Retirement-size windfall and timing the market

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
wanson
Posts: 4
Joined: Sat Sep 11, 2021 11:19 am

Retirement-size windfall and timing the market

Post by wanson »

We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options]. 3% of the after-tax amount is enough for us to comfortably cover annual expenses + afford some luxuries. While we can continue employment for another year or two, both my spouse and I are planning to retire shortly. The question we have is about investment planning, and here are the concerns / discussion points:
  • The windfall amount is the amount we’re entering the market with. There will not be additional investments over time in the future unless we do DCA. Also, existing investments are not significant compared to the windfall amount.
  • If the investment portfolio drops 20-30%, we’ll survive but the 3% of the remaining portfolio won’t be enough to live as comfortably. Also, losing 20% of the portfolio in the first year or two is going to be a lot more painful than not earning an additional 20%. Not just due to psychology, but also because we’re at the beginning of a retirement with no further incoming money streams.
  • As the theory (eg. Bernstein) says, a good company doesn’t mean a good stock. The same can be said about asset classes at specific points of time. With prices/CAPE being where they are, we’re nervous about the possibility we’re starting retirement at outlier valuations.
I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
User avatar
GerryL
Posts: 3263
Joined: Fri Sep 20, 2013 11:40 pm

Re: Retirement-size windfall and timing the market

Post by GerryL »

If you are really worried about investing in a lump sum, I would lump sum at least half and then DCA the rest over the next year or less. Diligently. That is, set it up to auto-invest a specific amount on a specific day so you are not thinking about "what the market is doing." And keep working at your jobs.

At the end of the year, revisit your plan and determine if you are ready to retire. This way you make a single decision now and with a plan to make another decision a year down the line, after you've had time to consider where you want to be. The point is to not keep rethinking your decisions.
User avatar
anon_investor
Posts: 8299
Joined: Mon Jun 03, 2019 1:43 pm

Re: Retirement-size windfall and timing the market

Post by anon_investor »

GerryL wrote: Sat Sep 11, 2021 3:13 pm If you are really worried about investing in a lump sum, I would lump sum at least half and then DCA the rest over the next year or less. Diligently. That is, set it up to auto-invest a specific amount on a specific day so you are not thinking about "what the market is doing." And keep working at your jobs.

At the end of the year, revisit your plan and determine if you are ready to retire. This way you make a single decision now and with a plan to make another decision a year down the line, after you've had time to consider where you want to be. The point is to not keep rethinking your decisions.
+1.
KlangFool
Posts: 22061
Joined: Sat Oct 11, 2008 12:35 pm

Re: Retirement-size windfall and timing the market

Post by KlangFool »

OP,

I do not understand your question.

A) If your portfolio is big enough to retire, it should not be 100% stock.

B) The rule of thumb for the retirement portfolio is 10 to 20 years of expense in Fixed Income (bond).

C) So, if you follow (B), what is the problem of investing the lump sum now? Even if the market drop 50%, so what? You have at least 10 years of expense in fixed income (bond) to spend and wait for recovery.

D) If you do not know or confident enough to invest, just do nothing until you are comfortable.

E) My portfolio without the emergency fund (2X to 3X) is 27X my current annual expense. My Asset Allocation is 60/40. I am prepared for a market crash.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
Posts: 22061
Joined: Sat Oct 11, 2008 12:35 pm

Re: Retirement-size windfall and timing the market

Post by KlangFool »

https://www.bogleheads.org/wiki/Managing_a_windfall

OP,

Check out above Wiki.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
delamer
Posts: 12263
Joined: Tue Feb 08, 2011 6:13 pm

Re: Retirement-size windfall and timing the market

Post by delamer »

Here’s a link to a discussion of lazy (simple) portfolios from the wiki: https://www.bogleheads.org/wiki/Lazy_portfolios

All of them include US stocks, but only one doesn’t include international stocks also.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
User avatar
arcticpineapplecorp.
Posts: 8512
Joined: Tue Mar 06, 2012 9:22 pm

Re: Retirement-size windfall and timing the market

Post by arcticpineapplecorp. »

welcome to the group.

i would start with the managing a windfall page that was linked already.

similarly, you need a plan for the long term so check out : https://www.bogleheads.org/wiki/Investm ... _statement

finally, you need to always be prepared for a 20-30% decline in stocks (or more. I tell people be prepared to lose 50% of your money a few times over your investing career). Not just the first year or two of retirement, but always. Not because the portfolio won't recover it, but because if you can't handle that kind of decline 1 year into retirement, what makes you think you'll handle it better in year 10, 15, 20, etc of retirement? You won't. So you need to figure out what your maximum pain point is and design your portfolio with those maximum losses in mind.

