It Isn’t Just Boomers. Lots of Older Americans Are Stock Obsessed

Investing Strategies Retirement Investing
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WSJ has a good article on retirees with insanely high stock allocations. It seems that a lot of this is people who didn’t have financial advisors and benefited from decades of “skim-free” compounded investment returns. Liked this comment from an institutional bond salesman who retired at age 44.

{{ Bill Carson: 5 hours ago

Let me give everyone here a tip about stockbrokers or money managers. People use them thinking (or hoping) they’re investment geniuses. Stop thinking like that!

At least 85% of them are personally dead broke and know almost nothing. The other 15% maybe aren’t broke but have almost no investments of their own.

I know because I was one in the mid to late 80s. Then I became an institutional bond salesman and retired six years later at age 44.

Use index funds and manage your own money. Then hold on and don’t sell in a panic! And sprint away from anyone pointing you toward annuities, the worst form of investing in the history of mankind. There’s your free advice for the day. }}

intercst

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These types of articles usually focus on the ONE thing they are talking about (in this case 80+ year old folks with large stock allocations). But in the world of investing, that’s essentially useless information. If a person has $XX,000 in a retirement fund, it has to be put somewhere … there are a limited set of choices, you can leave it in the cash fund, in a bond fund, in a govt bond fund, in a target date fund, in a balanced (60/40 usually) fund, or in a stock fund. Or (if it is generally flexible, like a typical brokerage IRA) you could invest on your own via funds or individual stocks or bonds or pretty much anything. When an article doesn’t even mention what the alternatives were/are, how can you, the reader, judge if their conclusions are rational or not?

So, if you look at what the alternatives were/are for these 80+ year olds, and assume they aren’t stock pickers (vanishingly few people are), then they either can put it into fixed income or into equities, or a balanced option (target date, 60/40, etc). Had they chose some sort of fixed income, they probably would have been mostly shorter term (hard to picture buying 30-year maturities when you’re in your 80s) and they would have enjoyed near-zero (and negative real) rates for a decade or more. So their $XX,000 would have become $XX,000 + max a few hundred/thousand, so a negative real return of perhaps 20-30% over a decade or two. I don’t see how they had much of an alternative compared to a heavy equity portfolio, the simplest being a typical low-cost SP500 or total market fund.

The sad part? That only a fifth of these older investors did so. The other four fifths are likely behind inflation or maybe just barely keeping up with it.

Now this doesn’t mean that it’ll be like that forever. It is entirely possible that someday we enter a long period of bearishness for stocks, and high enough rates that as they slowly drop, bonds might outperform (best period ever was from early 80s when rates slowly dropped from 14% to near zero). But we aren’t anywhere near that point yet.

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At Vanguard, one-fifth of taxable brokerage account investors aged 85 or older have nearly all their money in stocks

Maybe it just means people with nearly all their money in stocks live longer.

:sunglasses:

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If I had more money than I needed at age 85, say several millions, why wouldn’t I put it in stocks to maximise the amount passed to my beneficiaries?

Once again, broad generalizations don’t tell you much.

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Exactly! Once you’ve reached a certain level of wealth, you’re investing for your heirs and charitable beneficiaries, rather than your remaining life expectancy.

intercst

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Or maybe it means they use Vanguard for the stock index fund and have all of their fixed income in bank Certificates of Deposit.

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Why wouldn’t you spend down your cash so you don’t have to cash out the stock portfolio and pay taxes on it?

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It’s just the opposite! Today at least. If you have a chunk of cash today, you are paying excessive taxes over having it all in stocks. That’s because that cash is paying you 5% a year which is taxed every single year that it is received. Meanwhile, the stock portfolio is only taxed when you have net gains throughout the year, and net gains can be avoided for quite a while by balancing the selling of losers versus winners. And by avoiding stocks that pay high dividends, of course.

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Yep. Just holding Berkshire Hathaway solves a lot of problems. And BRK comes with a lot of cash in its portfolio and a big position in Apple to boot.

intercst

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What if your money is still in tax sheltered IRA during retirement? You’d only pay money when you withdraw, correct?

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Correct. Keep in mind that one of the best ways to withdraw from a traditional IRA is to convert what you can manage into a ROTH. Taxes must be paid, and the withdrawl does not count against an RMD, but converting some amount - often up till it would raise you into the next tax bracket for the year - allows it to be invested within the ROTH. Withdrawals from the ROTH are tax free because the funds going in are post-tax.

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Maybe it is also helpful that those 85-year-olds can look up, and notice they still have folks older than them e.g. Charlie Munger (99), Carl Icahn (87), Warren Buffet (92), George Soros (92), etc. who could have retired years ago. But instead, those older peers are still pick stocks (investing), and generally successful. I bet a few of them are saying - when I grow up, I wanna be like Charlie Munger :grinning:

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Yes, Traditional (tax-deferred) IRA and 401(k) balances are taxed on withdrawal, while Roth (tax-free) IRA and 401(k) balances allow tax-free qualified distributions. That said, keep in mind that Traditional IRAs, Traditional 401(k)s and Roth 401(k)s all require that minimum withdrawals, based on the account balance and the owner’s age, be taken, currently starting at 73, increasing to 75 in 2033. These required withdrawals start out fairly low, in the 3.5% - 4% range for the earliest RMD ages, but hit 9.9% by the year you turn 93. If someone had a $1MM Traditional IRA balance at 73, had a 6% annual growth rate in the account and only took RMDs, they would still have about a $1MM balance at 93, and would be required to take a 6 figure RMD, which would have the potential to bump the IRA owner into a higher bracket than they otherwise would have been in.

