We have about a $2M portfolio and a paid-off home. I’m 53, and most of our funds are in IRAs and ROTHs, so we can’t touch them for another 6 years and I’m planning on working in some capacity until at least 62.
I’ve managed everything myself for 25 years and have always been wary of wealth/financial managers, but I’m starting to think it’s more important to have more time and just not screw things up than to chase growth.
My ideal is to figure out how to earn 5-6% for most of the port while minimizing downsize and keep ~20% for growth investing.
Recommendations on how to achieve this? Recommendations on should I work with an advisor or not, and if yes, where would you look?
You could probably find a few bonds that are yielding that amount. FNMA 2035 @6% (no idea the current price or YTM).
Some fixed annuities paying over 5% too. Might be able to find one for 10 years.
Both of those options would either reduce or virtually eliminate downside risk.
I am an Advisor but my feedback is not biased. If you are savvy, you may not need assistance. You could also look into a fee-only advisor. My job exists to help those that either need help or want it. Many are confident and mature enough to handle things themselves.
Hawkwin
Who is within 5 years of retirement and faced the same questions/situation earlier this year.
I would disagree that you can’t touch them for at least another 6 years. If you have an employer plan that you could roll the Traditional IRAs into, you can use the rule of 55 in, at most, 2 years. You can also take out contributions, and conversions that are at least 5 years old, from your Roth IRAs at any time with no taxes or penalties. And you could use 72(t)/SEPP (Substantially Equal Periodic Payments) withdrawals.
Keeping 80% of your portfolio in bond/bond equivalents/annuities probably isn’t going to be enough to both keep up with inflation and allow you to use the 4% withdrawal strategy. The 4% withdrawal strategy is most successful based on a portfolio with at least 40% stocks.
I think it was originally calculated with a 60/40 equities/bonds portfolio. But calculations were done with many other mixes of investments with slightly varying results.
Just as an aside (I know @aj485 is intimately familiar with this), the “4% rule” is probably one of the most misunderstood things in personal finance. First of all, it’s not really a “rule”, if anything, it’s a “rule of thumb”, and at the core, all it says is “if you withdraw 4% inflation adjusted from a 60/40 portfolio, there was never in history a 30-year period in which you would run out of money” (the converse is that if you withdraw 4.1%, and you started your retirement in 1928/9 (the great depression) or 1966/7 (the great stagflation), then you would have run out of money before 30 years had elapsed).
I’m not an advisor, and I can’t give individual advice. That said, I have long been of the perspective that your money is at risk no matter what you do with it. What matters is how you balance the various risks you face.
Too conservative: you risk losing ground to inflation and taxes over time. Too aggressive: you risk being forced to sell at a bad time because the bill collectors won’t wait, and you also risk seeing too large a part of your portfolio just outright fail.
The trick is finding the right balance. Where that balance sits is part art, part science. Personally, I like to address it from the perspective of “how much do I need to pull from my portfolio, and when do I need it?” In that framework, my personal balance point is 5 years (+ or - 2) of money I expect to need to pull from my portfolio in assets safer than stocks, with the rest available for more aggressive investments.
In my case, that 5-years + or - 2 looks like it’s shaping up to be an investment grade bond ladder, with each year’s rungs bumping up a bit for an inflation estimate.
As for why the + or - 2, that’s because the market sometimes drops, and sometimes, it goes up far faster than expected. That wiggle room gives me the chance to let the bond ladder shrink when the market is performing poorly and the chance to restore or extend its length when market is performing exceptionally well.
The key is a combination of having both a reasonable estimate of what I’ll need from my portfolio and awareness of where I’ll have flexibility in my plans.
I’m not living off my portfolio, but I do have a bond ladder — built because I am in the middle of a 12 year period where I expect one, often two kids in college at the same time. Thanks to scholarships, my older two kids’ 529 plans are able to cover their current costs, so I’m currently reinvesting rather than spending the maturing bonds. That said, the bond ladder has thus far worked as anticipated…
As someone that has owned NASDAQx2 for most of this century, I take issue with that statement. The NASDAQ is not a “fire and forget” solution. The NASDAQ spent the first decade of this century (2000-2009) at a massive 50% loss.
I don’t know the OP but I gather from their query that they would not be willing to take that level of risk (i.e. “My ideal is to figure out how to earn 5-6%…while minimizing downside”).
Of course investing is not that simple, it takes a library full of books to scratch the surface. Give the OP your favorite alternative and let him decide.
*Though, it isn’t my favorite as my favorite is not relevant for the OP since we have different timelines, needs/wants, and risk tolerances - as evidenced by the fact that I still have an excessive amount of my wealth in the S&Px3 and the NASDAQx2.
There are many ways to avoid the 10% early withdrawal penalty. While this link is old, the topic that you are probably looking for is Substantial Equal Periodic Payments. I was in a similar situation than you, looked into, but it made you commit to 5 years and required me to withdraw way more than I was needing and I was only wanting 2 years.
As far as earning 5-6%, it is doable. My portfolio currently returns 4.5% but with a yield on cost calculation, probably closer to the 6-7% range. I basically buy dividend paying/growing stocks when they are undervalued. Essentially Benjamin Graham’s formula but I occasionally buy stocks that don’t have the required 25 year dividend history that he did. You buy undervalued, get paid to wait via the dividend, when it recovers back to full valuation that makes up your growth portion of investing. Is it a guaranteed success every time? No, but it stacks the odds in your favor. Kind of like having Montana/Rice (or any other Hall of Fame QB/WR duo), you likes your chances but you don’t win every time. FWIW, I have 20 stocks in my portfolio.
Outside of that, I keep 1 year of expenses in a money market account. Adds a buffer for those unexpected happenings of car repair, A/C repair, need new washer, etc. Maybe you want to keep a little more.
One big expense, health insurance. Definitely look into that and get it figured out. We were good until our high deductible HSA plan was no longer grandfathered in anymore. Fortunately or unfortunately, we will be on Medicare soon.
In the meanwhile you might look into IRA to ROTH conversions. The money that moves is taxable income, (and I’m pretty sure the taxes must be paid with other funds), but it might make sense if your tax brackets are lower now than in the future. I didn’t start doing conversions until well after my (early) retirement, when I could already make regular IRA withdrawals. I wish I had started sooner.