If we look at the worst declines in the market (since the great depression) we'd look at 50% stock declines (for the total market. I'm not talking Nasdaq here). If you don't want to lose 20% or more, than a 40%-45% allocation to stocks might be more reasonable (see below). You might say, but if stocks fall 30% and I have 40% in stocks I'll only lose 12% and I can handle that! Sure, but we don't plan for the declines we want to see. We plan for more worse case scenarios. If they don't come to pass, you got lucky. If they do...and you designed your portfolio with those size declines in mind, you'll be fine too.

you said you'd feel worse if you lost the money than if you failed to make the money. So less risk means the tradeoff is lower returns. You can't have it both ways, so accept the tradeoffs that come with asset allocation and investing in general. You want higher returns, you have to accept the higher risk. There's no way around these tradeoffs.

Image

what do you think?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events.
privateer79
Posts: 198
Joined: Fri Apr 04, 2008 12:21 am

Re: Retirement-size windfall and timing the market

Post by privateer79 »

I almost feel like the right answer is "lump-sum 'n find out"....

i.e. go lump sum with a near-retirment allocation, and keep working 1 or 2 more years.... if the portfolio goes up, you added additional buffer and can confidently pull the plug with extra luxury/confidence.... if the market tanks you haven't left your position and can continue accumulating a few more years until you get to where you need to be.
User avatar
BolderBoy
Posts: 5854
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Retirement-size windfall and timing the market

Post by BolderBoy »

Based on what OP posted, I would lump sum the whole works into a 30/70 AA position using VTSAX and VBTLX (or their ETF equivalents). Then I'd sit back and see if you can tolerate more risk in the market and if so, start moving the AA towards 40/60 over time (or let market appreciation do it for you).

This starting AA would allow for opportunistic rebalancing if the situation allows while protecting your nest egg pretty well and most likely still beating inflation.

(Disclaimer: I'm retired and my AA has been 30/70 for about 8 years now)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
User avatar
Wiggums
Posts: 4221
Joined: Thu Jan 31, 2019 8:02 am

Re: Retirement-size windfall and timing the market

Post by Wiggums »

I’m at 65/35 and it’s pretty boring down here. You can see the maximum downside based on historical data using portfoliovisualizer.com. Estimate your retirement expenses and see how long your fixed income will last in the case of a down market. It’s reasonable to assume that the market can take a decade to recover since it happened before. I schedule a purchases using new money on a weekly basis so that I don’t watch the market all the time. I logon once a month.

My mom is 92 and she is at 30/70.
Investors need to be better informed about the costs they pay. “High fund fees can be hazardous to your wealth in the same way that high calories can be hazardous for your health.”
coachd50
Posts: 663
Joined: Sun Oct 22, 2017 10:12 am

Re: Retirement-size windfall and timing the market

Post by coachd50 »

wanson wrote: Sat Sep 11, 2021 11:45 am We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options]. 3% of the after-tax amount is enough for us to comfortably cover annual expenses + afford some luxuries. While we can continue employment for another year or two, both my spouse and I are planning to retire shortly. The question we have is about investment planning, and here are the concerns / discussion points:
  • The windfall amount is the amount we’re entering the market with. There will not be additional investments over time in the future unless we do DCA. Also, existing investments are not significant compared to the windfall amount.
  • If the investment portfolio drops 20-30%, we’ll survive but the 3% of the remaining portfolio won’t be enough to live as comfortably. Also, losing 20% of the portfolio in the first year or two is going to be a lot more painful than not earning an additional 20%. Not just due to psychology, but also because we’re at the beginning of a retirement with no further incoming money streams.
  • As the theory (eg. Bernstein) says, a good company doesn’t mean a good stock. The same can be said about asset classes at specific points of time. With prices/CAPE being where they are, we’re nervous about the possibility we’re starting retirement at outlier valuations.
I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???

