What should be my stock/bond allocation?

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DixieLynn
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What should be my stock/bond allocation?

Post by DixieLynn » Wed Jun 20, 2018 1:24 pm

My husband and I just sold our business (we are 52 years old and still have 3 kids to put through college).
We would need to live on 5-6% from our investments a year for the next 6 years then hopefully our cost of living will go down.
Given the current market, would a 40/60 allocation be appropriate?

bloom2708
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Re: What should be my stock/bond allocation?

Post by bloom2708 » Wed Jun 20, 2018 4:45 pm

I think 50/50 or 60/40 would be in the mix. 40/60 is on the conservative side at 52. You still have 40 years to go (hopefully).

My parents in their 70s are 40/60.

Asset allocation is very personal, so if 40/60 is where you can sleep well at night and not think about it, then 40/60 is fine.

50/50 might allow you to just be in the middle. I'm not sure. 50% of each. 60/40 probably has the best longer term ability to get you 5-6%.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

Doctor Rhythm
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Re: What should be my stock/bond allocation?

Post by Doctor Rhythm » Wed Jun 20, 2018 10:03 pm

Welcome to the forum...

In general, the "current market" as you perceive it shouldn't affect your allocation decision because you don't know where the market is heading. Your appropriate allocation is really more about your risk tolerance, which is affected by things like how much you've saved up, how much you will need, when will you need it, and just plain old personality factors.

I'm not sure I understand what you mean by "need to live on 5-6% from our investments a year for the next 6 years then hopefully our cost of living will go down." Are you saying you'll need to withdraw 5-6% of your portfolio annually for the next 6 years, meaning that you'll go through around a third of your current savings by the time you are 58? That's a pretty large draw down. It would help to have some more specific information about your situation like:

Where is the money sitting now (IRA, taxable account, 529 for college, etc)?
What's you current portfolio allocation (e.g., how much is cash, in bond or bond funds, stock or stock funds)?
Any income streams?
Current & future annual expenses?
Last edited by Doctor Rhythm on Wed Jun 20, 2018 10:12 pm, edited 1 time in total.

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Alexa9
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Re: What should be my stock/bond allocation?

Post by Alexa9 » Wed Jun 20, 2018 10:08 pm

Not enough info to provide you with good advice.
Asking Portfolio Questions:
viewtopic.php?f=1&t=6212

venkman
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Re: What should be my stock/bond allocation?

Post by venkman » Wed Jun 20, 2018 10:28 pm

DixieLynn wrote:
Wed Jun 20, 2018 1:24 pm
My husband and I just sold our business (we are 52 years old and still have 3 kids to put through college).
We would need to live on 5-6% from our investments a year for the next 6 years then hopefully our cost of living will go down.
Given the current market, would a 40/60 allocation be appropriate?
I think you should consider taking 30-36% of your portfolio and dividing it up into 6 equal parts. Invest the first part in a 1-year CD, the second part in a 2-year CD, etc., so that every year for the next 6 years, you have a CD maturing that will cover your expenses for the year, and the interest will hopefully have kept up with inflation. Invest the remainder of your portfolio at whatever allocation you desire.

You could also use individual bonds or TIPS. The main point is that, for money you will definitely need to withdraw at a specific time, the amount of risk to that money should gradually decrease as the withdrawal date approaches.

delamer
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Re: What should be my stock/bond allocation?

Post by delamer » Wed Jun 20, 2018 11:57 pm

venkman wrote:
Wed Jun 20, 2018 10:28 pm
DixieLynn wrote:
Wed Jun 20, 2018 1:24 pm
My husband and I just sold our business (we are 52 years old and still have 3 kids to put through college).
We would need to live on 5-6% from our investments a year for the next 6 years then hopefully our cost of living will go down.
Given the current market, would a 40/60 allocation be appropriate?
I think you should consider taking 30-36% of your portfolio and dividing it up into 6 equal parts. Invest the first part in a 1-year CD, the second part in a 2-year CD, etc., so that every year for the next 6 years, you have a CD maturing that will cover your expenses for the year, and the interest will hopefully have kept up with inflation. Invest the remainder of your portfolio at whatever allocation you desire.

