Chad- The correct way to look at bonds is that they are the volatility dampener in your portfolio, not the place to chase after excess yield. As such, you should keep durations short and credit quality high and "budget" your risk to equities where the expected return is higher.
And here is a question from Felice
Felice- It is hard to say anything definitive without knowing you better but it is important to make sure your portfolio continues to grow and outpace inflation throughout retirement. You therefore need to remain exposed to equities. Without knowing more about how much you need to live on it is hard to say if you have enough or too little allocated to equities but this would be an important area to look at.
Felice - Before your consider diversifying you need to think about a few other things. First, how much will you need annually from your investments? Then, estimate how many years you'll be retired; generally, this question relates to genetics and lifestyle. You can use some standard general numbers, such as to age 85 or 90. Once you have some sense of these factors, it becomes easier to make projections of what your investment return needs to be to provide for your needs over time.
Hi Felice - Because you are young, and have a very long retirement timeline when you'll want to draw income from your investments, you might want to consider a more aggressive investment allocation now. As you move through retirement, you'll become more conservative. Of course, your investment allocation will depend on a lot of factors, including your need for income from all sources.
Here's our next round of questions from Paul and Amar
Hi Paul - If you are nearly 65 years old, I'd say an all-stock portfolio may be too risky for you. You'll want to be more diversified across stocks and bonds, and even within stocks you should have more diversification than just blue chips. When you own bonds in your portfolio, they will provide some monthly income, which you can use. Depending on your income needs, you may need to sell stocks periodically as well.
Paul- You are probably taking on too much risk by investing in all stocks. Remember, dividend paying stocks are still stocks and not a substitute for bonds. I think a total return approach using a well diversified portfolio of both stocks and bonds is a better strategy.
Hi Amar - You have several competing goals: house, college, retirement. It's really a priority decision for you: what's most important? You and your daughter should carefully consider the cost of college and affordability; there are good schools that cost less and will require less borrowing. Beyond that, you'll have to decide how important each of your goals is.
Amar, Many parents like you are faced with the dilemma of paying for children's college while depriving themselves of their own retirement security. It would be good for you to sit down with a fee-only financial planner who could prepare projections for you of how much you would need to set aside for your own retirement while you are employed. A part of that analysis would be to see the effect on your retirement of you paying for college expenses out of current income rather than saving for you retirement. It may be that your child will be forced to take out college loans or grants or maybe scholarships. You have three main issues: house purchase, college education, and retirement. You should prioritize these in their order of importance to you. For example, if you absolutely must pay for college, then it may mean you and your wife with find higher-paying jobs. At your ages, while you have not yet accumulated significant assets, your achilles heel might be anything that would interfere with your income. To this latter point, I hope you both have adequate long-term disability insurance.
Amar- Remember that you can borrow to pay for college but you can't borrow for your retirement. I encourage clients to prioritize their retirement and then develop a strategy for funding other goals.
Here's our next round of questions
Howard-One way of looking at this is to see the ROI of the decision to go back to school. The other way is to look at the ROL (return on life) and weighing the personal value your derive from education and pursuing a passion for study. This is a very personal decision and is more than just about the numbers.
Howard: Choosing to return to school at any age is not only about the money, because there are many highly-educatied folks out there who chose to work in lesser-paying fields. If you return to school to study a field that you love, the rewards will follow. You might consider technical programs that issue a specialized certificate in your area of choice. For example, my niece is close to 50 and is embarked on a 2-yar program to become a respiratory technician. She's loving it! You might also benefit from taking some tests (like What Color is your Parachute?) that will point you in the right direction for your own capabilities and wishes.
Hi Ken - It might be helpful to determine what your spending will be in retirement, and break it down by essential vs. discretionary (needs vs. wants). Also, be sure to include infrequent expenses like car repairs, medical expenses and travel. That will help you decide how much you'll need, and whether your current income sources will be enough. But be careful about your Navy and Gov't pensions: are they fixed or do they adjust each year for inflation? If they don't adjust, they will be work much less (in buying power) in 10, 20, and 30 years. Finally, regarding annuities: in the current low interest rate climate annuities aren't paying much compared to years ago. You might consider an investment strategy for your 401(k) that will potentially provide more retirement income -- but not guaranteed like an annuity. Since you do have income that is guaranteed, you might be able to take reasonable investment risk.
Here are our next few questions from Mike
And here is one from Ann.
Hi Ann - Regarding investment assumptions, it might be helpful to look at some scenarios where the investment returns are much lower (as a worst case scenario) and see how that affects your withdrawal strategy. It's hard to say whether historical returns will continue into the future; some experts are doubtful, especially regarding bond returns. Consider your ages, a 60/40 stocks/bonds allocation may be reasonable. You might also look at delaying your husband's SS income to age 70, which will provide a higher amount over his total projected lifetime. Your adviser's fee is in the ballpark, as long as that's the total fee and they are paying attention to investment costs and taxes for you.
Ann-A couple of issues. First, I agree that assuming a 10.5% return for equities is speculative to say the least. I would not plan for this. Having said that, withdrawing $15k/year from a $1.6M portfolio is less than 1% of the portfolio's value and far from an aggressive withdrawal rate. Before making any decisions however it is important to perform a retirement needs analysis factoring in the effect of taxes to determine a reasonable cash flow in retirement, deciding on an optimal SS talking strategy and allocating your portfolio appropriately using reasonable return assumptions.
Ann, to try and answer your basic question I think you should feel comfortable withdrawing $15,000 now with a $1.6M portfolio and a 60/40 mix. The "rule of thumb" has been to keep withdrawals below 4% of your portfolio value. You are well within those bounds.
Ann - If I am reading your question correctly, you will have annual income in retirement of $80,000 from sources other than investments. Is your question whether your portfolio will provide you with $15,000/year from now throughout retirement? The rule of thumb for "safe" withdrawals from investment portfolios in retirement is 4%; however, this is a topic that is being hotly debated in the industry. The debate is about fluctuations of investment value over time and whether the 4% is a fixed dollar amount based on initial portfolio value or whether it fluctuates each year. The assumptions your advisors made do seem a little rosey; we use a 5% inflation rate for our "worst case" analyses and a return of 7% (blended equity/fixed income). Also, you did not state what probability your advisor gave for your analyses.
Here is our next round of questions from Michael B
Michael-Typically, file and suspend is used when one of the spouses has little or no benefits due them under their own work record. It is therefore advantageous for this spouse to take the spousal benefit based on the other spouses's record. I assume this is your situation. And yes I believe the SSA is correctly stating the fact that both spouses cannot each take a spousal benefit on the other's record simultaneously.
And next up, we have two from Tom
Tom, as with any investment risk, has to be considered. You specifically asked about California MUNI ETF's or CEF's versus mutual funds. With any bond or bond instrument there is risk of default. Limiting yourself to only California concentrates that risk. It's the old saying, "Don't put too many eggs in one basket."
Hi Tom - You are right to consider non-muni investments for your IRA. The primary reason people choose municipal bonds (mutual funds, ETFs, or bonds) is the tax benefit, which isn't available in the IRA.
Here is one from jfitteron