Portfolio Review - Semiretired and Heading into 70s

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Xigris1234
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Portfolio Review - Semiretired and Heading into 70s

Post by Xigris1234 »

Emergency Funds: 1 Year
Debt: None
Filing Status: Single (Widowed 2021)
Tax Rate: 12% Federal / 3.07% State
Residence: Pennsylvania
Age: 68
Income: Collecting social security which covers 2/3 of expenses and working part time for 20-hours per week. Plans to continue to work until RMDs begin at 72.

Background:
Mom is recently widowed and I am in the process of rolling over Dad's retirement accounts (mostly MYGA/indexed/variable annuities) into Fidelity. I've decided to keep a non-qualified MYGA paying 3.35%, otherwise all qualified funds will be held between traditional and Roth IRAs. For the most part, parents were very risk averse and avoided investing in the market, instead they put money into CDs and various annuity products. After having discussions with mom she understands the biggest risks to her retirement is inflation and longevity (her parents lived into mid-90s), and she understands the necessity of having part of her portfolio in the market.

Proposed Asset Allocation:
Equities (52%):
-Fidelity Total Market Index FSKAX 0.015% (80%)
-Fidelity Total Market International Index FTIHX 0.06% (20%)

Fixed Income (38%):
-Fidelity US Bond Index FXNAX 0.025% (40%)
-Fidelity Inflation Protected Bond Index FIPDX 0.05% (23%)
-I Bond (3%)
-MYGA 3.35% (34%)

Cash (10%):
-High Yield Savings Account (0.40% APY)

Questions:
My plan would be to continue to gradually shift AA to 40% equities over the next 5 years, and after RMDs move toward 30%. Mom likes the security of having cash on hand so I would plan to leave this around 10%. The hardest part for me is trying to assess and mitigate risk, but still position her portfolio to grow and last for the next 30 years. Appreciate any guidance or insight others may have, particularly those around a similar age.

1. What are thoughts about overall asset allocation/ and fund choices?
2. I'm least certain about the fixed income side of the portfolio. Particularly whether to use Fidelity US Bond Index (FXNAX) versus Fidelity Intermediate Treasury Bond Index (FUAMX)? And what percentage to devote to nominal bonds versus inflation protected?
3. I like the idea of adding I bonds to her portfolio and so does she since she is familiar with savings bonds. I'm planning on purchasing $10k this year, and continuing to do so for the next few years. Any reason not to do this?
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retired@50
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by retired@50 »

Xigris1234 wrote: Sun May 16, 2021 9:16 am ...
Filing Status: Single (Widowed 2021)
Tax Rate: 12% Federal / 3.07% State
...
Mom is recently widowed...
I think her tax filing status for 2021 can still be Married, Filing Jointly since this is the year her husband passed. It could matter (or be beneficial) if there are going to be any tax costs to switching around any of her investments.

Otherwise, your plan looks decent.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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retiredjg
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by retiredjg »

I think 52% stocks is way too much for a 68 year old person who has always been risk averse and has limited (or no) experience with investing in stocks. I can't imagine that she would be comfortable with that.
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Xigris1234
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by Xigris1234 »

retired@50 wrote: Sun May 16, 2021 10:24 am
I think her tax filing status for 2021 can still be Married, Filing Jointly since this is the year her husband passed. It could matter (or be beneficial) if there are going to be any tax costs to switching around any of her investments.

Otherwise, your plan looks decent.
Good advice, I will keep this in mind. Thank you.
retiredjg wrote: Sun May 16, 2021 10:42 am I think 52% stocks is way too much for a 68 year old person who has always been risk averse and has limited (or no) experience with investing in stocks. I can't imagine that she would be comfortable with that.
I appreciate this perspective. My mom is definitely conservative in her approach to money and previously had no real involvement with investments. I'm trying to put myself in her shoes to figure out what she would feel comfortable with since she can't quite articulate it herself. In discussions over the weekend she clearly prefers less volatility but wants her money to keep pace with inflation. We plan to keep talking about it and will likely settle somewhere between 35-50% equities.
whereskyle
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by whereskyle »

Xigris1234 wrote: Tue May 18, 2021 6:11 am
retired@50 wrote: Sun May 16, 2021 10:24 am
I think her tax filing status for 2021 can still be Married, Filing Jointly since this is the year her husband passed. It could matter (or be beneficial) if there are going to be any tax costs to switching around any of her investments.