You could also use individual bonds or TIPS. The main point is that, for money you will definitely need to withdraw at a specific time, the amount of risk to that money should gradually decrease as the withdrawal date approaches.

Seconding this advice.

I’d also figure out what you can expect in Social Security benefits so you can plan for the post-kid stage of your lives. Assume you’d collect at age 66, and determine how much you’ll need to take from your portfolio from 58 to 66 to cover your expenses until you collect SS.

msk
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Re: What should be my stock/bond allocation?

Post by msk » Thu Jun 21, 2018 6:36 am

If you can live and fund your kids' college with only 5% p.a. withdrawal of your NW today, I 'd put aside one year's expenditure (CD quarterly ladder) and put the rest in 100% stocks. Repeat each year till kids are all out of college. But that's my tolerance of market volatility. YMMV. Nevertheless since you were a business owner you are already very tolerant of volatility.

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BeBH65
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Re: What should be my stock/bond allocation?

Post by BeBH65 » Thu Jun 21, 2018 7:46 am

The general advise on this site is that one should not invest in stocks for short and medium term goals.
So the advise to use CD's for the next 6 years seems sound.
The remaining 64% then become your longer-term investments for which you need to determine your AA is correspondent to your need, ability and willingeness to take risk for the period 2025-... .
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

dbr
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Re: What should be my stock/bond allocation?

Post by dbr » Thu Jun 21, 2018 9:12 am

40/60 to 60/40 are probably all reasonable. The main thing is to just be cognizant of the fact that negative saving at a younger age leaves less for the future. There is nothing intrinsically wrong with that. It might be the most productive thing is to model the situation for the long term in FireCalc or another model and see what you think of the prospects. There is provision to configure a period of higher spending or less saving.

Mentally dividing up assets for near and long term purposes is beside the point in this context. You still have an asset allocation and a rate of withdrawal or saving that between the two drives your outcome for the future. Jogging the asset allocation around by a little bit in the short term has only a second order effect on things. Keep in mind that more conservative allocations buy less sensitivity to volatility of return but pay for that by giving up expected return. Those two factors offset each other when taking money out of a portfolio.

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knpstr
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Re: What should be my stock/bond allocation?

Post by knpstr » Thu Jun 21, 2018 9:36 am

dbr wrote:
Thu Jun 21, 2018 9:12 am
It might be the most productive thing is to model the situation for the long term in FireCalc or another model and see what you think of the prospects. There is provision to configure a period of higher spending or less saving.
+1
There isn't enough information given in the OP. Firecalc will let them play with expected expense changes and when they want to take S.S. etc.

Of course use it only as a guide, but its recommendation will be just as good as any given here.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Jack FFR1846
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Re: What should be my stock/bond allocation?

Post by Jack FFR1846 » Thu Jun 21, 2018 9:45 am

Anywhere from 40/60 to 60/40 is fine.

Learn what college costs are today.
Understand the financial aid landscape today.
Get the expectation of limits on college expenditures going now. It's easier than when they decide they want to go to Middlebury (currently over $70k COA). If you only plan to provide $20k a year towards college, better look into jobs for the kids or community college for the first 2 years.

What about health care costs?
Bogle: Smart Beta is stupid

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Taylor Larimore
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Re: What should be my stock/bond allocation?

Post by Taylor Larimore » Thu Jun 21, 2018 9:51 am

DixieLynn wrote:
Wed Jun 20, 2018 1:24 pm
My husband and I just sold our business (we are 52 years old and still have 3 kids to put through college).
We would need to live on 5-6% from our investments a year for the next 6 years then hopefully our cost of living will go down.
Given the current market, would a 40/60 allocation be appropriate?
DixieLynn:

Welcome to the Bogleheads Forum!

