Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Reply to @Junkster: Trying to be brief here. Get the point. But, after 30-40 years, investing gets In your blood. Suspect not many who hang out here could just shove her all into cash or bonds and go golfing. Besides, could be some big inflation surprises out there nobody even anticipates. Enjoy the trails. One of the wiser moves I've heard voiced here in long time.
The target 5% drawdon maximum is one of the two or three most important points. Think about this now...they want to lose a maximum of 5% in any calendar year (I suppose it could also be in any rolling 12-month period). Given where bonds are positioned at this time, and given where the stock market has come since 2008, how comfortable would anyone here be recommending much of anything from our traditional mutual funds and ETFs? One solution, or part of a solution, might be to start laddering CDs (yes, even in this current rate environment), to take advantage of what surely will be higher rates in future years. Maybe combine this with some very conservative allocation of short-term individual corporate bonds (if they could buy them individually), and dividend-paying stocks. Along the way, perhaps some dollars might be moved to an immediate fixed annuity as they started to need income from their portfolio.
I will defer to others to create the portfolio, since there is just not enough information available on this couple for me to hazard a guess. Old Joe pointed out a very big point about 2008, which could have a devastating effect on some portfolios, and inflation could also be a big factor.
All of this is much more important than active/passive, balanced/value/growth, and the other usual decisions when we are just talking about picking funds. As junkster says, if the portfolio is 'big enough' whatever that might be, a 30% loss might not be a big deal. But if the portfolio is $500,000 vs $2 million, the drawdown could blow up the entire plan. If the couple is truly serious about the 5% max drawdown, is there really anywhere to get a 'safe' 3-5% at this point in time, without tying up dollars in long-term bonds, CDs, or (heaven forbid) freakin' equity-indexed annuities?
Yes, we can point to a LOT of fund managers and indexes that have good 5-year records, but a fund that owns stocks that never lost more than 5% in any one year during a bear-market cycle? And is anyone willing to bet on any bond fund right now for that target? And even if we could find a manager who has performed such a herculean task, what are the chances of that happening again?
Ten years ago, we could easily have answered this couple's question. Today it is much, much harder without resorting to ultra-conservative, short-term options.
would go with a 6 fund portfolio but the condition of a 5% loss is hard to overcome/ I am going witha Vanguard/T.Rowe Price portfolio 20@ VTSMX, 15% VDMAX, 20 %VTAPX, and three T.Rowe Price funds 15% PRFRX, 15% PRWCX, 15% RPSIX. Of these I am least enthusiastic about the Spectrum fund but at least for the next two years I think a managed diverse bond fund is appropriatea
Reply to @AKAFlack: As someone who just retired a few months ago, forcibly, you can bet I understand sequence risk. Or say I do, and think I do. I look Murphy in the face every day, seldom knowing how to know what to do next. But you did not answer the question, implicit or indeed explicit: What is to be done? What do you advise and counsel? How are you prepping for that asteroid? Of course, since you are calling it the Age of Ruin (do you know any really elderly retirees?), I think I know the answer. But I would curious to know what you are doing about these swan-shaped objects from space. I bet you will have a response of some sort for MJG's wise thoughts.
I've been out of town. I will place replies, but will also add this information.
---The retiring couple has indicated that their traditional/Roth IRA's and the rollover 401k monies will total about $800K. ---Another part of their plan is to consult with at least 2 different fee only advisors for added input, regarding a portfolio.
Obviously, the portfolio could sustain a fairly large loss and this couple would not have to move to food stamps. 'Course, this (a large loss) is never part of an investment goal. Hopefully, a large loss would be avoided.
I apologize for providing an improper response to your question.
You noted: " The target 5% drawdon maximum is one of the two or three most important points. Think about this now...they want to lose a maximum of 5% in any calendar year (I suppose it could also be in any rolling 12-month period)." >>>My mistake in reply to your original question. I was stuck on drawdown, as to how much maximum they may pull annually from any of this portfolio; not drawdown in the sense of portfolio percentage loss. The correct answer would be in the 20% range. Their portfolio of IRA's/rollovers combined will be near the $800K area.
