be cognizant of avoiding these pitfalls as you are implementing a realistic retirement portfolio that will go the distance."

Article:
fmdcapital.com/wp/wp-content/uploads/2016/01/FMDCapital_RetirementRedFlags_2016.pdf

Derf

I noticed they didn't mention their fee schedule !
Derf

Mark

Right here Derf:

http://fmdcapital.com/wealth-management/fees/

Ted

@bee: Nice find !
Regards,
Ted

bee

Our fee schedule here at MFO for our clients/friends (any dollar amount, all levels):



Also,
Trip to woodshed...Free
Duplicate Post Scolding...Free
Wine, Beer, Scotch and other Hot Tips...One free round for all!

MikeM

Good article @bee and I like your quip on rate schedule for MFO clients. But to be serious, the negatives listed from the article below I think is the opinions or posts I see all the time here at MFO. Especially the 2nd. In any case, even though there are many successful investors here at MFO, but people have to be careful with free advice or opinions.

The few of the don't-does from the article:

- High fee mutual funds are still one of the worst ways you can invest your money in the stock market.

- When in doubt, just own 3 or 4 of everything. This is the motto of many portfolio managers who are
trying to appear sophisticated by loading you up with 20, 30, or 40 funds.

- One of the problems that the 2015 market flushed out was the overdependence on high yield securities.
Junk bonds, master limited partnerships, bank loans, and other credit sensitive areas

- Worries over political, social, and economic cycles that induce fear-based investment decisions are one
of the biggest mistakes I see retiree’s making.

BenWP

Compliment from Ted...Go directly to Go, collect $200! Donate it to MFO.

bee

Nice summary of highlights @MikeM. Others that caught my eye:

Markets aren’t logical, they are psychological. That is why investing is so difficult and requires a great deal of planning and discipline to execute successfully.

Don’t let fear keep you from implementing a balanced and steadfast retirement income portfolio.

Also, as far as annuities are concerned, remember your pension, your social security and eventually your RMDs (at 70.5) are all streams of income. Together they may provide enough income to cover your retirement living expenses and act as your "bonds". This should allow more of your remaining investments to be invested for capital appreciation (equities) and dividends (additional income).

I wish the article wrestled a bit more with the impact that taxes have on retirement income.

Derf

@ Mark: Nice find.
$250,000 – $499,999 = 1.00%
$500,000 – $999,999 = 0.90%
$1,000,000 – $1,999,999 = 0.75%
$2,000,000+ = negotiable
I guess that leaves me out. I did like the sliding scale. Two 401-ks in my possession & both charge a straight percentage. $2000 or $200,000 & it doesn't matter.

Derf

MikeM2

I liked the article and @MikeM's summary but I have a question that @Bee alluded to:

Does everyone here believe a 50/50 stock/ bond Asset Allocation is to conservative for retirement? That is what Mr Fabian noted in the article. Several Target Date Fund's "terminal" Asset Allocation are in the 40-20% range for holding stocks. He complained that the 50/50 account would need the stock sleeve to generate a 10% return in order to hit the 6-7% return for the portfolio as a whole. He didn't mention Social Security but that could lower the amount of bonds to cover fixed costs in retirement as @Bee noted above.

Old_Joe

@MikeM2- So much depends upon the overall financial construction of the retirement. For instance, we have income streams from SS and pensions which pretty much cover our living expenses. Because of that, our retirement asset allocation can be much more conservative than that of someone who needs a steady and predictable income stream, such as Junkster, and (I believe) Old_Skeet, to note two old MFO hands.

Whether you need the income for expenses, or possibly are trying to build an estate for other purposes will make a huge difference in approach.

MikeM

I think the equity allocation is based on what you need for withdrawals. Most of my retirement calculations are based on a somewhat conservative 5 to 5 1/2% portfolio return meeting my needs in retirement.

This is really where the Monte Carlo software is very handy. If you are up in the 90% probability range for your money out-lasting you with a 5% return, you can be more conservative with equities. If you truly do need the 6-7% return to make your money last, more risk is needed as he points out.

MikeM2

Since you have multiple income streams doesn't that mean you could be MORE aggressive in your portfolio since living expenses are covered? No wait...I see... you don't NEED to take more risk since you have already "won" the retirement game and expenses are covered. Hence a AA heavy on bonds/cash is appropriate. Building an estate would be a whole different ball of wax.

bee

@Old_Joe said,

Because of that, our retirement asset allocation can be much more conservative than that of someone who needs a steady and predictable income stream

My interpretation of @MikeM2 comment was just the opposite of yours.

Since you don't need to depend on it for income in retirement, you have the luxury of being more aggressive, not less.

I see your point, why take the risk if you don't need to, right?

I often look out over two generations when I consider resources I have saved, but probably I won't need.

How would I invest these funds for the next generation? One of the best ways is to let higher risk/reward investments grow over longer periods of time without the worry of selling at the wrong time. You have that luxury if you don't need to liquidate these investments for income needs...let them ride out the ups and the downs.

Also, occasionally when the market is "ripping higher" you might reallocate some of these gains into low risk/low return investments to help pay for future inflation and longevity risk...living a long life.

Old_Joe

@bee- Yes, I see what you mean. Our overall exposure is very conservative, but I certainly have been known to put some chips on very speculative individual punts, typically with very inconsistent results. Saves the expenses of a trip to Vegas.

MikeM

@bee, almost starting to sound like a bucket system. If you are lucky enough to have more money than you will need, put some in an all-equity bucket and manage the rest of the portfolio as a more conservative income stream. Good thoughts.

MikeM2

I like the idea of looking out TWO generations. That puts a different slant on things ie. taking more equity risk over a really long time horizon. Overall folks do not seem to be adverse to the 50/50 portfolio as kind of a generic AA. It all depends on the need, returns, income streams etc. for the individual retiree. Mr. Fabian's point on AA is the only point I was wondering about. Thanks all.