The "current market" (which suggests "market timing") should have nothing to do with your asset-allocation. Instead, use this Vanguard Investor Questionnaire link to help you decide your best allocation between safe fixed-income securities and risky stock securities:

https://personal.vanguard.com/us/FundsI ... unds/tools

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

DixieLynn
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Re: What should be my stock/bond allocation?

Post by DixieLynn » Thu Jun 21, 2018 9:57 am

Thank you for your responses. I am new to this so let me give some more detail.

The sale of the business will generate all cash for us (8 million). Our business was everything.
Outside of the sale, we have two years worth of living expenses and a house in which we have 65% equity.
To cover 3 kids at over lapping years in college plus living expenses, I project I will need 5-6% until they finish college.
My husband is ill so right now neither of us can go back to work to help offset the large draw.

I've interviewed a ton of advisors and never got comfortable with what they were offering, management fees plus
fund fees, annuities etc..

I get asked about my risk tolerance but honestly, our business was pretty steady and we understood it.
Investing is new to me.

I'm looking into having Vanguard financial advisors assist with the investing allocations. Any thoughts?

Glockenspiel
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Re: What should be my stock/bond allocation?

Post by Glockenspiel » Thu Jun 21, 2018 10:05 am

Personally, I don't see any reason why someone should ever go more conservative than 60/40 stocks/bonds, but I'm more aggressive than some others on this board. I could sleep well at night at 60/40.

delamer
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Re: What should be my stock/bond allocation?

Post by delamer » Thu Jun 21, 2018 10:11 am

DixieLynn wrote:
Thu Jun 21, 2018 9:57 am
Thank you for your responses. I am new to this so let me give some more detail.

The sale of the business will generate all cash for us (8 million). Our business was everything.
Outside of the sale, we have two years worth of living expenses and a house in which we have 65% equity.
To cover 3 kids at over lapping years in college plus living expenses, I project I will need 5-6% until they finish college.
My husband is ill so right now neither of us can go back to work to help offset the large draw.

I've interviewed a ton of advisors and never got comfortable with what they were offering, management fees plus
fund fees, annuities etc..

I get asked about my risk tolerance but honestly, our business was pretty steady and we understood it.
Investing is new to me.

I'm looking into having Vanguard financial advisors assist with the investing allocations. Any thoughts?
Vanguard is a good option. They will keep you in index funds, which means low costs and diversification.

And with your level of assets, their advisory fees will be minimal.

dbr
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Re: What should be my stock/bond allocation?

Post by dbr » Thu Jun 21, 2018 10:19 am

DixieLynn wrote:
Thu Jun 21, 2018 9:57 am
Thank you for your responses. I am new to this so let me give some more detail.

The sale of the business will generate all cash for us (8 million). Our business was everything.
Outside of the sale, we have two years worth of living expenses and a house in which we have 65% equity.
To cover 3 kids at over lapping years in college plus living expenses, I project I will need 5-6% until they finish college.
My husband is ill so right now neither of us can go back to work to help offset the large draw.

I've interviewed a ton of advisors and never got comfortable with what they were offering, management fees plus
fund fees, annuities etc..

I get asked about my risk tolerance but honestly, our business was pretty steady and we understood it.
Investing is new to me.

I'm looking into having Vanguard financial advisors assist with the investing allocations. Any thoughts?
Yes, your issue is not what funds to buy but to do the planning process of how to meet your income needs from your resources. Go run models like FireCalc and learn more about the prospects for use of that money. What would it mean to you if someone told you that on the odds $8M could allow you to spend $320,000 a year, inflation indexed, but including taxes and investment costs, for 30 years or more. How would that compare to what you plan to spend? Please answer that question, including any pensions and SS, before you start to think about what financial products to invest in.

As far as annuities, you could buy a single premium immediate fixed annuity, but not the one's offered by the advisors, starting at age 65, and for $4M it would pay you, not inflation indexed, $225,600 a year to both or either of you until you die.

