Need advise on cash heavy portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
orcas
Posts: 2
Joined: Tue Sep 10, 2019 4:22 pm

Need advise on cash heavy portfolio

Post by orcas » Wed Sep 11, 2019 1:07 pm

My wife (64) and I (66) have been retired 6 years. Our net worth now is the same as when we retired, so overall I think we are doing reasonably well.

We started out with a 50/50 mix of VTI and BND, but over the last few years we have gradually pulled money out of VTI as we felt the bull market couldn't go on forever. :oops: In addition we recently sold our house and are now happily renting, so we find ourselves in a very cash heavy position. I would appreciate feedback on a plan I have and any alternate ideas you have.

No debt
Married Filing Jointly
Tax rate 12% Fed 6% state
Wisconsin residents
We are both waiting until age 70 to collect Social Security
One car (2017) which we plan to keep as long as we can
No children or anyone depending on us
No long term care insurance
No life insurance

Current situation:

500K 3% five year CD (2024)
1000K 2% saving accounts
450K My rollover IRA 100% BND
200K Wife's rollover IRA 100% BND
260K Joint taxable 100% VTI

$7,000/year pension (wife) kicks in at 65 with a 3% COLA.

My plan:

My wife has zero interest in investing/taxes/etc, so I am trying to come up with a dead simple plan in case I die first. Also in case my mental facilities deteriorate.

Of our cash, we are setting aside 500K in case in a few years we tire of renting and want to buy a house again. This money could also be used for long term care if needed. Additionally, 300K (plus interest from savings) is earmarked for our income until SS kicks in at 70. Also, 200K is set aside as a fund for large or unexpected expenses such as house repairs or a new car. This leaves 500K additional cash available for investing.

I am thinking of converting both our IRA's to immediate annuities (Joint 100% Life Income with 3% COLA). If we buy them now but defer payment until age 70, the annuities, pension and SS will create an inflation protected income stream that covers our desired income (96K) as long as we live. Additionally we would not need to deal with RMDs.

I would convert the taxable account to 100% Vanguard Balanced Index Fund Admiral Shares (VBIAX). So the existing 260K plus the 500K cash comes to 760K VBIAX. This removes any need for us to rebalance. My goal would be to not touch the principal and to use the dividends to cover the taxes on our desired income. The principal would be another source of money for long term care down the road.

Thank you for any feedback.

User avatar
vineviz
Posts: 5054
Joined: Tue May 15, 2018 1:55 pm

Re: Need advise on cash heavy portfolio

Post by vineviz » Wed Sep 11, 2019 1:49 pm

orcas wrote:
Wed Sep 11, 2019 1:07 pm
Of our cash, we are setting aside 500K in case in a few years we tire of renting and want to buy a house again. This money could also be used for long term care if needed. Additionally, 300K (plus interest from savings) is earmarked for our income until SS kicks in at 70. Also, 200K is set aside as a fund for large or unexpected expenses such as house repairs or a new car. This leaves 500K additional cash available for investing.
My initial reaction is that this kind of complicated mental accounting is unlikely to be work out optimally for you.

The (maybe) house, the (maybe) car, and the bridge income are all just retirement expenses. I wouldn't treat them as being discretions buckets, not least because it is likely to lead you to make the same error you've already acknowledged making: holding WAY more cash than you need to be holding.

I'd take the $1.5 million you've got in cash (CDs and 2% and savings accounts) and move virtually ALL of it to your Vanguard taxable account (hold back some for cash flowing of monthly expenses). Invest the entire account in a single funds like Vanguard Target Retirement Income Fund (VTINX). This is a very conservative allocation, automatically rebalances, and possesses a small portion of assets in TIPS for inflation protection. An alternate approach would be to use a 50/50 mix of VBIAX and Vanguard Inflation-Protected Securities Fund (VAIPX).

If you do actually decide you want a home late AND the markets permit it, then buy the house. But holding cash for long periods of time in retirement for expenses that might or might materialize isn't smart. Money is fungible, and the worst rolling three-year return for VTINX over the past 15+ years has been +0.82%.

