Have you ever found yourself at a crossroads, wondering how to determine the perfect mix for your retirement portfolio? The questions can be overwhelming. What stocks should I own? What bonds should be in my portfolio? Where should I allocate them? In this video I walk through a real-life example to shed light on the steps taken to guide one couple through this intricate process.
Meet Todd and Katie
Todd, 66, and Katie, 63, approached us with a $3.2 million portfolio, seeking guidance on allocation. Despite diligent saving and investing, they felt uncertain about their financial security in retirement.
Building a Foundation: Goals and Income
With a retirement goal of $8,500 per month, including healthcare and travel expenses, Todd and Katie aimed for an additional $20,000 annually. Analyzing income streams, we considered Todd’s Social Security and Katie’s with a spousal benefit.
Understanding Cash Flows and Expenses
We broke down living costs, housing, healthcare, and travel expenses. Long-term care costs were factored in to ensure financial support for unforeseen circumstances.
Portfolio and Account Allocation Strategy
Determining the annual portfolio draw, we planned to source $600,000 from their taxable account for flexibility in tax-related strategies. Our recommendations focused on allocation strategy, ensuring each investment served a specific role.
Diversified Portfolio
Crafting a well-diversified portfolio for stability, we recommended conservative investments for the initial years. Emphasizing diversification even within their Roth IRA, we aimed to balance growth potential.
Addressing Current Investments
Shifting from predominantly large U.S. stocks to an 80-20 portfolio (80% growth, 20% stability) aimed to balance growth and risk mitigation.
Todd and Katie’s journey exemplifies the intricate yet rewarding process of crafting a retirement portfolio. By aligning investments with goals, addressing income streams, and strategically diversifying, we aimed to ensure they could enjoy a secure and fulfilling retirement.
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⏱Timestamps:⏱
0:00 – Todd and Katie’s portfolio
2:05 – About them and their goals
4:28 – Income and cash flows
8:55 – Considering tax strategy and markets
14:17 – James’s recommendation
18:25 – Strategically allocated funds
22:08 – Dream big
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Many people dream of a comfortable and secure retirement, but the reality is that achieving such a goal can be challenging. According to a recent study, the average American has just $127,000 saved for retirement, far short of the $1 million or more that many financial planners recommend. However, for those fortunate enough to have a $3.2 million retirement portfolio, the possibilities for a secure and enjoyable retirement are endless.
So, what does a real $3.2 million retirement portfolio look like? Let’s break it down.
First and foremost, a $3.2 million retirement portfolio is a substantial sum of money that provides a level of financial security that most people can only dream of. With this amount of money saved, retirees can afford to live a comfortable lifestyle without worrying about running out of money. This could mean traveling the world, taking up new hobbies, or simply enjoying a stress-free retirement.
A well-diversified retirement portfolio typically includes a mix of stocks, bonds, and other investments that are designed to grow and preserve wealth over time. With $3.2 million to invest, retirees can take advantage of a wide range of investment opportunities, including stocks from well-established companies, high-quality bonds, and real estate investments. This level of diversification helps to mitigate risk and ensures that the portfolio remains well-positioned for long-term growth.
In addition to traditional investment options, retirees with a $3.2 million portfolio may also consider alternative investments such as private equity, hedge funds, or venture capital. These types of investments can provide additional diversification and the potential for higher returns, although they also come with higher risks and may not be suitable for all investors.
Of course, it’s important to remember that a $3.2 million retirement portfolio is not a guarantee of financial freedom. Retirees must still manage their investments wisely, monitor their spending, and plan for potential healthcare costs and other expenses. Working with a financial advisor can help retirees make the most of their retirement savings and ensure that they are on track to achieve their long-term financial goals.
Ultimately, a $3.2 million retirement portfolio is a significant achievement that can provide a high level of financial security and freedom in retirement. With careful planning and investment management, retirees can make the most of their savings and enjoy a comfortable and fulfilling retirement.
Went to your website hoping to get started with discussing transitioning from current financial planner to your firm. Got all the way through the questioning only to realize that you have set a $2million MINIMUM. THAT would have been GREAT to know BEFORE I submitted information to you that I OTHERWISE would NOT have submitted! Bad. That 'question' about the 'size' of your portfolio should be the FIRST question in your 'survey'. This would avoid WASTING someone's valuable time. And you wouldn't/couldn't fully understand the concept of someone WASTING even a minute of your time since you are so young. But when you are actually 'retired' & in your 60s, EVERY minute of your life seems more 'valuable'. Something to consider.
Could you add a link to the Dream Big video you mention at the end? The link did not pop up on the screen as they usually do. I appreciate your sharing this example and for clearly explaining their options.
While cash is sitting, i assume as emergency, they do not know when they will need it. Therefore invest that, and they have all that equity in the house. They can always pull some from heloc. Also they probably should use heloc, a small down payment for smaller house as rental. Not now, but maybe few years down the road when interest rates are lower and prices dropped.
