How's your plan working?

Investing Strategies Retirement Investing
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How is your plan working?

I am currently transitioning into “full” retirement. Seems like bad timing. The last eight months have been brutal for investors - no way to candy coat it. My stock portfolio was off around 30% earlier this year but is now only off 25% (whoo-hoo). So I decided to go back and take a closer look at my financial plan to see how my expectations of how my plan should be working, match up to the reality of this latest market “correction”.

For some background, here is a summary of how I developed my plan:

About 10 years ago, I decided it was time to get serious about building a financial plan for my wife and I to meet our retirement goals. Up until then, our financial efforts had been primarily focused on providing for our family (as they should have been) as I worked at my engineering consulting firm and my wife was a teacher. At around this time, our kids graduated from college and were on their own, so we started looking forward to when we no longer needed to generate any income from our jobs.

But I hadn’t ignored retirement up to then. I contributed to a SEP/IRA through my business, and those funds were almost 100% invested in high-growth stocks - in other words, they were volatile. While retirement still seemed a long ways off back then, I decided that I needed to write out a formal plan. Here’s a list of items I considered in my plan at the time:

  1. Assumed retirement age
  2. Social Security income
  3. Pension income
  4. Other sources of income (e.g. real estate rentals, inheritances, etc.)
  5. Necessary supplemental income to meet LMP (Liability Matching Portfolio)
  6. Emergency and contingency funds
  7. Remaining investment funds allocated to RP (Risk Portfolio)
  8. Current income and business (i.e., 10 years ago)
  9. “Other” considerations

I got the concept of designating an LMP and RP from the writings of William J. Bernstein, including his 2012 booklet entitled The Ages of the Investor and 2014 book Rational Expectations. My LMP is comprised of investments and cash flows that will provide a minimum monthly income (after taxes and inflation) to maintain our current life style. The idea is to have an income stream that is essentially bullet-proof (as much as possible) so that the fickleness of Mr. Market won’t change our financial lives dramatically for the worse during retirement. My LMP income sources include items 2 - 4 in the list above, and are comprised of Social Security, my wife’s pension, and rental income. However, this didn’t get me to the full amount I needed, so I decided to build a 10-year ladder of TIPS bonds (item 5) to reach my total LMP requirement. In years where I could purchase TIPS with a minimum of at least a positive real yield to maturity, I bought bonds. My goal was to provide the necessary extra funds for the first 10 years of my retirement. Since real yields for TIPS have been negative over the last few years, I fell behind. But that has changed with the recent increase in interest rates, and I have now caught up. Unfortunately, 10 years is as long a ladder as possible using TIPS, but I think 10 years is a reasonable buffer.

Item 6, emergency and contingency funds - are just that, and I am quite conservative when it comes to this— I use 18 months income as my basis - many advisors recommend only 6 months. I’ve tried to find the best place to hold this money to minimize damage from inflation while preserving liquidity and safety (if possible). Since safety and quick access are paramount, I’ve been willing to accept a low return in an interest bearing savings account up until now, though increasing inflation has me revisiting this account lately.

The RP is made up of the remaining assets after LMP obligations are met. These funds will be used for luxuries and bequests, so I can invest in “riskier” equities. For me, this means stocks, using TMF services and my own research as guides for buying and selling.

The last two items are a check list of things I wanted to keep in mind as I moved toward retirement. First (Item 8), I wanted to make sure my business was healthy and continued to provide for my needs until I was ready to retire. As it turned out, my business partner and I were able to sell our business and transition into retirement over a three year period (8 months left), thus providing extra RP funding. Item 9 was a catch-all for all the other important issues I needed to address, including things like health insurance, disability insurance as necessary, consequences of death (in other words, estate planning), and long-term care insurance.

So that is the plan I came up with 10 years ago, and I am just now starting to fully implement it. How is my plan working out? So far so good, even with the recent drop in the markets. I revisit my plan at least once a quarter and make adjustments as I deem necessary. As I note above, I’ve just finished filling the holes in my 10 year bond ladder, so for the next 10 years at least, my LMP is fully funded, and even if the markets completely crash, my life style shouldn’t change too much. I still need to consider how to best invest my RP funds, and maintain my bond ladder as the markets allow, but for the most part I am satisfied with how it is working out.