Otherwise, your plan looks decent.
Good advice, I will keep this in mind. Thank you.
retiredjg wrote: Sun May 16, 2021 10:42 am I think 52% stocks is way too much for a 68 year old person who has always been risk averse and has limited (or no) experience with investing in stocks. I can't imagine that she would be comfortable with that.
I appreciate this perspective. My mom is definitely conservative in her approach to money and previously had no real involvement with investments. I'm trying to put myself in her shoes to figure out what she would feel comfortable with since she can't quite articulate it herself. In discussions over the weekend she clearly prefers less volatility but wants her money to keep pace with inflation. We plan to keep talking about it and will likely settle somewhere between 35-50% equities.
https://www.portfoliovisualizer.com/bac ... tion3_2=50

Have you considered using an intermediate treasury fund, such as VGIT (Vanguard Intermediate-Treasury ETF, ER .05), instead of the total bond market in an effort to decrease overall portfolio volatility? Intermediate treasuries, as opposed to the total bond market, have had an inverse correlation to equities and have decreased overall portfolio volatility while sacrificing virtually nothing in return on the fixed-income side. If volatility is the primary concern, intermediate-term treasuries may be the better option.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
HomeStretch
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by HomeStretch »

+1 that 52% equity seems high for someone who is risk averse and new to investing in equities.

Will Social Security benefits plus a 4-5% withdrawal from your mom’s portfolio starting at age 72 cover all her retirement expenses (including income taxes, healthcare and lumpy expenses such as a new car, home repairs, etc.)? If yes, a 35-40% allocation to equities from the start may be more reasonable.
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retiredjg
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by retiredjg »

Xigris1234 wrote: Tue May 18, 2021 6:11 am I appreciate this perspective. My mom is definitely conservative in her approach to money and previously had no real involvement with investments. I'm trying to put myself in her shoes to figure out what she would feel comfortable with since she can't quite articulate it herself. In discussions over the weekend she clearly prefers less volatility but wants her money to keep pace with inflation. We plan to keep talking about it and will likely settle somewhere between 35-50% equities.
I would suggest that you two consider something more like 20% - 30% stock.

A 68 year old person (and even older) who is not risk averse can be fine with 50% stock. I would not suggest anything near that for an investing novice who "clearly prefers less volatility."

A 50% stock portfolio can make some big drops - $100k can become $75k in a significant downturn...and stay there for months or even a year or longer. For an older person, that could be very stressful and discomforting, especially if she actually needs the money.

Don't look at this as "she's tough, she can gut it out for a few months". Look at this as "she will be stressed and may not sleep well for months". Stress and not sleeping well takes a toll on a person. The toll can get larger with age. There is no reason that whatever money she has should cause her discomfort.

Invest in a way that brings her comfort, not discomfort.
angelescrest
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by angelescrest »

retiredjg wrote: Tue May 18, 2021 6:52 am Don't look at this as "she's tough, she can gut it out for a few months". Look at this as "she will be stressed and may not sleep well for months". Stress and not sleeping well takes a toll on a person. The toll can get larger with age. There is no reason that whatever money she has should cause her discomfort.

Invest in a way that brings her comfort, not discomfort.
Excellent, thoughtful advice, particularly given the loss of spouse and uncertainty right now. By almost all definitions, uncertainty and change equates to stress. I also recommend leaning toward a more stable portfolio for the time being.
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dodecahedron
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by dodecahedron »

angelescrest wrote: Tue May 18, 2021 8:07 am
retiredjg wrote: Tue May 18, 2021 6:52 am Don't look at this as "she's tough, she can gut it out for a few months". Look at this as "she will be stressed and may not sleep well for months". Stress and not sleeping well takes a toll on a person. The toll can get larger with age. There is no reason that whatever money she has should cause her discomfort.