Hi MJG, Thank you for your time and effort with this thread subject. The couple has previously been made aware of the LazyPortfolio and Merriman portfolios; of which, I recommend to all, for study and consideration. OJ also noted about the abilities of the pair, regarding the investments management. He is more directed in this area. However, there is consideration for other supporting help/persons for her, in the event of his passing, prior to her. And yes, they have done very well with their spending, investing and planning habits. I do believe they will be part of MFO in the future, if only to read. Lastly, they will pursue their investment choices; but with consideration to all worthy outside input, and MFO is one such place. Take care, Catch
HI hank, I agree, regarding a 50/50 mix or otherwise will float around over time. Moderate and balanced funds have some large gaps among styles and sectors. We can only get "close" to some mix that satisfies an acceptable range of mix, eh? I find no problem with considering, for them; a mix of moderate/balanced funds to investigate for inclusion in their portfolio. Thank you for your input. Take care, Catch
Hi Old_Joe, You are correct as to how any major event that affects a portfolio has many variables to the well being of the investor(s). These folks in this thread could lose a large percent of the portfolio ($800K) and likely never have to move to food stamps. 'Course, not unlike you and I; keeping the losses to a "dull roar" is more acceptable. Thank you for your thoughts about this. Take care, Catch
Hi Junkster, You may be out into the forest already; but reply I will.
Their portfolio (which will be all IRA's) is about $800K.
I agree, that there is a point in time when one has to set aside some of what you noted as "fret" about the portfolio. I'll be 66 this year. I know how fast various segments of my time on this rock have passed. By average and luck, I have only 20 more years remaining.
Time reduction for portfolio maintenance is already in place at this house. We've played a decent investment game for 35 years, are satisfied and possibly not unlike yourself or others you know, "the neighbors would be surprised at the networth".
Thank you for your thoughts here. Take care, Catch
Hi Bill, So many areas/sectors were connected with large losses during the 08-09, it is difficult to assess going forward if anything would be different from a similar event. Many index funds would not do well, I suspect. And yes, recovery could be difficult; if the holdings were sold at a wrong time. Sadly, I am sure too many folks in retirement or just moving into retirement were hurt by the market melt; almost 5 years ago. Take care of you and yours, Catch
I’m sorry to hear about your forced retirement. We all desire to have some control over such matters.
I’m comfortable with MJG’s reply and don’t wish to get into another prolonged exchange with him. He is indeed a very bright guy and I’ll leave it at that.
“What is to be done? What do you advise and counsel? How are you prepping for that asteroid? Of course, since you are calling it the Age of Ruin (do you know any really elderly retirees?), I think I know the answer.”
Sorry, I don’t know what you mean by “do you know any really elderly retirees?” If this is a serious question, the answer is that over the course of my investment class, I’ve personally meet and discussed retirement investing with perhaps 500 “really elderly retires”, and if it helps, I mean those over the age of 70… and many more between 60 and 70.
“What is to be done? What do you advise and counsel? How are you prepping for that asteroid?”
I have explained my simple long-term exit strategy on this board and Charles was gracious enough to run the numbers and place his spreadsheet results on this board a month or so ago.
I'm coming late to the party (this thread), and it's been a very interesting read. Let me offer a few(?) tangential observations on pensions, IRAs, SS:
RMDs - people tend to think that these are drawdowns. They are only tax events, not investment events. You can take distributions in kind, of course owing taxes but otherwise not changing your investment positions. So I find it better to think of RMDs strictly in terms of forseeable future tax liabilities and not money that needs to be spent. (That is, RMDs simply move investment from traditional IRAs to taxable accounts; the rule of thumb about spending down from taxable accounts first still applies.)
SS: Catch wrote that the couple would "take a chance" on both people surviving to age 70. Once they both hit 70, they begin drawing SS and start reducing the amount they've put at risk by deferring their benefits, but they are still at risk of "losing" some money. The break even point is around age 81-82 (generally true regardless of what age you start benefits). So you "win" only if both spouses live to age 81 or so.
One can push out that break even point a bit by having one spouse (the lower earner) start benefits at full retirement age (FRA), while the higher earner simultaneouslyfiles and suspends. That person can then get spousal benefits (half of the other's amount) for four years, until at age 70 that person starts taking one's own benefits.
So, unless you think there's a good chance of both people living well into their 80s, it might be better to consider starting some benefits earlier. That said, I'm a strong advocate of waiting until 70, as you suggested, because that provides a form of longevity insurance (with inflation adjustments) that makes it much easier to relax without worrying about living too long.
State taxes/Roth conversions - depending on the amount in tax deferred accounts (401K rollover plus traditional IRA), one might want to gradually convert some of the money to Roths over a period of years. In Michigan (current state income tax rate 4.25%) the first $40K of income from pension/IRA is not taxed (for people born between 1/1/46 and 12/31/52). That makes it somewhat cheaper to do the conversions, especially if the pension, along with RMDs, grow to exceed this amount down the road unless the conversions are made over time. (Michigan, like the majority of states, does not tax Social Security benefits.)