So that is how my plan is working. I present it here as an example for discussion - just one approach to a retirement plan. How is your plan working?

Best,
DT
TXT, ANSS Ticker Guide
Long TXT
Click on my board name to see a list of my holdings

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Item 9 was a catch-all for all the other important issues I needed to address, including things like health insurance, disability insurance as necessary, consequences of death (in other words, estate planning), and long-term care insurance.

Estate planning is not the only consequence of death. The change in tax rates to single and the Medicare surcharge changes are things to consider along with being sure each spouse understands this entire plan.

My plan is fine.

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I’m pretty sure our plan is still good - but I’m meeting with a new financial advisor next week to review.

I’ve been retired since 2017 and DW retires next May. I started collecting SS at 62. My lifespan is predicted to be to 83-86, so I decided to start collecting as soon as I was able.

DW has a longer projected lifespan - 92 and we are deciding whether she should start to collect as soon as she turns 65, or wait until her Full Retirement Age of 66 and 8 months.

I have a nice pension coming from P&G that I am eligible to start to collect on right now, but we have opted to wait until age 70 (with spousal survivor option) to begin collecting on that.

We have LOTS of savings - mostly in the form of short term investments.
85% Cash
7% Treasury Bonds
4% Domestic Bonds
2% Large Cap Stocks
2% International Stocks

Our Net Worth is broken down as:
19% After Tax Investments
42% Retirement Investments
39% Fixed Assets / Property

We’ve been out of the market since 2019 waiting for the shoe to drop - I think we were a bit early. But now, it looks like we’ll finally get a chance to get back into the market in the next year or so.
We will most likely invest in VOO and BRK-B. VOO gets us our top investment positions (GOOG, AAPL, TSLA, PG, TJX, JNJ). We won’t invest all of our 61% that is currently cash. I’m unsure what percentage we will put into the market, but it won’t be 50% that’s for sure. We are just too risk adverse for that.

We’ve been taking small amounts from our After Tax investments to make up the difference between our cash flows and expenses now that I am retired. Our former financial planner (since retired) told us that we needed a 3% return on our investments considering our conservative spending habits and assuming a 3% inflation rate. Our plan also works at a 1% return - which would leave nothing to our kids - which would also be OK with us as they are very self-sufficient.

So far so good - but we will see what our new financial planner has to say…

'38Packard

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7 years in, our plan is doing fine. Net worth is above goal, living off business income.

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4. Other sources of income (e.g. real estate rentals, inheritances, etc.)

I’m guessing it would be a small portion of your plan, but in no way would I be counting on an inheritance.

Our plan is working fine, surprised the other day when my stock portfolio was up 2% over the past year (not YTD) compared to an 11% decline for the S&P 500.

The biggest change in our plan was the abruptness of my retirement and not fully realizing how much spare time I was now in possession. Part time hobbies of gardening and wood working have turned into full time hobbies among a few other things.

JLC

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5. Necessary supplemental income to meet LMP (Liability Matching Portfolio)
7. Remaining investment funds allocated to RP (Risk Portfolio)

There is no magic here. This is just obscuring your asset allocation.

My LMP is comprised of investments and cash flows that will provide a minimum monthly income (after taxes and inflation) to maintain our current life style.

Pension & SS are not “investments” or “portfolio”. They are just income streams.

As for the actual investment part of LMP & RP…that’s what asset allocation and the 4% SWR are to accomplish.

6. Emergency and contingency funds

You do realize that after you retire you just have ONE portfolio, don’t you? It’s just one portfolio, invested in different things and perhaps multiple accounts.

Also, an emergency fund is for when you are working, to make sure you can pay your mortgage, etc. if you lose your job. After you are no longer living on a paycheck that could vanish, that rationale is no longer operative. This has been discussed a lot on various retirement boards.

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Hi Rayvt,

“Pension & SS are not “investments” or “portfolio”. They are just income streams.”

While the OP has a unique name for it, our portfolio does the same thing.

Pension and SS are not part of our portfolio either.

Our portfolio is managed in 2 components:

  1. Income/cash flow
  2. Growth

The primary component of our Income/cash flow portion is our dividend Core:

Dividend Core 27.44% of portfolio: ABBV, AEP, CAT, CCI, CL, JNJ, KMB, KO, MMM, NLY, O, PAYX, PEP, PG, VZ

The other major component is our 2 Roth annuities that pay 4.5% interest compounded daily:
Bond Annuity: 7.25% of portfolio.

