How to Invest Your Portfolio to Maximize Retirement Success
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- Опубликовано: 5 июл 2024
- As retirees embark on their post-career life, a crucial decision is how to allocate their investment portfolio. Many set their allocation initially and never revisit it, risking long-term financial security. Through Eduardo and Anna’s story, I explore why continuous portfolio adjustments are essential for a secure retirement.
Eduardo, 65, and Anna, 64, planned to retire in 2022. A heavy investment in tech stocks caused a 25% portfolio loss, delaying their retirement. By the end of 2023, after a market rebound, they sought professional guidance.
They had substantial savings: Eduardo’s 401(k) had $825,000, Anna’s IRA over $1 million, and their joint investment account was $616,000. With a paid-off home valued at $1.1 million, they were in a strong position. Their monthly expenses were $6,600, excluding healthcare and occasional large purchases like a new vehicle every five years.
Eduardo and Anna planned for healthcare costs, new vehicles, and inflation. Eduardo would claim Social Security at 70 to maximize benefits, and Anna had a $600 monthly pension and also planned to claim Social Security at 70. This strategy aimed to maximize their secure income and reduce reliance on their investment portfolio during market fluctuations.
Their total portfolio was $2.45 million, with $615,000 in their primary withdrawal account. We allocated $490,000 in conservative investments to cover five years of expenses, considering dividends and interest income. Balancing risk and growth, 70% of their primary account went into bonds and 30% into stocks, ensuring stability and allowing for growth.
As they aged and Social Security kicked in, their income sources diversified, reducing reliance on investments. For example, by age 70, their portfolio could grow to around $3 million, assuming a 6% return rate. Regular reviews and adjustments kept their portfolio aligned with their financial plan, providing stability and peace of mind.
Eduardo and Anna’s story highlights the importance of a dynamic investment strategy in retirement. Continuous portfolio management transforms retirement from financial uncertainty to stability and enjoyment, allowing retirees to focus on what truly matters - time with loved ones and pursuing their passions.
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⏱Timestamps:⏱
0:00 - Meet Eduardo and Anna
2:10 - Retirement goals
3:40 - Retirement income
5:42 - Expenses in retirement
8:11 - Protecting against a downturn
13:33 - Risk capacity
15:32 - Annual adjustments
20:30 - The end result
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Thank you for such detailed explanation with examples and calculation. Your videos are very helpful.
First!. Great explanation of the plan's framework James. Rich
Thanks James this video was informative and helpful!
Thanks! Love your videos
Congratulations to these great savers (Eduardo & Anna)! You are in great shape and you deserve a happy retirement!
Why use the brokerage account as the primary and not instead draw from the tax deferred accounts and reduce future RMDs without Roth conversions?
One more great video from you and your team. 👏👏
Another great video with the framework case example. Are those the two sheets you use for the framework end to end? Would like to see a complete case example end-end if there's more worksheets.
Great content as always
This presentation is very informative
Thanks James, I have gotten a lot of great information from watching your videos over the past year or so. Do any of the big retirement/investment companies (Fidelity/Vanguard/etc…) have an automated way to designate which account withdrawals come out of each month? For instance a way to say I want $5k each month and if the market is down 20% from peak take that out of my bonds account, otherwise just take out of my stocks account? Even better would be a way to do that and automatically rebalance portfolio if the balances got out of balance as the markets do their thing.
Get video James. You and your team provide some great information on every video and we greatly appreciate it. I am almost 50 and my wife will be 40 in July. Our net worth with home is approx 1.6 million. We live in Connecticut. My question to you, when would be a good time to someday contact you and your group to possibly get a plan together??? Would it be 10 years from now when I am in my 60’s???
Helpful presentation. Presumably the annual update to the plan and portfolio allocation is a paid service subject to an ongoing AUM expense. Did the scenario include your annual AUM fee? The ~1% AUM fee may be worth the cost, but is not trivial, particularly in a reduced return market. Curious if it was included.
You are correct. I don't recall this important financial / budgeting cost being worked into one of these examples on this or any other financial advisor channel.
An AUM fee structure at 1% can be a HUGE drag on a portfolio. For bond allocation this cuts directly into income for very little active management, and for equities adds insult to injury in a downturn having to pay more from your emergency bucket while waiting for a recovery calculated from the depressed value of your stocks. AUM was not always the way money mangers or advisors were paid.