Invest in a way that brings her comfort, not discomfort.
Excellent, thoughtful advice, particularly given the loss of spouse and uncertainty right now. By almost all definitions, uncertainty and change equates to stress. I also recommend leaning toward a more stable portfolio for the time being.
Speaking as a widow (eight years ago this week), I strongly agree with the above. I felt exceptionally emotionally fragile in the 12 months after my husband died. Avoid anything that might provoke emotional shock during this period.
Xigris1234 wrote:My mom is definitely conservative in her approach to money and previously had no real involvement with investments. I'm trying to put myself in her shoes to figure out what she would feel comfortable with since she can't quite articulate it herself. In discussions over the weekend she clearly prefers less volatility but wants her money to keep pace with inflation. We plan to keep talking about it and will likely settle somewhere between 35-50% equities.
With all due respect, I don't think it is possible to put oneself into the shoes of another person who has been widowed. I could not possibly have imagined the emotional shock of widowhood before I actually experienced it. I am glad I gave myself time and space to figure things out gradually.

My recommendation would be to do things very gradually. There is no urgency to do anything drastic immediately. Going from zero percent equities to even 35% equities this year strikes me as drastic.

I started out at 20% equities (which was lower than where my late husband had our asset allocation but now there was only one person who needed to rely on it for retirement, not two) and through appreciation over the past eight years since his death, I have allowed my equities to gradually drift up to a bit over 30%. (It would be even higher if I had not practiced rebalancing by donating significant chunks of appreciated equities to charity.) Along with a significant chunk of TIPS and some I bonds, a paid-off mortgage and some other minor inflation hedges (e.g., community solar investment which effectively locked in 20 years of electric bills), I sleep well at night.
Last edited by dodecahedron on Tue May 18, 2021 10:04 am, edited 1 time in total.
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dodecahedron
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by dodecahedron »

One further observation: the basic principle of asset allocation decision-making is that asset allocation should be based on "ability, need, and willingness to take risk."

I don't think it is possible to accurately assess any of the ability/need/willingness factors in the immediate aftermath of widowhood, especially for a widow who has never been exposed to equity in the past.

So much of ability/need to take risk is contingent on big decisions that generally should be postponed for at least a year. (E.g., should new widow sell the family home, downsize, and/or relocate to a higher or lower cost of living area, etc.) I was acutely aware in the immediate aftermath that I could not trust my emotional/mental state to make major decisions in the first year, so I was grateful to be able to put them off.

As for willingness to take risk, that can change too. As I started to feel less emotionally fragile, and figured out the answers to downsizing and relocation questions, I got more somewhat comfortable with equities (i.e., willingness increased somewhat, but still guarded.)

Also, as to concerns about inflation, I have learned to "think outside the box" about some of my inflation hedges. For example, I eventually decided to stay in my home for the long-term but invested in decommissioning the inground pool (which was unused but a money sink for repairs and upkeep) and invest in landscaping that would be enjoyable but low-cost to maintain. I have already mentioned my community solar investment but insulating an energy inefficient home could also be an investment hedge against inflation if one intends to live there long-term.

But I am glad I gave myself several years to ease into those decisions.

(I also eventually learned a lot about the likely nature of long-term household operating expenses in the first few years after my husband died. Our tastes and priorities were quite different in many ways. He liked to keep the AC operating at far lower temps than I did and he rarely opened windows because of allergies. My electric usage fell to less than half of what it was during his time. I drive way less than he did and enjoy using low cost public transit. I shop in different places than he did and the kinds of simple but satisfying meals I now contentedly prepare for myself are pretty different from the ones we ate as a married couple. He liked to eat out a lot. I like to have an organic farm-share delivered and find creative ways to use whatever arrives. He liked to buy extremely nice clothes and enjoyed shopping for them--and arguably needed some of them for his profession. I am perfectly content wearing the same clothes I have had for years, except for shoes, since I walk a lot and wear them out. I cancelled a lot of subscriptions to magazines that only he read and to cable TV, because he liked to watch but I never did.)
Last edited by dodecahedron on Tue May 18, 2021 11:28 am, edited 1 time in total.
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by dodecahedron »

Xigris1234 wrote: Tue May 18, 2021 6:11 am
retired@50 wrote: Sun May 16, 2021 10:24 am
I think her tax filing status for 2021 can still be Married, Filing Jointly since this is the year her husband passed. It could matter (or be beneficial) if there are going to be any tax costs to switching around any of her investments.
Good advice, I will keep this in mind. Thank you.
Right now is a very good time for you to thoroughly educate yourself about your mother's income tax situation (as well as ancillary related issues such as IRMAA Medicare Premiums, income eligibility qualifications for senior citizen property tax breaks in her area, etc) so you have a strong handle on those issues going forward.