I manage this portion of our portfolio to provide at least 150% of our needed cash (Income Shortfall = Expenses - Income{pension, SS,etc})

Portfolio Cash Flow vs Income Shortfall: **225%**
Dividend Core  174.41%
Other Dividend   1.42%
ETFs             3.47%
Cash            45.36%

The Growth portion of our portfolio is managed primarily for growth:

Growth 54.49% of portfolio: CRWD, DDOG, ENPH, MNDY, NET, PAYC, S, SNOW, TEAM, TTD, ZS

The above info is part of what I post each day on my Fool profile page. (Which may stop when the new board system is fully in place.)

“Also, an emergency fund is for when you are working, to make sure you can pay your mortgage, etc. if you lose your job. After you are no longer living on a paycheck that could vanish, that rationale is no longer operative. This has been discussed a lot on various retirement boards.”

We keep some additional cash in our savings account and add to it each year as a type of emergency fund. It has funded a refrigerator replacement, a roof replacement and a heat pump system replacement just to name a few things. When these things come up, normally at times when I don’t want to sell stock, I have the cash and can call a contractor and get things going.

Currently, I have just added that money to our building cash pile. After the house is done, I will start building the emergency pile again.

“You do realize that after you retire you just have ONE portfolio, don’t you? It’s just one portfolio, invested in different things and perhaps multiple accounts.”

We have had ONE portfolio since we got married 49+ years ago. It has nothing to do with retirement.

I found it simpler to pool our resources and manage them as a single entity.

Some people at the Fool think retirement accounts are different from a taxable account or each service they subscribe to should be a different portfolio or spouses should keep everything separate to make it easier for a divorce.

For me, a single portfolio is much easier to evaluate and manage than having 10 separate portfolios with various goals.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

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Hi DT,

wow. Your plan is elaborate.

I only have a stock portfolio (taxed and tax deferred); some MF and indexes, and basically social security which I intend to start taking at 70 yol or 15 years from now, and a house with no mortgage.

I am going to take the plunge with one of the ‘safe withdrawal method’. I don’t have a pension or other source of income.

Makes me wonder if my plan is not too simple when I read yours.

my portfolio was down 50% earlier in June from last November’s top. It is now more like >40% (yipee?) since last Nov. Talk about stress test.

It’s a good experience assuming these large slides would come far apart(?) in the next few decades of my retirement. I have experienced the 2000 tech bubble and the financial crisis not from a retiree frame of mind but as an investor with new money coming in regularly. This time even if I have not officially retired (I will soon), this downturn will serve as an early drill. But I would not be deterred by it and will not delay my retirement.

tj

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Makes me wonder if my plan is not too simple when I read yours.

Many people like extremely simple plans based on a very small number of index funds. Pretty much the whole bogelheads community swears by it. Most there think it’s impossible to beat the market except by getting lucky. Many here disagree. I do think it’s true that more people lose a lot of money trying complex poorly understood strategies than those who significantly beat broad indices year after year. As for me, I tried a few strategies, did ok, but in the end i decided it was too volatile. I settled on a few broad market etfs.

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Tj,

Have you gamed out how ss affects your income? Sounds to me like you could split your funds into a large portion for the next 15 yrs, and a smaller portion for after 70.

If we had waited until 70 to draw ss,all of our needs and most all of our wants would be covered.
Our post 70 portfolio could probably be 1/3 the size of our portfolio now.
Jk

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Makes everything as simple as possible but no simpler than it needs to be.
Be simple but not naive.

It is sometimes unclear if the complex strategies are really better. Why complicate one’s life if it is not going to be significantly better?

By better, I mean better in your overall financial well-being and not something that ekes out a marginal advantage in a specific area of your finances.

tj

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Jk,

sorry not sure I get your msg. Do you mean… You took s.s. before you were 70yol and you suggest it’s might be better to take it before rather than wait?
and you attribute your taking s.s. early (at 62? at 67?) to be able to compound more in your portfolio and as a result a bigger portfolio now?