On the other hand, if you're planning to leave money to charity, it's better to do it via traditional IRAs, because then the money will never get taxed.
Medicare (hey, I'm on a roll here) - look into Medicare Advantage (Medicare Part C) as an alternative to Medicare (Parts A, B, D) plus Medigap. Here's the Medicare site that will show you all the plans available (of all varieties): https://medicare.gov/find-a-plan/questions/home.aspx. A key feature of Medicare Advantage plans is that they must cap the out of pocket expenses. IMHO, that's the main virtue of Medigap plans, so Medicare Advantage seems to obviate the need for Medigap.
None of this addresses the core question: what to invest in. But I find these are all significant planning issues to consider in conjunction with the investing side.
Thank you again for "being on top of things" to help us sort out the facts.
As you would have read in this thread, a portion of this discussion found the words for "drawdown", meaning investment portfolio downside loss limits and RMD becoming intermixed. I replied to this confusion from my wording and initial misunderstanding of Bob C's. reply.
As you note, too; RMD may not be monies that are needed, but the IRS rules/regs will cause this event. I am 5 years away from the RMD, and have looked at the numbers; which indicate about a 3.7% RMD the first year and the rate moves slightly upward each year, going forward. Hopefully, this house will not have a "real" need for the monies; but perhaps we will be able to stimulate the Michigan economy with "cash injections".
---SS: Another complex area of retirement that deserves an indepth review from those nearing retirement age. Thank you for your information about this area.
---State taxes/Roth conversions. The new MI pension tax is a strange duck of legislation, that is targeted towards the main cluster age of the baby boomers. These tax dollars (it is argued) are to be used as an offset to lost tax revenue from a change in the MI business tax. I suspect that the magical spreadsheet calculations are tailored to look nice going forward; but MI is 20 years too late for attracting major business projects. MI did have a fairly attractive climate for pension taxes, but this is now impaired. The couple noted in this thread will likely further investigate Roth conversions. That will be a topic for them and a tax professional to sort, among other estate matters.
---Medicare. Thank you for the notation regarding the Medicare Advantage plans. I'll have to check, but I am recalling that these plans have restrictions as to an individual not being able to use their doctor of choice, etc.
Lastly, these issues and areas are complex; but can be sorted to the greatest available benefit. And yes, there will be some luck (health, accidents, investment returns, etc.) involved, eh?
Reply to @AKAFlack: Of course it was a serious question: I was wondering why you had not talked about the great flexibility and drawdown discipline (often enforced by reality, of course) that retirees over the late 70s and into their 80s and 90s exhibit. I meant doing the work with or for, say, one's elderly parents. Perhaps you did and I missed it; I shall try to study your opus here before asking you further questions. 70 is not anyone's cutoff for 'really elderly', even if you're an instructor in this area. I will try to find your 'simple longterm exit strategy' and see how it plans for whatever. Same with Joe and his aspirational plans for Murphy. Thanks finally for diction correction; of course one preps for asteroids, or can, bearing in mind I naturally meant asteroid hit, in the usual idiom. Retirement going okay so far, thanks, owing to decades of savings and equity-fund investing. Don't know how the future will go, which is why I am here, studying away, thinking, etc.
Reply to @catch22: In Mass. anyway, Advantage plans (at least Tufts and BCBS) are doctor-limited, as you surmise, but you would very pressed to find any physician you had ever seen or would ever want to see who wasn't on the list. Fwiw and of course ymmv.
Reply to @catch22: Welcome. I am ever surprised these extremely handy things do not get more attention. I certainly recommend them regularly to family and friends, usually as a pair, since they hold up well against most active variously balanced funds. M* seems to have caught on to how cool AOA is.
Comments
I will defer to others to create the portfolio, since there is just not enough information available on this couple for me to hazard a guess. Old Joe pointed out a very big point about 2008, which could have a devastating effect on some portfolios, and inflation could also be a big factor.
All of this is much more important than active/passive, balanced/value/growth, and the other usual decisions when we are just talking about picking funds. As junkster says, if the portfolio is 'big enough' whatever that might be, a 30% loss might not be a big deal. But if the portfolio is $500,000 vs $2 million, the drawdown could blow up the entire plan. If the couple is truly serious about the 5% max drawdown, is there really anywhere to get a 'safe' 3-5% at this point in time, without tying up dollars in long-term bonds, CDs, or (heaven forbid) freakin' equity-indexed annuities?