In addition, one of the best interest rates if not the best they can get on debt, is to have their portfolio at interactive brokers or m1 finance. They offer the lowest Sbloc, lower than mortage or heloc. It is not taxed, and one click away from accessing cash, no credit inquiry etc. They should do die/borrow/die, when they never sell anything, and borrow against portfolio.
p.s. their initial investment was actually good, nasdaq and snp. People way to early go into bonds and what not, while in reality you need bonds and boring stocks like coca and mcdonalds only in retirement.
p.s.2 Traditional usage: 4.1 mil portfolio, at 9% yearly interest, generates over 334k a year 1st year, while withdrawing 144 000 a year. After 15 years, portfolio is 9.4 mil.
I would structure in a way to draw some from tax free retirement. Then borrow against portfolio taxable account so used line of credit is not taxable. And have a rental to offset some of the taxes on taxable dividends, and real estate tax (realestate investment in america is best asset for tax write offs). Even not counting their house or whatever, portfolio at 3.2 mil, same other numbers, after 15 years, portfolio is 6.4 mil. Very safe portfolio 6% instead of 9% generating yearly… after 15 years… 4.3 mil. They will never run out of money.
20 year treasury still at 4.3%, even invested everything in it, in 15 years, their portfolio would only drop from 3.2 to 3 mil, and thats given they always withdraw 12k/month aka 144k a year.
p.s. they actually have 3,354,858 so at 4.3% from treasuries, thats 144.3k a year income.
Great presentation. Good details. Tx. One question. How has Nasdaq done over longer time for tech stocks. And what is the industry that has done best?
James you are a good teacher
5k per month in health care????
$5k a month for medicare?? I assume you meant per year.
Nobody, and I mean nobody on YouTube is this generous with their financial information. Thank you!
I don't agree with your advice to the couple. If the market goes down you tell them to suck it up buttercup and you're going to have to deal with it and spin just a little less this year. If this couple isn't willing to give up their 150,000 lifestyle than they deserve everything that comes to them.
The taxable portion could be put into MYGA ladder and yield over 5% tax differed allowing bigger draw on IRA or Roth conversion.
How do i get these sheets
At 7:07, wouldn't you also need to budget for maintenance and other capital improvements needed for the residence? (New roof, furnace etc.) thanks!
I ran across one of your vids and am interested in checking out more . As a Dr of 48 yrs practice credibility is key to trust . I ask advisors for example if they taught eligible clients “File and Suspend “ , Restricted Spousal Benefit and the U S Insp Gen Report on Soc Sec’s scam on spousal death benefits ?
Interesting.
But w/ 60k coming from S.S. they need about 140k from 3.4 million.
At present a 10 year Bond pays 4.2% which is 142k. And if they keep till maturity they can not lose principal or interest.
Seeing the thought process of the entire portfolio, withdrawals, and living expenses was incredibly valuable. This gave a full picture. Thank you!
hi
$3.5 million portfolio, age 65 and only 10% in bonds proposed? Seems like a lot of risk that's not needed.
Thank you. Just what I needed to watch.
My hubby and I are directors of our farm business and own property, plus small pensions. I am nearly 52, hubby is 55. We have started to save to retire from the farm, and possibly live on rental income, I'd really appreciate you go LIVE and talk about how to earn passive income online and retire comfortably, let’s say $820K.
Great walk-through of how to approach this! I would suggest five years is not long enough for the safe part of the portfolio. 8-10 years would be better, and put it in a TIPS ladder to guard against inflation. About 63% in stocks. This comes out approximately to a rule of 125, which is already considered more aggressive than the traditional rule of 100 or rule of 120. Check William Bengen and Wade Pfau.
I'm sure your clients like to see that they are both going to live to the same ages, but that is highly unrealistic and leads to poor planning. A realistic plan would have the man die in 2040 (instead of 2047) and have the woman die in 2055 or even 2060 (instead of 2050). That would highlight the importance of claiming the larger social security benefit at 70 instead of 66 and would show the need to plan for 15 years of higher taxes as a single filer and only one social security check per month.
I don't know if you are ignoring realistic longevities on purpose to be able to present a happier picture of retirement to your clients or if you don't understand the actuarial reality. Actuaries Longevity Illustrator website is a great resource for this information. I put in the ages for your case study and it says that the male 66 has a 34% chance of living to 90 and the female 63 has a 45% chance of living to 90. However, the key here is the joint longevities since this is a joint plan. There is only a 50% chance that they both live to 2040 (ages 83/80). There is a 50% chance that one of them will live to 2051. There is a 25% chance that one will live to 2055 and a 10% chance that one will live to 2060. Both living a long life is a low probability. An extended widowhood is the norm – especially with this case study given the age differences – and is the scenario that requires the most difficult planning.
This video really highlighted the benefits of a simple 80/20 portfolio of a total stock market index fund and cash.
Focus on tax and fee efficient investing and withdrawal strategies using a combination of qualified accounts and a brokerage account.