I think what Klangfool is alluding to is important. Without saying it directly, he appears to be trying to get you to really question if this amount actually is retirement-size. If this wasn't a windfall, but rather the amount in question was the result of the past 20 years of investing would you say you were ready to retire even if the market dropped? Would you pull everything out of the market and into cash?

As others have mentioned, you need to be prepared for a decrease at ANY time in your retirement, not just the first year or two. The concerns you are describing are emotional ones, and that certainly is a part of the human condition.

Just some things to mull over.
Topic Author
wanson
Posts: 4
Joined: Sat Sep 11, 2021 11:19 am

Re: Retirement-size windfall and timing the market

Post by wanson »

Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???
Here's where I'm coming from:

It's healthy for markets to be at their peak prices many times a year, and it's also expected in a growing economy. But peak prices don't always mean peak valuations. 4-5 years ago (and really at almost any time in the history of US stocks) the prices were near the peak, but their valuations were reasonable (that is, within a standard deviation from the mean). There have only been a few times throughout the history where valuations (of US stocks) were this off. Again, it should not be an issue to enter the market at peak prices as long as the earning are proving to be high. But if prices are high because the public sentiment says that US stocks are a good investment no matter what, it feels somewhat scary.

In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward? In that case, it's not supported by anything in the history. Or are we saying that the earnings are expected to double in the near future?
User avatar
2pedals
Posts: 1436
Joined: Wed Dec 31, 2014 12:31 pm

Re: Retirement-size windfall and timing the market

Post by 2pedals »

wanson wrote: Mon Sep 13, 2021 9:03 am
Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???
Here's where I'm coming from:

It's healthy for markets to be at their peak prices many times a year, and it's also expected in a growing economy. But peak prices don't always mean peak valuations. 4-5 years ago (and really at almost any time in the history of US stocks) the prices were near the peak, but their valuations were reasonable (that is, within a standard deviation from the mean). There have only been a few times throughout the history where valuations (of US stocks) were this off. Again, it should not be an issue to enter the market at peak prices as long as the earning are proving to be high. But if prices are high because the public sentiment says that US stocks are a good investment no matter what, it feels somewhat scary.

In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward? In that case, it's not supported by anything in the history. Or are we saying that the earnings are expected to double in the near future?
It's just like it's always been, nobody knows nothing. You have to do what you think is right for you and your family. It's always a risk. It's a risk that you may not take enough risk. It's a risk that you take too much risk and you can't ignore the noise. You decide what you're asking allocation should be and I would be thinking long-term. If you can't take a 50% drop in equity then your asset allocation is too high.
User avatar
2pedals
Posts: 1436
Joined: Wed Dec 31, 2014 12:31 pm

Re: Retirement-size windfall and timing the market

Post by 2pedals »

wanson wrote: Mon Sep 13, 2021 9:03 am
Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???
Here's where I'm coming from:

It's healthy for markets to be at their peak prices many times a year, and it's also expected in a growing economy. But peak prices don't always mean peak valuations. 4-5 years ago (and really at almost any time in the history of US stocks) the prices were near the peak, but their valuations were reasonable (that is, within a standard deviation from the mean). There have only been a few times throughout the history where valuations (of US stocks) were this off. Again, it should not be an issue to enter the market at peak prices as long as the earning are proving to be high. But if prices are high because the public sentiment says that US stocks are a good investment no matter what, it feels somewhat scary.

In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward? In that case, it's not supported by anything in the history. Or are we saying that the earnings are expected to double in the near future?
It's just like it's always been, nobody knows nothing. You have to do what you think is right for you and your family. It's always a risk. It's a risk that you may not take enough risk. It's a risk that you take too much risk and you can't ignore the noise. You decide what you're asset allocation should be and I would be thinking long-term. If you can't take a 50% drop in equity then your asset allocation is too high.
dbr
Posts: 36933
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirement-size windfall and timing the market

Post by dbr »

It's reasonable to reassess the level of risk you want when a situation changes, such as having a lot more money than before. You can take your time figuring out what that is, but what the market is now has nothing to do with that.