Bought a good cross section of an economy after i retired, Also i built a diverse portfolio that i'm attached to because it keeps me motivated. I never follow the crowd emotionally when choosing my picks. To be honest i sped up the profit and stock picking process where possible by using an FA, I also dabble in etf's, bonds, coins etcetera. After my first million I realized that when a stock starts booming chances of you finding out it's potential on time is very slim. most average investors are always late to the party, for this I make sure my CFA handles that, ever grateful to Dianne Sarah Olson. it’s like turning your notifications to earn more millions.
Thanks for the video James. If the portion of cash reserves you need are currently invested in stocks, how do you account for the tax hit that will occur selling these stocks to raise the cash for the root reserve?
Hi James, another great educational video. Thank you! Question: Do you know where I can purchase similar software to the application that you use? I have a spreadsheet, having many sheets, all connected, representing income, spending for go go, low go, it's very customized for me and my goals. But I would love to find your software vendor and or be able to purchase a copy. Thank you.
He posts that information in description for his videos. There is a link there to the software they use.
We keep it simple, particularly with cash currently earning 5%. We keep 4-5 years expenses in a “cash” bucket so we should never have to dip into our near fully market-invested main “longer term” bucket in a down market. If the market is down, we spend from the cash bucket, even all the way down to zero… expecting the market will have recovered by that point and we can then replenish the cash bucket.
We do periodically evaluate our total “bonds-cash”/equity mix. In addition to being simple, this ends up being a low stress method, particularly since, when social security kicks in, plus a modest pension, our routine expenses will be fully covered without touching the portfolio other than for big one time expenses like a new roof or vehicle… and periodic bigger trips.
Good plan!
Our plan is very similar but with stocks currently near ATH we recently went from 80% large cap funds to about 40% with the other 60% in short term CDs, bonds and money market, if the stock market has a downturn, we will plow it back into large caps, if no correction just as well, still enough vested in large caps to make a difference with the rest collecting a low risk 5%
@@coastalhillbilly3419 I understand your strategy. However, a move of equities from 80% to only 40% is pretty extreme for purposes of timing the market in hopes of a correction. Remember that rates may eventually go down and those short-term CDs at 5% will not last long, and new rates might be much lower. Maybe an 80% to 70 or 60% stock would be more sensible and still give you the dry powder you are looking for in the event of a correction.
Great Fundamentals here. Focus on the Big Picture. The future is unpredictable, just be prudent with your living expenses.
Bucket strategies are a form of mental accounting that are really not efficient or as safe as they seem. Same thing with dividend/income investing. If it helps behaviorally to keep you in the market, go right ahead, but realize that your entire portfolio has a certain risk profile that you ignore by splitting things up into buckets. Bear markets can and do last longer than 5 years while you bleed your cash dry. And when the market does well, you have a bunch of cash dragging down your portfolio returns. From a total return perspective it is better to look at your asset allocation’s total risk profile and adjust as necessary for your goals and timeline. Not saying I do this perfectly with my own portfolio but I recognize that it is less than optimal. (My apologies to the late Harry Markowitz if my description of modern portfolio theory isn’t perfect).
And buy some bitcoin. :)
I agree. What happens if you bleed the cash bucket down and THEN are forced to sell stocks? And when do you refill the cash bucket?
I prefer setting the asset allocation and rebalance periodically with market fluctuations. That said, I don't think James was proposing a bucket strategy, rather getting this couple to when SS starts.
What about the tax implications of changing that initial brokerage acct to 20% stocks / 80% bonds right as they retire? I’m assuming that would be a potentially big drain on long term success?
He actually said the total portfolio would be 80% stocks.
Your question is valid, but we don’t really know what their current allocation is.
If this was in a 401k or ira, then there is no tax implications since all withdrawals are taxed as regular income, or zero taxes if ROTH accounts. If it was a taxable account, as long as they plan the stock gains as long term capital gains, its not bad since LT capital gains is 15% for most people.
do you do individual consultations? Are you fee based or are you a broker?
What would you consider an acceptable average SS tax % throughout retirement. I’m ending (EOY 2025) an arduous exercise of Roth transfers/distributions that yield zero Fed taxes at RMD time and < 50k in taxable IRAs at age 90. however, 28.9% of our SS earnings are getting taxed. Considering 85% is the max I’m satisfied. What am I missing?
James, could you please clarify what you include in the assets in the “root reserves”? You said they were “bonds”. Did you mean actual bonds, or did you mean treasuries, cds, money market? Bond funds have been losing money so it would seem best not to use them in “root reserves”.
Bond funds were hit just as hard as stocks in 2022 due to the inverse relationship with fed rate hikes. Wasn't so safe then.