To the degree you’re risk adverse, keep working as long as it takes to stack as many years of living expenses in cash as allows you to sleep well at night.
This was another excellent video. Thank you, sir!
Omg! Drunk?
I know this won’t be applicable to a lot of folks but let’s say a couple is projected to have about 100k worth of pensions annually, how would they approach a tax strategy at different levels of portfolio balances at a retirement age of 60. I’m assuming it’d be the same framework you’ve mentioned before but the benefits of, say, a Roth conversion would just be less.
So your plan is to incur taxes on their entire taxable account by rebalancing
The only way I can possibly relate to this example is if I divide their yearly outflows by 3 (which means $195k down to $65k) and divide the expected inflows in half ($40k down to $20k). The investment advice in this video was pretty good. Unfortunately, the Target Date fund in his 401k was a very bad investment. It seems like most actively managed Target Date funds are garbage compared to investing in the actual index. Hopefully, he was dollar cost averaging and dividend reinvesting into it for at least 5 years to have a chance at break-even or better.
Great video. My only issue is that your example offer is too complicated. You could get the same 80/20 without so many funds.
Secondly is there a reason you are using mutual funds as an example versus ETF's? ETF's are usually more cost efficient and liquid. Granted either could be used to reach your goals.
Lastly whether the market is up or down, with quality holdings does the price change matter much if the dividend is the same or increasing? I think most have a goal to eat less into the principle and use income from your investments.
Instead of taking a vacation or holiday abroad every year, I add this money to my portfolio instead.
Great video. Making me think about our portfolio. We are invested in separate stocks and a bond fund but your video made me wonder what are the pros and cons of funds vs. individual stocks. Have not asked about dividend stocks either. Another good question to ask our financial advisor.
Recommended portfolio asset location is not tax efficient. Carry only tax efficient index funds (VOO or VTI) in taxable brokerage. If forced to sell during market drawdown simply sell bonds and rebuy equities in tax deferred. Money is fungible and portfolio should be viewed as a whole with strong consideration regarding income tax bite
Your content is awesome, but the only thing that irks me about CFP's is the obsession with throwing funds out there that can be easier to capture with simple fund of funds. For example, Your VIGAX, VVIAX, VTMGX, VBTLX, VEMAX, VFITX fund selections could have easily been summarized on VASGX. That would have gotten you a cheaper exposure of very similar composition, and the benefit of constant re-balancing built in – no need to portfolio fiddle. So you created a complex 9 fund portfolio that could have been accomplished with 3 at worst.
International funds are horrible…. No way would have more than 5% allocated
Great video! I’m curious why you did not include any TIPS exposure within the bond allocations?
Another great video that explains the basic concepts and pointing out the weighting issue with the index funds. I also like how you moved them into specific bond funds to address their short and medium term spending needs in case there is a market correction. I share the concern raised in the comments about the capital gains tax hit when reallocating the taxable account into bonds along with the interest generated in the taxable account.
78% in the market at age 66? I think that is way too aggressive. Also, too heavy in International. No direct ownership of muni bonds, no 3 to 5 year fixed annuities for guaranteed income while the rates are still good. I think this portfolio has a ton of risk for their age and as others have said, has too many funds. I just retired at 56 with a couple mil more than this couple and my overall allocation is 50% equities (almost zero international and all ETF funds and some dividend stocks for income), and 5 year fixed annuities, Munis, some bond funds, structured debt paying 7%, and a couple CDs paying 5%+. I think you have them in way too much risk. Capital preservation should be an additional focus.
I would put all the bonds in the IRA/tradition 401k (so that that account doesn't grow much more and it is the most stable — the higher that grows the larger the RMDs and subsequent inheritance to kids — someone is going to have to pay ALL THE TAXES on that money as ORDINARY INCOME. I would use the taxable brokerage account for EQUITIES that don't force/distribute much Dividends or Capital Gains. Then use that account only when necessary and if the couple dies with a lot left in the account, the STEP UP cost basis will let their kids inherit that money TAX-FREE. Yes to converting some 401k to ROTH but that will cause greater taxes (increase marginal taxes and may even result in IRMAA taxes if they are not careful).
I enjoy your video, very informational! However, why do CFPs still push emerging market and international funds? They've been such a poor investment for ~20 years and you'll never regain the loss vs US funds? Also, what's the expense ratio across all 9 funds vs a total stock market, etc? How much does it cost, on top of the 1% AUM fee they're paying? I love the videos, but this is why I moved on from 2 CFPs, I don't want to pay fees and "no one cares more about my money than me!"
Is it wise to keep your taxable income down until 65 to qualify for a better ACA subsidy? Would save a lot on monthly insurance premiums,.
Terrific job James, thank you, what's your opinion of creating an immediate annuity for the $600k parked outside of the market in their situation?
I am not getting the math why is Katie's retirement benefit on the monthly in/out less than the $ presented earlier $825×12= $9900 vs $9772…?
What software are you using to analyze this data?
stock and bond performance has been correlated lately -bonds don't add stability