It is still true that investing is for the long term and it does not help to try to time the market. If you find the right asset allocation you should be in it from the start.

A starting point to center any portfolio is the three assets of US and international stocks and US total bonds. While in theory having no bonds or no international stocks is still 3 funds with an allocation of zero to one or two, that is more a mathematical quip than a serious idea. Departing from the starting point can be done when there is good reason to do it.

Risk reflected in stock/bond allocation should be set by need, ability, and willingness to take risk, intended to be a thoughtful approach to understanding one's objectives and one's situation.
User avatar
retired@50
Posts: 6673
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Retirement-size windfall and timing the market

Post by retired@50 »

wanson wrote: Mon Sep 13, 2021 9:03 am In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward?
I get where your concern is coming from, but you don't really get to pick how the markets behave while you happen to be an investor.
You have a 50-70 year window of time to be an investor, assuming you live a full life, and that's that.

Stock valuations are high.

Bond interest is pathetic.

Cash has a negative real return when you consider inflation.

Take your pick.

Maybe someday the P/E will fall back to "normal", but who knows when. Maybe someday bonds will return 5%, but who knows when.

Personally, I'm sticking with my globally diversified stock and bond portfolio with a healthy emergency fund. It's been working my whole life, so I don't see any good reason to change now.

Regards,
This is one person's opinion. Nothing more.
coachd50
Posts: 663
Joined: Sun Oct 22, 2017 10:12 am

Re: Retirement-size windfall and timing the market

Post by coachd50 »

wanson wrote: Mon Sep 13, 2021 9:03 am
Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???
Here's where I'm coming from:

It's healthy for markets to be at their peak prices many times a year, and it's also expected in a growing economy. But peak prices don't always mean peak valuations. 4-5 years ago (and really at almost any time in the history of US stocks) the prices were near the peak, but their valuations were reasonable (that is, within a standard deviation from the mean). There have only been a few times throughout the history where valuations (of US stocks) were this off. Again, it should not be an issue to enter the market at peak prices as long as the earning are proving to be high. But if prices are high because the public sentiment says that US stocks are a good investment no matter what, it feels somewhat scary.

In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward? In that case, it's not supported by anything in the history. Or are we saying that the earnings are expected to double in the near future?
I think everyone who posts on this board knows where you are coming from. The point remains, If you hold out in cash now, and the s&p 500 is at 5,500 next August are you buying then?
Last edited by coachd50 on Mon Sep 13, 2021 11:00 am, edited 1 time in total.
Topic Author
wanson
Posts: 4
Joined: Sat Sep 11, 2021 11:19 am

Re: Retirement-size windfall and timing the market

Post by wanson »

...but you don't really get to pick how the markets behave while you happen to be an investor.
Here's a quote from "The Four Pillars of Investing":

These stories of financial excess, from the diving company bubble to the dot-com mania, are not just entertaining yarns, they are also a mortal warning to all investors. There will always be speculative markets in which the old rules seem to go out the window. Learn to recognize the signs: technological of financial "displacement," excessive use of credit, amnesia for the last bubble, and flood of new investors who swallow plausible stories in place of doing the hard math.

When this happens, keep a close hold on your wallet and remember John Templeton's famous warning: The four most expensive words in the English language are, "This time, it's different."


From my perspective, the signs are there (especially the technological "displacement" and use of easy money). I also feel like having a lower cost basis and weathering the storms (instead of having to deal with capital gains) is a bit different from entering the market at retirement.

Really just trying to get a reaction from so many experienced investors here :)
CoherentIntegration
Posts: 15
Joined: Mon Jul 26, 2021 2:05 pm

Re: Retirement-size windfall and timing the market

Post by CoherentIntegration »

[deleted - duplicate]
Last edited by CoherentIntegration on Mon Sep 13, 2021 11:18 am, edited 1 time in total.
CoherentIntegration
Posts: 15
Joined: Mon Jul 26, 2021 2:05 pm

Re: Retirement-size windfall and timing the market

Post by CoherentIntegration »

wanson wrote: Mon Sep 13, 2021 9:03 am
Couldn't you have written this post at almost anytime in the last 4-5 years or so? That should give you a little bit of perspective. Remember, with regards to holding it in cash and waiting, the key is WHEN do you get in. What if in Sept of 2022 the S&P 500 is at 5,500? Are you going to feel good about investing THEN???
Here's where I'm coming from:

It's healthy for markets to be at their peak prices many times a year, and it's also expected in a growing economy. But peak prices don't always mean peak valuations. 4-5 years ago (and really at almost any time in the history of US stocks) the prices were near the peak, but their valuations were reasonable (that is, within a standard deviation from the mean). There have only been a few times throughout the history where valuations (of US stocks) were this off. Again, it should not be an issue to enter the market at peak prices as long as the earning are proving to be high. But if prices are high because the public sentiment says that US stocks are a good investment no matter what, it feels somewhat scary.

In other words, are we saying that the S&P500 10-year P/E ratio of near 40 can be the new normal going forward? In that case, it's not supported by anything in the history. Or are we saying that the earnings are expected to double in the near future?
Some food for thought: if we accept that things like forward P/E ratio, CAPE, valuations, etc, are predictive of anything (which is a tenuous assumption at best due to the unpredictability of the market), then what they predict is lower expected returns for U.S stocks in the future as compared to the historical average. That is a very different thing to expect than a prediction of an imminent crash. If you're so inclined, give a listen to the following episode of the Rational Reminder podcast: https://rationalreminder.ca/podcast/146. Ben Felix also gave a bit of an update in the most recent episode. I have found this podcast to be extremely helpful when it comes to the nitty gritty details of numerical approaches.

By all means, proceed with caution, and do your own research. Congratulations on your windfall! :sharebeer
aristotelian
Posts: 9502
Joined: Wed Jan 11, 2017 8:05 pm

Re: Retirement-size windfall and timing the market

Post by aristotelian »

If the money was already invested would you sell?

I would suggest taking a step back and reassess your risk tolerance now that you have this new windfall. The windfall is enough to reduce your need to take risk and could incline you toward wealth preservation.

If it helps, think of the windfall as part of your whole portfolio. You don't have "portfolio money" and "windfall money". You have one big portfolio to allocate according to your risk tolerance and tax situation. Decide how much of your overall portfolio you are willing to put at risk, invest the lump sum, and rebalance. I would not stay in cash in an attempt to time the market.
magicrat
Posts: 1140
Joined: Sat Nov 29, 2014 7:04 pm

Re: Retirement-size windfall and timing the market

Post by magicrat »

wanson wrote: Mon Sep 13, 2021 10:53 am
...but you don't really get to pick how the markets behave while you happen to be an investor.
Here's a quote from "The Four Pillars of Investing":

These stories of financial excess, from the diving company bubble to the dot-com mania, are not just entertaining yarns, they are also a mortal warning to all investors. There will always be speculative markets in which the old rules seem to go out the window. Learn to recognize the signs: technological of financial "displacement," excessive use of credit, amnesia for the last bubble, and flood of new investors who swallow plausible stories in place of doing the hard math.

When this happens, keep a close hold on your wallet and remember John Templeton's famous warning: The four most expensive words in the English language are, "This time, it's different."


From my perspective, the signs are there (especially the technological "displacement" and use of easy money). I also feel like having a lower cost basis and weathering the storms (instead of having to deal with capital gains) is a bit different from entering the market at retirement.

Really just trying to get a reaction from so many experienced investors here :)
Not sure what you think this quote does for you. The only one on this thread saying anything like "this time will be different" is you! Your posts are filled with emotions, not hard math. What is your track record of predicting marketing movements?
Topic Author
wanson
Posts: 4
Joined: Sat Sep 11, 2021 11:19 am

Re: Retirement-size windfall and timing the market

Post by wanson »

...then what they predict is lower expected returns for U.S stocks in the future as compared to the historical average.
But "lower expected returns" is different from "lower future earnings". I think that's precisely the point. If you buy today, you should expect lower returns because the valuations are so high. For instance, between today and today+10 years there may be low returns, but it doesn't mean there will be low returns between today+1 year and today+10 years. My understanding is that lower historical returns are typically related to bad investment periods (during which asset classes mean-revert).
User avatar
retired@50
Posts: 6673
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Retirement-size windfall and timing the market

Post by retired@50 »

wanson wrote: Mon Sep 13, 2021 10:53 am From my perspective, the signs are there...
If you feel the market is over-valued, then do what you must.