I thought by taking s.s. at 70yol, I could first get more and more for my wife who does not have any s.s. Also if my portfolio depletes too quickly, I can at least have something after 15 years. But that is not a good enough reason…I should look at this more closely. I just didn’t think I need to look at it now- maybe when I am 62yol I can re-assess.

What is your rec and why again?

tj

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My point was you may want to think of your present portfolio in two pieces,the first to spend until 70,and then the second to fund the amount over 70. If you are 55 and have 15 yrs to grow portfolio 2,it will probably more than double in terms of purchasing power in 15 years.
You may use 2/3 of your portfolio to fund the first 15 yrs,and then 1/3 for the delayed portion.

We took ours early because of family history and by personal confidence that I can manage our portfolio to end up in a better financial position than waiting. That is a personal decision,with many acceptable answers as there are people.

Jk

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Upon further reading,If there was only one ss check in the household,I would wait til 70 also.

Jk

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Thanks to all for the input and comments on my and your retirement plans, and various ways of looking at retirement portfolios and cash flows. Obviously, designating different names such as LMP and RP for portions of one’s net worth doesn’t change the fact that at the end of the day, everyone actually has only one “portfolio”. But I find this concept useful in deciding how to allocate funds into different risk categories.

Regarding SS, I’ve also decided to wait until 70 since I have other sources of income to draw from for living expenses until then. It’s hard to pass up a government guaranteed cash flow that increases 8% per year in addition to an annual inflation adjustment.

Right now, I’m sitting on a 20% cash position, and am thinking of moving a portion of that into dividend bearing stocks, as Gene (gdett2) describes as his Dividend Core. I’m also considering reallocating a portion of my RP (growth) portfolio into Dividend payers.

Thanks again for all the input,

DT
TXT, ANSS Ticker Guide
Long TXT
Click on my board name to see a list of my holdings

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Regarding SS, I’ve also decided to wait until 70 … It’s hard to pass up a government guaranteed cash flow that increases 8% per year in addition to an annual inflation adjustment.

It is not a 8% per year increase.
It’s giving you a higher payment for a lesser number of years.

Lower monthly amount for more years vs. fewer years at higher monthly amount. Designed to be actuarially the same.

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It is not a 8% per year increase.
It’s giving you a higher payment for a lesser number of years. – Rayvt

I did a quick mental calculation as I approached 62 years of age.

It turned out that taking SS at 62 is indeed offset by waiting, but (forgetting some of the details now) breakeven between starting early versus waiting was somewhere in my early 80s! And that doesn’t take into account the time value of having that money early.

I took the obvious course of electing withdrawals starting at age 62.

Rob
Former RB and BL Home Fool, Supernova Portfolio Contributor & Maintenance Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

“The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor; it’s not for the professional.” Charlie Munger

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FWIW, we are planning for 1poorlady to take it at 62, and me waiting until 70. If I predecease her, she will have the option of taking my bigger SS payout. Otherwise, at 70 we’ll both enjoy the payout.

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FWIW, we are planning for 1poorlady to take it at 62, and me waiting until 70. If I predecease her, she will have the option of taking my bigger SS payout. Otherwise, at 70 we’ll both enjoy the payout.

If she predeceases you it works out too.

My wife was ten years older than me. She started SS at FRA, Full Retirement Age, which I think was 65 for her. When she died I was still short of my FRA (66), and had not decided whether to start then or wait until I hit 70.

When she died I began to collect a survivor benefit based on what she had been collecting. The amount was almost the same as what she received, as the difference in age seems to be the basis for calculating the amount. I’ve been receiving that ever since. I will reach 70 this December, and right after my birthday I will contact SS and initiate collecting my own. Mine was already going to be significantly more, and now it will be 32% more than that.

As a side note, one thing the SS site will not tell me is what my benefit is, based on my own work. I recently went through the painful process of going into the details of the calculation, applying my history (which they do provide) to the amazingly strange calculation. It took me four sheets in an Excel spreadsheet. My calculation came to 86% more than the survivor benefit. It will be interesting to see how well that matches their number.

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I will reach 70 this December, and right after my birthday I will contact SS and initiate collecting my own.

To avoid delays in getting your increased benefit, you actually should have contacted SS last month - 4 months before your birthday. I would suggest contacting them on Monday.

AJ

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