I would like to see advisory fees in these examples.
If you have .5M in a brokerage account, is it better to live off of that for the first few years and let your retirement savings grow, or start dipping into RS right away and keep the funds for a market downturn?
Couples have huge advantage for retirement income (2X Social Security)... but how do you plan for one person dying early ?
They made it all back and then some in 2023
Not sure if should use taxable account as primary in early retirement years in which tax rate is low so make more sense to use tax deferred account as primary. This way you will have less RMD and lower tax rate in late years.
Good point but, since tax planning was not part of his video, he probably left that part out in the explanation. Due to the large balances in tax-deferred accounts he probably would suggest Roth conversions before 70 or RMD age, while most of the expenses are paid from taxable and pensions and later with SS.
Always keep your bonds in a tax deferred account! If the stock market dips, draw from the traditional Ira/401k and if the market is within 5% of its all time high, draw from your brokerage account. The tax ramifications are huge!
You would need to redo this every single year to set up 5 years worth of reserve each year. You wouldnt actually just let the first 5 ride.
Isnt it bad for taxes to put bonds into the taxable account?
Not once you retire and your income goes away, and your situation suggests that is best to withdraw first from the taxable account. At that stage you use the interest from the bonds (and dividends from stocks) to fund your expenses rather than reinvesting them, and you probably pay no or little taxes for them due to being in a lower tax bracket.
Can you please show realistic retirement amounts? These 3million + are not where most Americans are.
I don’t think they’re are nor spending enough of their money. I know they said this is what we want to do, but from what you’ve shown they are leaving all of their portfolio alone and one day they will be dead, and none of it will be spent.
Must be great to have clients who are ridiculously overfunded. They don't require much planning and can afford a lot of advisor fees. Pretty idiotic to require buying a new car a year before social security starts.
What happens if you have a 10 year downturn like the 1970s or 2000s? The plan just blew up but for all of the overfunding.
Only 20% of people have more than 100k
Only 0.1% have $5mln+
are u a fiduciary?
A CFP is an accredited fiduciary. Excellent content, James.
dont forget your paying this guy close to 25000 a year to tell all you this.
If you want to hire him and his firm AND you have a Minimum of $2M in Assets, THEN you will be paying him @$25K a year for his firms advice.
I don’t have the patience to be a planner. To sit there and smile and help people light money on fire with a $1m house worth of nearly dead money and a new car every five years which is far far worse than dead money would hurt my soul. Yes, different people have different goals but it has to be hard to smile and say yes I can help you light money on fire. The neutrality an advisor must show is impressive.
And based on your statement it's a good thing you're not.
I lost you at a pension of $6,000/month for Anna. This becomes an irrelevant scenario for 99% of your viewers.
He misspoke, it was $600/month
its 600 a month, 7200 a yr.
He misspoke the second time. It was $600/month or $7200/year.
😂he said $600 a month
To be fair, they are still out there. My husband and I are in our early thirties and we will both have pensions from two separate jobs.
I think the number is closer to 15% of private sector companies and well over 50% for public sector (including military).
Wow, 2.4mil. I can totally relate. 🤣🤣So stupid. FFS
That’s really not a stretch.
Retired at 55 several years ago, $1m in the bank. More time with my wife. 3-5 trips to the gym each week that I couldn’t do while working. Way less stress. More time for hobbies. Cycled 5,000 miles my 1st year of retirement. Joined a golf league that work travel had prevented. Actually have seen our net worth INCREASE nearly each year in retirement, thanks to no debt and years of dedicated investing with my FA Dianne Sarah Olson who made me a million after giving her a sum of one hundred and eighty thousand to start. Now i'm able to help my elderly mom more. Way more time spent outdoors with my family. Life is good!
I would just put the $2.4 million portfolio in a dividend ETF like SCHD at 3.5% and you'd make $80k a year in dividends without having to sell any stocks no matter if the stock market goes down. Living off dividends is magic. Add in some JEPQ and you could bump up that annual dividend income.
3.5 % will not be enough to make up for inflation. You need to have a more diverse portfolio. To make safe investments in a down market yet have some investments for long term to adjust for inflation. Many people make this mistake.
75% SCHD
15% JEPI/JEPQ
10% VTI
Your salary is your dividends. Live within those means and you are good to go.
Locking in at 3.5% for a 30-year retirement is not a great plan. IMHO.
3.5% won't even keep up with real inflation.
Why neuter their long term growth for something irrelevant like qualified dividends over cap gains?