You could try something completely different than stocks or bonds.

You could buy some rental real estate, or some small business, like a car wash or a dry cleaning operation.

Since I'm retired and don't want to deal with tenant / landlord problems and don't want to go back to work, I'm going to stick with my passive stock and bond investments.

Maybe the stock and bond markets aren't right for you? Best of luck.

Regards,
This is one person's opinion. Nothing more.
ThisTimeItsDifferent
Posts: 293
Joined: Sat Jan 31, 2015 2:51 pm

Re: Retirement-size windfall and timing the market

Post by ThisTimeItsDifferent »

I use "This time it's different" as my user name as a warning that it isn't different, or anyway nobody can predict whether it is or not.
Patzer
Posts: 440
Joined: Wed Jun 10, 2015 10:56 am

Re: Retirement-size windfall and timing the market

Post by Patzer »

wanson wrote: Sat Sep 11, 2021 11:45 am I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
If you give it another year, you will be in the same situation and it will be just as hard to get into the market, maybe harder, if stocks continued to go up.
wanson wrote: Sat Sep 11, 2021 11:45 am
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
Having a portfolio without US stocks doesn't make any sense at all.

You have a long time horizon and a pretty safe withdrawal rate.
You really need to spend some time figuring out what your target asset allocation is, but I will give you a good starting point.
In your situation, I would be targeting something like 56% US (VTI), 14% International Developed (VEA), 30% Intermediate Term US Treasuries(VGIT).

You are obviously nervous about getting into the market, and with such a big windfall, I can't blame you.
In your situation, I would immediately start with something like: 16% VTI, 4% VEA, and 30% VGIT, with 50% left in cash.
Then, every month, buy 4% VTI and 1% VEA, for the next 10 months, until fully at allocation.

If the market tanks, you are still historically safe withdrawing at 3% of the original portfolio (not the reduced portfolio) from VGIT.
z3r0c00l
Posts: 2506
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC

Re: Retirement-size windfall and timing the market

Post by z3r0c00l »

I would:
  • Make absolutely sure that you are factoring in the cost of raising 3 children through the 2030's
  • Invest it all today at an allocation of 50% bonds and 50% stocks per the global market cap
  • Avoid letting large amounts sit in cash as inflation could easily eat away at it
  • Avoid alternatives like buying a rental property since that defeats the purpose of retiring, every year you stay at work adds substantially to your financial security so keep working if you are uncertain
100% Global Stocks / Ibond Emergency Fund
tacobellcow
Posts: 11
Joined: Fri Jul 09, 2021 2:49 pm

Re: Retirement-size windfall and timing the market

Post by tacobellcow »

KlangFool wrote: Sat Sep 11, 2021 3:22 pm OP,

I do not understand your question.

A) If your portfolio is big enough to retire, it should not be 100% stock.

B) The rule of thumb for the retirement portfolio is 10 to 20 years of expense in Fixed Income (bond).

C) So, if you follow (B), what is the problem of investing the lump sum now? Even if the market drop 50%, so what? You have at least 10 years of expense in fixed income (bond) to spend and wait for recovery.

D) If you do not know or confident enough to invest, just do nothing until you are comfortable.

E) My portfolio without the emergency fund (2X to 3X) is 27X my current annual expense. My Asset Allocation is 60/40. I am prepared for a market crash.

KlangFool
Regarding point B: if the market were to go down for someone with 10-20 years in fixed income bonds, is the idea to pull dollars from that bond allocation until the other investments come back up? Or is the idea to shift bonds to mutual funds at a low point to capitalize on the downturn?
KlangFool
Posts: 22061
Joined: Sat Oct 11, 2008 12:35 pm

Re: Retirement-size windfall and timing the market

Post by KlangFool »

tacobellcow wrote: Mon Sep 13, 2021 12:12 pm
KlangFool wrote: Sat Sep 11, 2021 3:22 pm OP,

I do not understand your question.

A) If your portfolio is big enough to retire, it should not be 100% stock.

B) The rule of thumb for the retirement portfolio is 10 to 20 years of expense in Fixed Income (bond).