This last year of MFJ could be a very good opportunity for Roth conversions because she gets one last shot at the big MFJ standard deduction and more favorable MFJ bracket rates. Her Social Security will be taxed more favorably in 2021 than it will in subsequent years, because the formula for taxable SS is more generous to MFJ filers than single filers.

Worth keeping in mind: as a general rule, Roth conversions can have the unfortunate side-effect of crossing an IRMAA threshold and triggering higher Medicare Part B and Part D premiums two years down the road, but there are special circumstances under which Medicare allows filing for a waiver of IRMAA surcharges and widowhood is one of those waiver exception qualifications specifically in the year of the spouse's death.
Last edited by dodecahedron on Tue May 18, 2021 12:07 pm, edited 1 time in total.
delamer
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by delamer »

I’m inclined to agree with the other posters who think 50% equities is too high for some who has been risk averse.

You didn’t indicate how large her portfolio is or how much she’ll need to withdraw for expenses once she stops working.

But another possibility might be a liability matching portfolio where she puts 20 to 25 years of expenses in TIPS (or similar) and whatever is left in equities. Read “How Much Is Enough?” In this link: https://www.whitecoatinvestor.com/berns ... -the-game/
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Xigris1234
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by Xigris1234 »

whereskyle wrote: Tue May 18, 2021 6:26 am
Have you considered using an intermediate treasury fund, such as VGIT (Vanguard Intermediate-Treasury ETF, ER .05), instead of the total bond market in an effort to decrease overall portfolio volatility? Intermediate treasuries, as opposed to the total bond market, have had an inverse correlation to equities and have decreased overall portfolio volatility while sacrificing virtually nothing in return on the fixed-income side. If volatility is the primary concern, intermediate-term treasuries may be the better option.
I was debating between using Fidelity US Bond Index 0.025% and Fidelity Intermediate Treasury Bond Index 0.03%, but you make a good point that the intermediate treasury would do a better job at at decreasing volatility. I think I will make the switch, as well doing an even split between treasuries and TIPS.
HomeStretch wrote: Tue May 18, 2021 6:44 am +1 that 52% equity seems high for someone who is risk averse and new to investing in equities.

Will Social Security benefits plus a 4-5% withdrawal from your mom’s portfolio starting at age 72 cover all her retirement expenses (including income taxes, healthcare and lumpy expenses such as a new car, home repairs, etc.)? If yes, a 35-40% allocation to equities from the start may be more reasonable.
delamer wrote: Tue May 18, 2021 11:29 am I’m inclined to agree with the other posters who think 50% equities is too high for some who has been risk averse.

You didn’t indicate how large her portfolio is or how much she’ll need to withdraw for expenses once she stops working.

But another possibility might be a liability matching portfolio where she puts 20 to 25 years of expenses in TIPS (or similar) and whatever is left in equities. Read “How Much Is Enough?” In this link: https://www.whitecoatinvestor.com/berns ... -the-game/
Total portfolio is about $850k with $600k in traditional IRA. Parents annual spend last year was $40k (including insurance, utilities, taxes, and credit cards) and I estimate this may decrease a bit as Dad was the bigger spender. Social Security will provide about $24k per year, and I estimate RMDs will initially be around $25-30k per year depending on portfolio value. Mom plans to continue working part-time until she is 72 which will provide about $20k additional income per year during that period.

dodecahedron wrote: Tue May 18, 2021 11:16 am Right now is a very good time for you to thoroughly educate yourself about your mother's income tax situation (as well as ancillary related issues such as IRMAA Medicare Premiums, income eligibility qualifications for senior citizen property tax breaks in her area, etc) so you have a strong handle on those issues going forward.

This last year of MFJ could be a very good opportunity for Roth conversions because she gets one last shot at the big MFJ standard deduction and more favorable MFJ bracket rates. Her Social Security will be taxed more favorably in 2021 than it will in subsequent years, because the formula for taxable SS is more generous to MFJ filers than single filers.