Yes, we can point to a LOT of fund managers and indexes that have good 5-year records, but a fund that owns stocks that never lost more than 5% in any one year during a bear-market cycle? And is anyone willing to bet on any bond fund right now for that target? And even if we could find a manager who has performed such a herculean task, what are the chances of that happening again?
Ten years ago, we could easily have answered this couple's question. Today it is much, much harder without resorting to ultra-conservative, short-term options.
I've been out of town. I will place replies, but will also add this information.
---The retiring couple has indicated that their traditional/Roth IRA's and the rollover 401k monies will total about $800K.
---Another part of their plan is to consult with at least 2 different fee only advisors for added input, regarding a portfolio.
Obviously, the portfolio could sustain a fairly large loss and this couple would not have to move to food stamps. 'Course, this (a large loss) is never part of an investment goal. Hopefully, a large loss would be avoided.
I apologize for providing an improper response to your question.
You noted: " The target 5% drawdon maximum is one of the two or three most important points. Think about this now...they want to lose a maximum of 5% in any calendar year (I suppose it could also be in any rolling 12-month period)."
>>>My mistake in reply to your original question. I was stuck on drawdown, as to how much maximum they may pull annually from any of this portfolio; not drawdown in the sense of portfolio percentage loss. The correct answer would be in the 20% range. Their portfolio of IRA's/rollovers combined will be near the $800K area.
Thank you again, for your time and effort.
Take care,
Catch
Thank you for your time and effort with this thread subject.
The couple has previously been made aware of the LazyPortfolio and Merriman portfolios; of which, I recommend to all, for study and consideration.
OJ also noted about the abilities of the pair, regarding the investments management. He is more directed in this area. However, there is consideration for other supporting help/persons for her, in the event of his passing, prior to her.
And yes, they have done very well with their spending, investing and planning habits.
I do believe they will be part of MFO in the future, if only to read.
Lastly, they will pursue their investment choices; but with consideration to all worthy outside input, and MFO is one such place.
Take care,
Catch
I agree, regarding a 50/50 mix or otherwise will float around over time. Moderate and balanced funds have some large gaps among styles and sectors. We can only get "close" to some mix that satisfies an acceptable range of mix, eh?
I find no problem with considering, for them; a mix of moderate/balanced funds to investigate for inclusion in their portfolio.
Thank you for your input.
Take care,
Catch
Thank you for noting the I-shares. They will be reviewing various fund types; although their exposure/knowledge is more to active managed funds.
Take care,
Catch
You are correct as to how any major event that affects a portfolio has many variables to the well being of the investor(s). These folks in this thread could lose a large percent of the portfolio ($800K) and likely never have to move to food stamps. 'Course, not unlike you and I; keeping the losses to a "dull roar" is more acceptable.
Thank you for your thoughts about this.
Take care,
Catch
You may be out into the forest already; but reply I will.
Their portfolio (which will be all IRA's) is about $800K.
I agree, that there is a point in time when one has to set aside some of what you noted as "fret" about the portfolio. I'll be 66 this year. I know how fast various segments of my time on this rock have passed. By average and luck, I have only 20 more years remaining.
Time reduction for portfolio maintenance is already in place at this house. We've played a decent investment game for 35 years, are satisfied and possibly not unlike yourself or others you know, "the neighbors would be surprised at the networth".
Thank you for your thoughts here.
Take care,
Catch
Thank you for taking the time, adding some more considerations.
Take care,
Catch
So many areas/sectors were connected with large losses during the 08-09, it is difficult to assess going forward if anything would be different from a similar event. Many index funds would not do well, I suspect. And yes, recovery could be difficult; if the holdings were sold at a wrong time. Sadly, I am sure too many folks in retirement or just moving into retirement were hurt by the market melt; almost 5 years ago.
Take care of you and yours,
Catch
I’m sorry to hear about your forced retirement. We all desire to have some
control over such matters.
I’m comfortable with MJG’s reply and don’t wish to get into another
prolonged exchange with him. He is indeed a very bright guy and
I’ll leave it at that.
“What is to be done? What do you advise and counsel? How are you prepping
for that asteroid? Of course, since you are calling it the Age of Ruin (do you
know any really elderly retirees?), I think I know the answer.”
Sorry, I don’t know what you mean by “do you know any really elderly retirees?”
If this is a serious question, the answer is that over the course of my investment class, I’ve personally meet and discussed retirement investing with perhaps 500 “really elderly retires”, and if it helps, I mean those over the age of 70…
and many more between 60 and 70.
“What is to be done? What do you advise and counsel? How are you prepping
for that asteroid?”