C) So, if you follow (B), what is the problem of investing the lump sum now? Even if the market drop 50%, so what? You have at least 10 years of expense in fixed income (bond) to spend and wait for recovery.

D) If you do not know or confident enough to invest, just do nothing until you are comfortable.

E) My portfolio without the emergency fund (2X to 3X) is 27X my current annual expense. My Asset Allocation is 60/40. I am prepared for a market crash.

KlangFool
Regarding point B: if the market were to go down for someone with 10-20 years in fixed income bonds, is the idea to pull dollars from that bond allocation until the other investments come back up? Or is the idea to shift bonds to mutual funds at a low point to capitalize on the downturn?
<< is the idea to pull dollars from that bond allocation until the other investments come back up? >>

Correct.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
CyclingDuo
Posts: 4456
Joined: Fri Jan 06, 2017 9:07 am

Re: Retirement-size windfall and timing the market

Post by CyclingDuo »

wanson wrote: Sat Sep 11, 2021 11:45 am We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options].
You're only 46. Work another 10 to 15+ years and forget about it.

There. Problem solved.....

:sharebeer

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Chadnudj
Posts: 894
Joined: Tue Oct 29, 2013 11:22 am

Re: Retirement-size windfall and timing the market

Post by Chadnudj »

wanson wrote: Sat Sep 11, 2021 11:45 am We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options]. 3% of the after-tax amount is enough for us to comfortably cover annual expenses + afford some luxuries. While we can continue employment for another year or two, both my spouse and I are planning to retire shortly. The question we have is about investment planning, and here are the concerns / discussion points:
  • The windfall amount is the amount we’re entering the market with. There will not be additional investments over time in the future unless we do DCA. Also, existing investments are not significant compared to the windfall amount.
  • If the investment portfolio drops 20-30%, we’ll survive but the 3% of the remaining portfolio won’t be enough to live as comfortably. Also, losing 20% of the portfolio in the first year or two is going to be a lot more painful than not earning an additional 20%. Not just due to psychology, but also because we’re at the beginning of a retirement with no further incoming money streams.
  • As the theory (eg. Bernstein) says, a good company doesn’t mean a good stock. The same can be said about asset classes at specific points of time. With prices/CAPE being where they are, we’re nervous about the possibility we’re starting retirement at outlier valuations.
I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
1. 3% is already a conservative withdrawal rate.
2. You're not factoring in Social Security, which adds extra layers of safety when you can claim it.
3. You're also not factoring in working a few more years, adding to this windfall/letting it grow without drawing it down, which would greatly increase the likelihood you're safe.

I'd invest it all at your desired AA, plan to work a few more years (because you seem to not yet have plans for post-work life, which you should have before retiring), and then make the move. But there's no rationale for keeping this windfall in cash -- it's just a bad move.
Chadnudj
Posts: 894
Joined: Tue Oct 29, 2013 11:22 am

Re: Retirement-size windfall and timing the market

Post by Chadnudj »

wanson wrote: Sat Sep 11, 2021 11:45 am We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options]. 3% of the after-tax amount is enough for us to comfortably cover annual expenses + afford some luxuries. While we can continue employment for another year or two, both my spouse and I are planning to retire shortly. The question we have is about investment planning, and here are the concerns / discussion points:
  • The windfall amount is the amount we’re entering the market with. There will not be additional investments over time in the future unless we do DCA. Also, existing investments are not significant compared to the windfall amount.
  • If the investment portfolio drops 20-30%, we’ll survive but the 3% of the remaining portfolio won’t be enough to live as comfortably. Also, losing 20% of the portfolio in the first year or two is going to be a lot more painful than not earning an additional 20%. Not just due to psychology, but also because we’re at the beginning of a retirement with no further incoming money streams.
  • As the theory (eg. Bernstein) says, a good company doesn’t mean a good stock. The same can be said about asset classes at specific points of time. With prices/CAPE being where they are, we’re nervous about the possibility we’re starting retirement at outlier valuations.
I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
1. 3% is already a conservative withdrawal rate.
2. You're not factoring in Social Security, which adds extra layers of safety when you can claim it.
3. You're also not factoring in working a few more years, adding to this windfall/letting it grow without drawing it down, which would greatly increase the likelihood you're safe.