Worth keeping in mind: as a general rule, Roth conversions can have the unfortunate side-effect of crossing an IRMAA threshold and triggering higher Medicare Part B and Part D premiums two years down the road, but there are special circumstances under which Medicare allows filing for a waiver of IRMAA surcharges and widowhood is one of those waiver exception qualifications specifically in the year of the spouse's death.
Thank you for this information, I wasn't aware of the effects of income on Medicare premiums. Later in the summer we plan to meet with her CPA to review her entire tax situation as well as the possibility of Roth conversions. I'll make sure to keep this in mind as we discuss further.
retiredjg wrote: Tue May 18, 2021 6:52 am I would suggest that you two consider something more like 20% - 30% stock.

A 68 year old person (and even older) who is not risk averse can be fine with 50% stock. I would not suggest anything near that for an investing novice who "clearly prefers less volatility."

A 50% stock portfolio can make some big drops - $100k can become $75k in a significant downturn...and stay there for months or even a year or longer. For an older person, that could be very stressful and discomforting, especially if she actually needs the money.

Don't look at this as "she's tough, she can gut it out for a few months". Look at this as "she will be stressed and may not sleep well for months". Stress and not sleeping well takes a toll on a person. The toll can get larger with age. There is no reason that whatever money she has should cause her discomfort.

Invest in a way that brings her comfort, not discomfort.
angelescrest wrote: Tue May 18, 2021 8:07 am Excellent, thoughtful advice, particularly given the loss of spouse and uncertainty right now. By almost all definitions, uncertainty and change equates to stress. I also recommend leaning toward a more stable portfolio for the time being.
dodecahedron wrote: Tue May 18, 2021 9:49 am One further observation: the basic principle of asset allocation decision-making is that asset allocation should be based on "ability, need, and willingness to take risk."

I don't think it is possible to accurately assess any of the ability/need/willingness factors in the immediate aftermath of widowhood, especially for a widow who has never been exposed to equity in the past.

So much of ability/need to take risk is contingent on big decisions that generally should be postponed for at least a year. (E.g., should new widow sell the family home, downsize, and/or relocate to a higher or lower cost of living area, etc.) I was acutely aware in the immediate aftermath that I could not trust my emotional/mental state to make major decisions in the first year, so I was grateful to be able to put them off.

As for willingness to take risk, that can change too. As I started to feel less emotionally fragile, and figured out the answers to downsizing and relocation questions, I got more somewhat comfortable with equities (i.e., willingness increased somewhat, but still guarded.)
I've been largely navigating this on my own, and I can't begin to tell you how helpful it is for all the perspectives and advice. I can see now that I've been approaching her portfolio with the wrong mindset and the higher equity allocation doesn't make sense based on Mom's willingness to take risk, as well as there not being a real need. I spent some time on portfolio visualizer last night comparing different allocations (15-50% equities) assuming a 3.5% withdrawal rate, and see the risk in having a higher equity allocation with negative returns early in retirement (e.g. 2000-2020). In the portfolios that I compared, it seems like the sweet spot for returns to match inflation, preserve capital, and minimize volatility was somewhere around 25-30% equities (assuming 10% in cash, and the rest split evenly between intermediate treasuries and TIPS). I plan to share this with her to help her visualize and get her thoughts. I'm leaning to 25% equities, 65% fixed income (40% IT, 40% TIPS, 20% MYGA), and 10% cash.

https://www.portfoliovisualizer.com/bac ... GlobalBond
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retiredjg
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by retiredjg »

This is a way better idea! :D :D :D

There are hundreds of good ways to allocate the 75% that is not stocks. Any of them will do as long as you stay away from junk bonds and stuff like that. So don't get bogged too far down into those details.

This is a good plan and I would think your mother should be comfortable with it.
whereskyle
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Re: Portfolio Review - Semiretired and Heading into 70s

Post by whereskyle »

retiredjg wrote: Wed May 19, 2021 10:15 am This is a way better idea! :D :D :D

There are hundreds of good ways to allocate the 75% that is not stocks. Any of them will do as long as you stay away from junk bonds and stuff like that. So don't get bogged too far down into those details.

This is a good plan and I would think your mother should be comfortable with it.
+1.

Also, once the plan is implemented, stop watching the market and stick with the plan. Emotional concern about whether you set up the right plan for someone you care about can cause you to tinker where tinkering is counter-productive.

This good plan is good enough. That's step one. Standing still and doing nothing once the plan is implemented is step two. Step three is enjoying life and not worrying about investing.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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