The only book I know of that addresses how all this works as such is the one by Otar: http://www.retirementoptimizer.com/ But maybe other posters can recommend one substantial but focused publication that addresses this topic.

Otherwise, this is what financial advisors do. I think Vanguard could do a responsible job of helping you, including the spending plan. Your chances of finding any other advisor that will this responsibly are about 95 to 5 in favor of finding a salesman who wants part of your money and nothing else. Some people recommend advisors from Garrett Planning Network, but I have no personal endorsement of that.

DixieLynn
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Re: What should be my stock/bond allocation?

Post by DixieLynn » Thu Jun 21, 2018 12:44 pm

Thank you. Definitely going to look into the FireCalc and retirementoptimizer websites.

bloom2708
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Re: What should be my stock/bond allocation?

Post by bloom2708 » Thu Jun 21, 2018 1:09 pm

5-6% withdrawal is $400k-$480k each year. Even $8 million won't sustain that level of spending for long.

How "accurate" is the 5-6% withdrawal amount? It that just a high guess?

I try to put myself in your shoes. $8 million is a nice amount of money. Balancing risk/spending.

Is this what the Vanguard Tax Managed Balanced Fund Admiral is targeted at? One fund. 47/53 or around there. Send dividends to the settlement account ($160k at 2.04% currently). Sell shares to meet the rest of spending goals. No need for PAS with a one fund/low cost/tax-efficient solution.

I know you could do a lot worse.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

DixieLynn
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Re: What should be my stock/bond allocation?

Post by DixieLynn » Thu Jun 21, 2018 2:06 pm

Yes, it probably is on the high side.
I was hoping to reinvest the income earned for 2 years and build the balance to ~$8.5 million (~3% a year) and use
my 2 year cash reserve. I guess I would invest the 2 year reserve in a short term cd ladder (?)

Then start withdrawing funds the beginning of 2021. I was leaning toward being conservative because of the
short time horizon in which I need to start drawing funds and talk of the market becoming more volatile.
This site has been really helpful. I see I have more options.

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Taylor Larimore
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Re: What should be my stock/bond allocation?

Post by Taylor Larimore » Thu Jun 21, 2018 5:01 pm

I'm looking into having Vanguard financial advisors assist with the investing allocations. Any thoughts?
DixieLynn:

I think this would be a very good decision (especially with $8 million dollars).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

nasrullah
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Re: What should be my stock/bond allocation?

Post by nasrullah » Thu Jun 21, 2018 5:40 pm

Selecting an AA is about balancing required growth vs protecting from loss. If you have enough and have already "won" then your AA can be extremely conservative. Or if you have multiples more than you need (Warren Buffet's instructions for his Wife's portfolio on his passing) then you can be very aggressive and not worry.

It's a very personal matter.

A year ago I believed that I should be 60/40 based on my understanding of my risk profile. After asking questions here, running simulations with firecalc and talking with Vanguard PAS I ended up with 75/25 which is still more conservative than what's recommended.

If you are in accumulation phase you should be more aggressive, if you are in draw down phase more conservative.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

Doctor Rhythm
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Re: What should be my stock/bond allocation?

Post by Doctor Rhythm » Thu Jun 21, 2018 9:07 pm

$8M is a lot, though you didn't say how much will be left over after taxes. But in any case, I don't think you need to worry unless you have exceptionally high living expenses. Four years of tuition and expenses at a private college x 3 kids might cost $800,000 total (https://www.investopedia.com/articles/p ... -costs.asp. That's equivalent to "only" a 10% one-time draw down. What you'll have left over is more than enough to pay your expenses indefinitely just through interest income (again, unless you are living the vida loca), without having to ever withdraw from your principal. Simple example: current ~3% APY on a 5-year CD yields $180,000 on $6M. In other words, you have tremendous financial security and can be more conservative with investments (if that's your personal style) while still leaving a huge inheritance.

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