I have explained my simple long-term exit strategy on this board and
Charles was gracious enough to run the numbers and
place his spreadsheet results on this board a month or so ago.
By the way, one doesn’t prep for an asteroid. If I were to think along the lines
of MJG, I would direct you to this site -
http://www.universetoday.com/36398/what-is-the-difference-between-asteroids-and-meteorites/
Best of luck with your retirement,
Flack
RMDs - people tend to think that these are drawdowns. They are only tax events, not investment events. You can take distributions in kind, of course owing taxes but otherwise not changing your investment positions. So I find it better to think of RMDs strictly in terms of forseeable future tax liabilities and not money that needs to be spent. (That is, RMDs simply move investment from traditional IRAs to taxable accounts; the rule of thumb about spending down from taxable accounts first still applies.)
SS: Catch wrote that the couple would "take a chance" on both people surviving to age 70. Once they both hit 70, they begin drawing SS and start reducing the amount they've put at risk by deferring their benefits, but they are still at risk of "losing" some money. The break even point is around age 81-82 (generally true regardless of what age you start benefits). So you "win" only if both spouses live to age 81 or so.
One can push out that break even point a bit by having one spouse (the lower earner) start benefits at full retirement age (FRA), while the higher earner simultaneouslyfiles and suspends. That person can then get spousal benefits (half of the other's amount) for four years, until at age 70 that person starts taking one's own benefits.
So, unless you think there's a good chance of both people living well into their 80s, it might be better to consider starting some benefits earlier. That said, I'm a strong advocate of waiting until 70, as you suggested, because that provides a form of longevity insurance (with inflation adjustments) that makes it much easier to relax without worrying about living too long.
State taxes/Roth conversions - depending on the amount in tax deferred accounts (401K rollover plus traditional IRA), one might want to gradually convert some of the money to Roths over a period of years. In Michigan (current state income tax rate 4.25%) the first $40K of income from pension/IRA is not taxed (for people born between 1/1/46 and 12/31/52). That makes it somewhat cheaper to do the conversions, especially if the pension, along with RMDs, grow to exceed this amount down the road unless the conversions are made over time. (Michigan, like the majority of states, does not tax Social Security benefits.)
On the other hand, if you're planning to leave money to charity, it's better to do it via traditional IRAs, because then the money will never get taxed.
Medicare (hey, I'm on a roll here) - look into Medicare Advantage (Medicare Part C) as an alternative to Medicare (Parts A, B, D) plus Medigap. Here's the Medicare site that will show you all the plans available (of all varieties): https://medicare.gov/find-a-plan/questions/home.aspx. A key feature of Medicare Advantage plans is that they must cap the out of pocket expenses. IMHO, that's the main virtue of Medigap plans, so Medicare Advantage seems to obviate the need for Medigap.
None of this addresses the core question: what to invest in. But I find these are all significant planning issues to consider in conjunction with the investing side.
Thank you again for "being on top of things" to help us sort out the facts.
As you would have read in this thread, a portion of this discussion found the words for "drawdown", meaning investment portfolio downside loss limits and RMD becoming intermixed. I replied to this confusion from my wording and initial misunderstanding of Bob C's. reply.
As you note, too; RMD may not be monies that are needed, but the IRS rules/regs will cause this event. I am 5 years away from the RMD, and have looked at the numbers; which indicate about a 3.7% RMD the first year and the rate moves slightly upward each year, going forward. Hopefully, this house will not have a "real" need for the monies; but perhaps we will be able to stimulate the Michigan economy with "cash injections".
---SS: Another complex area of retirement that deserves an indepth review from those nearing retirement age. Thank you for your information about this area.
---State taxes/Roth conversions. The new MI pension tax is a strange duck of legislation, that is targeted towards the main cluster age of the baby boomers. These tax dollars (it is argued) are to be used as an offset to lost tax revenue from a change in the MI business tax. I suspect that the magical spreadsheet calculations are tailored to look nice going forward; but MI is 20 years too late for attracting major business projects. MI did have a fairly attractive climate for pension taxes, but this is now impaired.
The couple noted in this thread will likely further investigate Roth conversions. That will be a topic for them and a tax professional to sort, among other estate matters.
---Medicare. Thank you for the notation regarding the Medicare Advantage plans. I'll have to check, but I am recalling that these plans have restrictions as to an individual not being able to use their doctor of choice, etc.
Lastly, these issues and areas are complex; but can be sorted to the greatest available benefit. And yes, there will be some luck (health, accidents, investment returns, etc.) involved, eh?
msf, thank you again.
Take care of you and yours,
Catch