Post New

Executive summary: For portfolios that don't need to be touched and worry about pulling funds out in a down market isn't an issue, why diversify?


Recently went for a sanity check up by checking out a financial planner. We are about 5 years into retirement, and living well below our means. He told us we could easily more than double what we are spending, and still have a large terminal value to our portfolio, even without his reconfiguring our allocation and managing the process for us. We are not big spenders out of choice, which is why we are in this position to begin with, but had indeed intended to bump up our travel expenditures greatly, now that we are true empty nesters and only have ourselves to worry about.

At some point, having someone take over our portfolio will be a good thing, unless I can simplify what we hold and give one of our kids oversight/control. Alzheimer's runs deep on my dad's side of the family, and I have learned the need to protect ourselves from ourselves as we age. I turn 60 this year and do not feel I am close to that point yet.

For reasons I do not regret, we are very cash heavy at this time. While I realize that is not optimal long term, according to the FP, even with the large cash holdings and more than doubling our expenses, we would not touch the principal we have accumulated, though via inflation it certainly would have less spending power at our death. So as was expressed in a prior post on this board, we could be extremely cautious in our investments and not outlive our funds. That tends to be contrary to my nature, however, which is why I am putting this out for your consideration.

We are putting off taking SS until DH is 70 and I am full retirement age, which should, assuming no decrease in the SS payouts or means testing, fully cover our base needs, keeping us from having to sell stocks in a down market. To bridge the 7 years until we take SS, we are keeping 1 year of base expenses in a money market earning 4+%, have 1.5+ years worth of base expenses in I bonds earning over 13% currently, that mature in 2030, (to which we will continue adding $20K/year,) and will be locking in these nice rates with Treasury bond purchases for the other years to get us to SS. From an allocation POV, this safety net amounts to about 10% of our assets. This is the cautious part of me.

I consider this 10% to be my bond allocation, as is the not quantified lost opportunity costs from not taking SS earlier and investing it. Unlike the FP, I consider this to be sufficient allocation to bonds. My exposure to FPs lead me to generically believe that simplicity is not one of their goals, as they have to impress you with how difficult it is to manage your own funds, in order to justify their fee. Having buckets of purpose like this would also prompt me to keep those funds outside of their fee territory, which would also not be their preferred choice. (That is not to say that FPs do not fill an important role for those with no interest in managing their own accounts or keeping up with what is happening in the retirement investing/benefits world. I know a number of people who have benefitted greatly from them and were more than happy to pay someone to manage things for them rather than learn to do so themselves.)

I was not unimpressed with the FP we spoke with, but having made the choice not to proceed with him at this time, I am tackling setting up a plan to reinvest the cash we hold. First hurdle is to set the allocation. I understand that a diversified portfolio should essentially temper the volatility, eliminating the soaring highs and blistering lows to give a tighter band of less extreme positive and negative returns. Having to sell stocks for expenses in a down market can not only hurt the portfolio, but give great amounts of indigestion. However, (and yes I am finally getting to the point,) if one's portfolio is only needing to be touched for discretionary purchases, is diversification necessary? Wouldn't it be better to invest in the assets that typically do best most often, rather than spread across the entire financial options because you don't know what will do best in one specific year? Looking at the annualized returns over 20 years, https://www.mfs.com/content/dam/mfs-enterprise/mfs..., why would you invest in anything other than US stocks in a portfolio that doesn't need to be touched and volatility isn't a concern? The 96 year average return of the S&P500 is 10.08%. https://www.officialdata.org/us/stocks/s-p-500/192.... (Note this link uses returns to the end of 2023, which is curious as we are not there yet. Change the end date to 2022 to get my posted number.)

Surely I must be missing something. The FP and others on line are suggesting high amounts of foreign stocks and emerging markets. I am more tempted to wait for a pull back in the US markets and throw the cash in there, ignoring further bonds or international stocks and bonds.

IP,
who is not proposing this is right for you, but wondering why it might not be right for me

Some food for thought. On the old TMF board, there was discussion about the partner that would get the least SS taking it at 62, and the one that would get the most taking it at 70.5. It provided money much earlier, but also enabled the max payout for the biggest earner. Though it sounds like you may not need it at all, and could wait until 70.5. But it's another option.

