Retiring With $5 Million

Reader Question

Greetings LTR, recently found your blog and have been enjoying your content and style. I wondered if I could get a sanity check on my investing plans going forward? I'm 55 and have about 4.3mm in investments with a 180k mortgage loan. My plan is to retire in a couple of years or when I get to 5mm with a paid off mortgage. Our investments are split about 50/50 between taxable and traditional IRAs. There is only about 100K of capital gains in the taxable account. The taxable and IRA accounts are invested exactly the same way: roughly 45% equites, 45% bonds, 10% gold. The equities are split roughly 50/50 domestic foreign with 5% REITs. The breakdown:
15% VWINX Wellesley
10% VBR Vanguard Small Cap Value
5% VOO Vanguard S&P
5% VNQ Vanguard REIT
10% VSS Vanguard International Small
5% VWO Vanguard Emerging Market
5% VTRIX Vanguard International Value
10% TLT iShares Long Term Treasury
15% IEI iShares 3-7 year Treasury
10% GLD Gold
10% Cash
Hope that adds up to 100%... Looking back this would have been down about 11-12% in 2008. I use treasury bonds everywhere currently to protect against declines in the equity portfolio. Otherwise, would probably be in munis on the taxable side. I think our retirement expenses will be somewhere in the 90-120k range depending on how much we splurge on travel, recreation, etc. Retiring at 57 or so means I probably need to plan on 40 years of retirement and a 3% withdrawal rate. 3% of 5mm would be 150K minus taxes of 20% or so would leave me with 120K to spend. Additioinally, we will have 30-40K annual SS income at age 70. What do you think of the current portfolio in light of the above? Another decision is what to do with the Cash. Some choices are SHV, SHY, use part of taxable to pay off 180K mortgage at 4.375%, leave it alone, Anything else? Thanks for any guidance.

My Reply

Thanks for writing, glad you're liking my blog. You are obviously in fine financial shape and will have no problems supporting a long comfortable retirement with any number of asset allocations. 3% withdrawal rate over 40 years is very reasonable and you have a large safety cushion, both in the form of SS benefits and in the ability to reduce expenses if it becomes necessary (not that I expect it to). Your current asset allocation should be more than sufficient. But since you asked, I will try to suggest some optimizations...

You obviously prefer to tilt to small and value stocks, both domestically and internationally. I'm neutral on value tilt and am not a fan of small tilt, especially at present valuations (you may find this interesting if you are curious about my reasons: http://www.longtermreturns.com/2012/12/small-cap-premium-or-liquidity-premium.html ). But I realize that there is a whole lot of academic research in favor of small/value investing and I certainly won't try to discourage you from it. If you did not have these investments already and wanted to tilt to small/value, I would have recommended a much milder tilt -- e.g 20% VTI + 5% VTV + 5% VBR for the 30% you have in non-REIT US holdings. But since you do have the heavy small/value tilt already, I'll steer around this issue going forward.

For your Wellesley holding, hopefully it's in the lower-fee VWIAX and not VWINX. If for whatever reason you are still in VWINX, you should call Vanguard to get that upgraded to VWIAX and save 0.07% annually.

Your VBR, VOO, VNQ, VSS, and VWO holdings are fine. I would be a bit concerned about REIT valuations, but at 5% it simply won't matter much.

I would switch from VTRIX to a broader, passive, lower-fee VTIAX (Admiral version of VGTSX). They have had effectively identical performance:

Despite the "value" in its name, VTRIX portfolio is a blend (which explains its performance similarity to the VGTSX/VTIAX blend). Even VTRIX dividend yield is lower than that of VGTSX/VTIAX, in case you like to "withdraw" by simply spending the dividend. I just don't see any reason to keep paying the higher expenses for VTRIX going forward.

I like the idea of TLT for its insurance value in a repeat of 2008. But instead of TLT I would consider holding Vanguard's EDV ETF. Instead of 25-30-year coupon-paying treasuries of TLT, EDV invests in 25-30-year zero-coupon treasuries. But even though it invests in coupon-less bonds, because it is structured as an ETF EDV is able to throw off "virtual interest" payments by selling some of its holdings. That aside, EDV will perform like TLT on steroids. It will soar higher than TLT and it will plunge lower than TLT. Since the primary reason for TLT's inclusion is its "insurance" value, EDV would, well, be insurance on steroids. As a bonus, EDV has slightly lower expense ratio and significantly higher yield. Like TLT, on its own EDV is an extremely risky holding that will have all sorts of wild swings and which is, unfortunately, clearly on the pricey side now. But in the scope of the larger portfolio EDV not only provides some income but also a very valuable zig when everything else zags, as was the case in 2008 and 2011. In that way it is (somewhat ironically) similar to gold. And that insurance aspect of both gold and long-term treasuries like TLT or ED is also the underlying idea behind the "Permanent Portfolio".

If that was all there to it I would encourage you to switch to EDV without a second thought since it's simply a much more effective "insurance" for times of crisis. However there is a big strike against EDV -- it is much less liquid than TLT. I haven't looked at it during the trading day in a long time, so I'm not sure what its bid-ask spreads (or market depth) are now but they used to be as high as 40 cents a couple of years ago. Worse, it's conceivable and maybe even likely that in a true crisis -- when you would most want to sell EDV to rebalance or to finance your living expenses -- that already low liquidity could get much worse. It's a very real concern and it makes me hesitant to recommend EDV over TLT outright. But it's something to think about. Part of that thought process should include checking out EDV bid-ask spreads and bid-ask volumes during the day. It won't tell you what would happen in a crisis situation, of course, but if even during normal times there is only a very shallow market for EDV it might be best to pass on it.

Instead of IEI I would just invest in some CDs. It's very easy to find CD yields higher than 0.7% that IEI is likely to get you over the next 5 years or so. PenFed's CDs approach 2% and there are many others that pay well over 1%. In addition many CDs (such as PenFed's) have option to break early for a relatively small penalty which would let you re-invest in a higher-yielding instrument should rates rise. During such time IEI could easily lose 5-10% of its value. It's true that in a 2008-like crisis IEI is likely to appreciate a bit, but there is just not much room for that given how low its yields are already. Around 3% is absolute most it can go up and I doubt it will be nearly that much even if we do repeat 2008. I think CDs over IEI are a no-brainer today, though it will require a few hours of your time to shuffle the money around.

I like the 10% in gold. I rarely recommend gold on this blog because I think its returns going forward are likely to be very pedestrian. But as alluded to in TLT/EDV discussion, it does double as great insurance against some unlikely but potentially devastating scenarios. You have more than enough already and you don't need great returns to achieve your goals. Instead you should be ensuring the safety of your portfolio against as many adverse scenarios as possible. This is where gold's insurance-like properties are very useful. You might also consider having a bit of physical gold in your house in case of a (hopefully) temporary disruption of the markets and life in a general. Again, you will probably never have to use it, but it does provide some extra insurance.

For the 10% in cash, first definitely pay off that mortgage. You won't get better return on cash anywhere else. For the rest you can continue keeping it in cash in some "high-yield" accounts like Ally bank and/or CDs.

Finally, in general, you probably could lower your equity allocation by 10-15% from its present 55% (counting VNQ) without jeopardizing your 3% withdrawal plan. If you go this route for starters I would be tempted to dump VNQ for some high-yielding but still investment-grade fixed income -- say, VCLT or VWETX or maybe VWLUX in taxable.

That's about it. As I said, you are in great shape overall and your retirement will not be threatened in any way if you ignore every one of my suggestions.