Rather than deferring the annuities, I'd probably just convert 1/3 of the IRAs now to immediate annuities. Do another 1/3 in 4 years, and the final 1/3 at age 70 or so. This preserves some flexibility around planning. Meanwhile, move the remaining IRA funds to VTINX instead of total bond.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

megabad
Posts: 2360
Joined: Fri Jun 01, 2018 4:00 pm

Re: Need advise on cash heavy portfolio

Post by megabad » Wed Sep 11, 2019 3:02 pm

Do you have room in 0% LTCG bracket? Do you have VTI gains? If so, I would really try to tax gain harvest before 70.

You are extremely exposed to inflation risk, but it appears that you need very little of your portfolio each year so you may be ok. Wild guess, you are looking at a 2% withdrawal rate at 70 from portfolio. At this rate, you could probably afford to take a ton of inflation risk and still be ok. Personally, I would have a TIPS fund position though.

I am neutral on the annuity choice. It is traditionally a big faux pas to buy one in an IRA but a SPIA (or delayed SPIA) is a little different. Personal choice but I would keep this amount low as a % of portfolio since you already have a pension and SS.

I do not like balanced index in taxable given its complexity, but I assume you want this just so spouse can spend distributions which makes some sense so I am somewhat with you there. Overall, you have a very very conservative portfolio (even after your suggested changes), but I think at 2% withdrawal rate, you can afford to be very conservative if you so choose.

longleaf
Posts: 282
Joined: Sun Nov 26, 2017 4:13 pm

Re: Need advise on cash heavy portfolio

Post by longleaf » Wed Sep 11, 2019 3:19 pm

+1 on VTINX

I'd go one step further and setup automatic distributions into your checking account for monthly expenses if needed. There's no reason to hold so much cash if you're not going to spend it within 3-5 years.
Frugality, indexing, time.

Topic Author
orcas
Posts: 2
Joined: Tue Sep 10, 2019 4:22 pm

Re: Need advise on cash heavy portfolio

Post by orcas » Fri Sep 13, 2019 11:11 am

Thank you all for the great advise! Clearly I need to be less conservative.
vineviz wrote:
Wed Sep 11, 2019 1:49 pm
The (maybe) house, the (maybe) car, and the bridge income are all just retirement expenses. I wouldn't treat them as being discretions buckets, not least because it is likely to lead you to make the same error you've already acknowledged making: holding WAY more cash than you need to be holding.
vineviz wrote:
Wed Sep 11, 2019 1:49 pm
If you do actually decide you want a home late AND the markets permit it, then buy the house. But holding cash for long periods of time in retirement for expenses that might or might materialize isn't smart.
In particular, these quotes helped me think differently about the amount of cash we need to keep on hand. Thank you!

Boatguy
Posts: 16
Joined: Fri Apr 19, 2019 7:54 pm

Re: Need advise on cash heavy portfolio

Post by Boatguy » Sat Sep 14, 2019 9:43 pm

Regarding SS, because you are 66 you would be able to claim a spousal SS benefit if your wife were to file NOW without claiming your own SS (thus allowing it to grow until age 70). This strategy works especially well if you were the higher wage earner. Have you run the numbers on this? Open Social Security (don’t have the link handy) is a great resource to determine your optimal filing strategy. My wife (63) and I did this when I turned 66 in July.

User avatar
willthrill81
Posts: 12606
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Need advise on cash heavy portfolio

Post by willthrill81 » Sat Sep 14, 2019 9:58 pm

Given your apparent concern about recessions, you may want to check out the active thread below.

viewtopic.php?f=10&t=290472
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

smectym
Posts: 479
Joined: Thu May 26, 2011 5:07 pm

Re: Need advise on cash heavy portfolio

Post by smectym » Sat Sep 14, 2019 11:54 pm

Boatguy wrote:
Sat Sep 14, 2019 9:43 pm
Regarding SS, because you are 66 you would be able to claim a spousal SS benefit if your wife were to file NOW without claiming your own SS (thus allowing it to grow until age 70). This strategy works especially well if you were the higher wage earner. Have you run the numbers on this? Open Social Security (don’t have the link handy) is a great resource to determine your optimal filing strategy. My wife (63) and I did this when I turned 66 in July.
Good catch, and this so-called loophole goes away very soon. We wound up going this route, which in our case yields $50,000 in spousal benefits and then when spouse switches to own benefit at 70 it’s amazing how much higher it will be. Certainly one potential exception to “Just take it at 70. End of discussion.”

Post Reply