Another thing about RMDs is that if you are MFJ and your spouse leaves you their tax-deferred accounts when they die, you are now required to take RMDs on the total of your (previously joint) tax-deferred balances, but you will be taxed at higher Single rates, which has the potential to at least double the taxes paid on the same withdrawal amount that you had been taking jointly.

And when tax-deferred accounts are eventually inherited by someone other than a spouse, the beneficiary only has 10 years to completely distribute the account balance. So if they, in order to try to balance out their tax burden, tax 1/10 the first year, 1/9 the 2nd year, etc. they will be taking a 6 figure distribution at least in the first year on a $1MM balance, and depending on growth in the account, could continue to take 6 figure withdrawals each year for those 10 years.

So, tax-deferral is great as long as it works. But it stops working at some point, which is why those with substantial assets in tax-deferred accounts should have a plan on how to distribute those tax-deferred assets, rather than just leaving them untouched until they are forced to take them out.

Yes, it’s a first world issue. But it can be a large issue for those with large balances.

AJ

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This is simply not accurate. Cash/money market balances in a retirement account are NOT taxed this way, they are taxed as part of (and depending on the amount of) annual withdrawals - RMD or otherwise.

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This is correct. But if you read the article we are discussing, they are talking about “taxable brokerage account investors”. It’s literally in the subheading of the article, and is in the header sample in the first post of this thread.

Here it is again -

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The article seems to be behind a paywall, so I can’t really read the details. That said, it’s possible there’s some strong selection bias with that way of slicing the accounts, then. For investors with both a taxable brokerage account and an IRA, one very common strategy is to put the assets that are tax inefficient inside the IRA and the assets that are tax efficient in the taxable brokerage account.

If you have a bond-heavy IRA and a stock-heavy taxable brokerage account, your overall portfolio may be well balanced for a retiree, but someone looking only at your taxable account might think you’re incredibly stock-heavy.

On a related note, this can be especially true for retirees at the age where RMDs are mandatory. You have to take money out of Traditional IRAs, but you don’t need to spend it. If your RMDs are generating more cash than you need, then there’s good reason to invest the excess in ways that wouldn’t generate a substantial amount of even more immediately taxable income.

Another factor to consider is that current retirees are more likely to have a pension-style retirement plan than current workers are. If the combination of Social Security and a pension are more than enough to cover your costs, then why not invest that much more aggressively with your available money?

Finally, until very recently, interest rates were near zero. That pushed many investors “higher up the risk curve” to buy income producing stocks rather than bonds. Even if those investors are now more willing to buy bonds now that rates are generally higher, a rapid rebalancing inside a taxable account could very likely drive a huge tax burden. So if rates stay around these levels, it’s possible that retirees’ accounts should shift more towards those bonds over time…

Regards,
-Chuck
Home Fool

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Ugh. I’m 56 with a reasonable IRA balance (I’ve hit the 10X salary target, but still don’t feel that is enough to retire on). I also now have a large RSU grant with my employer that will fully vest in under 4 years. That grant bumps my wages up pretty high and will be so for the next several years. So doing a Roth conversion now makes zero sense - my tax bracket is too high right now.

But I will have to consider upon retirement, do I draw down the IRA first, or live off the RSU’s first? I have a few years to learn all this stuff fortunately. Which is why I’m here now. :slight_smile:

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BJurasz,
Where do you work? I want to finish my full-time career there :wink:

I also now have a large RSU grant with my employer that will fully vest in under 4 years

FC
a few years closer to 6x than you
have only 10x our expenses, not salary

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I can’t give individual investing advice. That said, from the information you shared, it may be worth sitting down with a fee-only financial planner and paying that planner for his or her time to design a plan and/or some what-if models for you.

You painted a picture of someone with decently high income, decently high savings in tax-deferred accounts, stock-based as well as cash compensation, and somewhere in the neighborhood of two decades of compounding ahead of you before RMDs will start.

The “do nothing” scenario of letting your money stay in “traditional / tax deferred” retirement plans will likely set you up for a substantial “first world problem” of taxes and income-based costs when your RMDs start and you are required to take money out of those plans.

Whether there are any alternatives to that which make sense depends on lots of factors, such as how long you plan to keep working, how long the RSUs and other stock-based or otherwise deferred compensation will live on past your retirement, what sources of money you have outside of your retirement accounts, etc…

Regards,
-Chuck
Home Fool

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This scenario has been exacerbated by the increase in RMD starting age, because the accounts have the potential to grow significantly in the additional 3 - 5 years. That said, the increase in age also gives an additional 3 - 5 years to help mitigate the high account balance by:

  • Spending out of the Traditional accounts (adds to AGI)
  • Doing conversions to Roth accounts (adds to AGI)
  • Beginning no earlier than 70 1/2, doing QCDs (Qualified Charitable Distributions) (does not add to AGI for up to $100k/year)

For those retiring early, there may be other considerations:

  • ACA subsidies (current year income prior to Medicare) based on MAGI
  • IRMAA premiums (looks back to 2 years prior income) based on MAGI
  • SS - starting between age 62 and 70
  • Pension income
  • Deferred compensation income
  • Annuities
  • NIIT (Net Investment Income Tax) starting at AGI of $125k for MFS, $200k for Single & HOH, $250k for MFJ
  • etc.

It can be helpful to put a bar chart together by showing when you expect to start getting income for different scenarios. You can use the chart to ensure you’re going to have enough income, and also to see where mitigation strategies for large tax-deferred balances will fit best, without triggering things that are based on AGI/MAGI

AJ

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