1poorlady and I are thinking of doing that. In a few years we'll evaluate it again under the then-current circumstances and see if it's a good idea for us.

Some food for thought. On the old TMF board, there was discussion about the partner that would get the least SS taking it at 62, and the one that would get the most taking it at 70.5. It provided money much earlier, but also enabled the max payout for the biggest earner. Though it sounds like you may not need it at all, and could wait until 70.5. But it's another option.

Appreciated, but SS is what we consider our insurance policy and as such we are maxing it out. We are also trying to minimize income for as long as possible so that we can make taxable moves with less consequences, such as Roth conversions and realizing capital gains on long held assets at a low tax rate.

There are so many ways to do the right thing, depending on what is right for you. Thank you for raising the idea, which may come in handy for someone else reading this thread.

There are SS optimization programs that can spell out your options based on all the variables. Don't know if they charge or not, but that may be something you should look for. Most FPs have them as a "free" service.

IP

If the lower earner gets it at 62, then what happens if the higher earner passes away say at 72? Does the lower earner get what the higher earner was getting or is it reduced due to the lower earner starting theirs at 62? I thought it was reduced but I always get social security stuff wrong.

As I understand it, the survivor gets to choose which one they take. AJ will correct me if I'm wrong, but that's my present understanding.

AJ will correct me if I'm wrong,...

Has AJ made it over here? Great news.

IP

I have reached out to aj485, Dope1 and BruceM to this forum several times on another platform over the last two months. None of them have expressed any desire to join.

If the lower earner gets it at 62, then what happens if the higher earner passes away say at 72?

It's in my spreadsheet. https://www.dropbox.com/s/gebanzrbr3g33qf/My%20SS%...


Survivor rules
He *did* file before death. "Early" means before FRA (normally 66).

Filed early Larger of his reduced benefit OR 82.5% of his FRA amount
Not early: Her reduced spousal benefit (based on her age) applied to his increased amount

He did *not* file before death:
Died early: His FRA amount
Not early: Her reduced spousal benefit applied to the amount he would have gotten if he filed at date of death.

and

Widow benefit base:
If he filed early His reduced benefit., but not more than 82.5% of his FRA benefit. ( 13 months of reduction)
If he filed not early His benefit (perhaps bumped up.)
Not filed, died early His FRA benefit
Not filed, no die early His benefit at date of death (perhaps bumped up.)

Widow benefit reduction, based on her age vs. 66
Widow benefit base reduced by # of months before she is 66.
No increase past 66.

Hi IP!

It's a good question: why not just invest in the expected highest returning asset class instead of diversifying. A few thoughts, some or all of which I know you have considered. :)

- You may expect 'US Stocks' to have the highest return, but you could be wrong. Valuations are fairly high now, and I know you say you'd wait until a downturn and then plonk it in, but in the meantime you are earning cash returns that are roughly equivalent to inflation, in general. What if they stay high for years and years, interest rates drop, and you miss out on huge moves in foreign/emerging stocks that you could have ridden?

- There is country-specific risk to any single country, including the US. William Bernstein points out that countries, even seemingly robust long-lived countries, have existential crises often enough that the risk should be considered in long term planning.

- You miss out on not only on the lower volatility of a diversified portfolio, but also the rebalancing bonus that an investor can sometimes harvest by automatically buying low and selling high when rebalancing every year or two.

- You may consider yourself immune, but high variance of a single asset class portfolio can trigger maladaptive responses in many people, like deciding 100% US stocks is inappropriate in the middle of a big crisis/stock crash, and selling low, locking in potentially significant losses. Part of the designing a portfolio for ease of ongoing maintenance by a child might include some diversification to ease that risk and give the manager 'something to do' in such a situation by re-balancing: buying low instead of selling low.

- Buffett seemingly agrees with you that US stocks are enough diversification, from comments he's made.

- IMO US Small Cap Value is historically the highest returning readily available asset class, and having a portfolio something like 40% S&P 500, 40% SCV, 20% short-intermediate bonds will probably return as much as the S&P 500 alone, with less variance, and you could probably sneak in 10% foreign for more diversification and lower variance without affecting return much as well.

Hi BenSolar.

Been away from the boards and just seeing your post now. Simply wanted to let you know I appreciate the reply.

IP

Post New

Retirement Investing FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.