Reader Question
Hello LTR, I have a sep-Ira and I am taking an rmd for several years.I would like to keep 25% in the prime money market to cover my rmd in case of a long market down turn or side way movement. I've got 25% in vwiax and 25% in vwenx. I would like 25% in another fund. I love vwiax and vwenx, so what fund should the 4th 25% be into. Thank you.
My Reply
Unfortunately you did not mention your preference for the safety of those last 25%. If your portfolio is already big enough to sustain you through a long comfortable retirement even in an adverse market, then I would keep the last 25% in something reasonably safe and conservative, such as either short- or intermediate-term investment grade corporate bonds (VFSUX or VFIDX respectively).
If you your portfolio is not particularly large or if you are also investing for your heirs or charity and wish to take more longer-term risk in stocks, then foreign equities available via VTIAX would provide good potential for higher returns (with higher risk, of course) and be a great diversifier to US-heavy Wellington and Wellesley that you hold now.
If you go the VTIAX route for the last 25% then your overall portfolio will be 25% money market, 25% corporate bonds (via Wellington and Wellesley), 25% US large-cap value equities (again, via Wellington and Wellesley), and 25% international equities, for the net result of 50% in stocks and 50% in cash/bonds with reasonably good diversification. Such a 50/50 portfolio would generally be my recommendation for upper limit of risk for somebody in retirement. I think that level of risk is justified today since today's stocks have much better potential for keeping up and beating inflation than today's bonds, though unfortunately both are on the pricey side overall.
But again, if you already have more than enough money, then I would go with something more conservative than VTIAX.
Hello,
ReplyDeleteYour last sentence...."if you already have more than enough money". I wonder if you could discuss retirement calculators or your personal method of determining whether one has "enough".
Thank you,
Great question to which there is unfortunately no perfect answer. In the past, any reasonably diversified (and, of course, having lowest possible expenses) portfolio of stocks and bonds lasted 30 years or more while still allowing you to withdraw 4% of the portfolio in the first year and increasing the amount with inflation in subsequent years (google "Trinity study" if you wish to read more about this).
DeleteI like to err on the side of caution and assume that the future won't be quite as rosy as the past. So let's go with assumption that instead of 4%, only 3% starting withdrawals can be expected to safely last for 30 years. Then we knock off another 0.5% from the starting withdrawal percentage for every decade after 30 years. So if you expect to live another 50 years, then I'd be looking to withdraw no more than 2% (our starting 3% minus two 0.5% adjustments, one for each decade past 30 years) of the portfolio in the first year, increasing withdrawals with inflation in subsequent years.
So using this guesstimate we find that for a 30-year outlook we'd want to have portfolio valued at ~33 times annual expenses (so you can start by withdrawing 3%), for 40-year outlook -- 40 times annual expenses (starting at 2.5% withdrawals), for 50-year -- 50 times (2%), and for 60-year -- 67 times (1.5%). If your portfolio is that large or larger, then I would say that you have "enough" and have no reason to exceed maybe 25% in stocks. And of course if you have a truly giant portfolio then you have no reason to invest in stocks at all -- but then you wouldn't be spending your time reading this blog.
And note that the "living expenses" here refer to what you have to fund out of pocket, beyond what Social Security and pension payouts (if any) provide. So if you need $100,000 annually (before taxes), your Social Security covers $40,000, and you like to have a 40-year outlook, then "enough" would be around $2,400,000 (40 times $60,000 annual shortfall after Social Security). If your portfolio is that large or larger, then you can confidently keep a quarter of it in stock index funds and the rest squirreled away in fixed income.
Again, this is far from an exact science, but those are the guesstimates I would use.