I'd invest it all at your desired AA, plan to work a few more years (because you seem to not yet have plans for post-work life, which you should have before retiring), and then make the move. But there's no rationale for keeping this windfall in cash -- it's just a bad move.
cbs2002
Posts: 116
Joined: Thu Feb 27, 2020 2:10 pm

Re: Retirement-size windfall and timing the market

Post by cbs2002 »

wanson wrote: Mon Sep 13, 2021 11:27 am If you buy today, you should expect lower returns because the valuations are so high. For instance, between today and today+10 years there may be low returns, but it doesn't mean there will be low returns between today+1 year and today+10 years. My understanding is that lower historical returns are typically related to bad investment periods (during which asset classes mean-revert).
How is this relevant? You said you can live on 3% of the portfolio annually. Allocated appropriately, historically a 3% withdrawal rate never has drawn a portfolio to zero. It does not matter to the investor when the downturns happen if you are withdrawing such a small amount.

If you want to believe there is something special about the next decade that is going to make a 3% withdrawal rate unsustainable, you can believe that.

EDIT: also "3%" means 3 % of the original portfolio amount adjusted for inflation annually. You don't reduce your withdrawal because the portfolio value decreases. So. you'd never be expecting to live on 3% of a reduced portfolio.
bltn
Posts: 1257
Joined: Mon Feb 20, 2017 9:32 pm

Re: Retirement-size windfall and timing the market

Post by bltn »

BolderBoy wrote: Sat Sep 11, 2021 5:29 pm Based on what OP posted, I would lump sum the whole works into a 30/70 AA position using VTSAX and VBTLX (or their ETF equivalents). Then I'd sit back and see if you can tolerate more risk in the market and if so, start moving the AA towards 40/60 over time (or let market appreciation do it for you).

This starting AA would allow for opportunistic rebalancing if the situation allows while protecting your nest egg pretty well and most likely still beating inflation.

(Disclaimer: I'm retired and my AA has been 30/70 for about 8 years now)
Wanson
Based on your concerns , this might be the plan that fits you best and allows some current investment in the stock market. Then let some gradual shift in assets get you to 40/60 while you work for another year or two.
I agree that an s&p P/E ratio of 35x makes for a scary time to go all in with a heavy stock allocation. Your sequence of returns risk with stocks shortly before retiring is very high now historically. But returns from cash will be less than inflation, currently. And bond have returns barely keeping up with inflation, but offer high interest rate risk to the principal.
Anyone who believes in John Bogle s emphasis on "reversion to the mean" would be scared of stocks' current evaluation and bonds' interest rate risk with historically low rates. At least with high quality fixed income, FDIC cd s and limited term government bonds, there is a measure of safety of principal .

In your position, I would put 30-40% of my windfall into stock index funds. 20% would go into 5 year cds at various banks and s&l s with early withdrawal penalties of 6 months interest or less, 250,000 per account at each of the institutions. Not brokered cd s. Then 40-50% would go into high quality short duration bond funds with low expense ratios. I would be looking for the opportunity to get to a final stock allocation of 50-60%. I would plan to work for two more years while I watched the markets and my accounts, and continue to read this forum.

Best of luck.
McGowan
Posts: 55
Joined: Sat Jul 08, 2017 12:30 pm

Re: Retirement-size windfall and timing the market

Post by McGowan »

OP,

One thing worth pointing out is that there are different types of stock options with different types of taxation. Make sure you get this part right.

One other unpleasant surprise with long term capital gains over $501k for married filing jointly is that the tax rate is 20% (not 15%) PLUS 3.8% surcharge - so 23.8%. I'm not giving you tax advice but make sure you take taxes and AMT into account. These are not as straight forward as you might think.

Quick Google got me this tax breakdown for stock options but get a good tax advisor:

https://smartasset.com/taxes/stock-opti ... 0employees.
Juice3
Posts: 332
Joined: Sun Nov 05, 2017 7:40 am

Re: Retirement-size windfall and timing the market

Post by Juice3 »

wanson wrote: Sat Sep 11, 2021 11:45 am What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
Stupid. Make a plan. Execute plan. Have reasonable change / wiggle room in plan.
wanson wrote: Sat Sep 11, 2021 11:45 am Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
Other have talked about various glide path idea. I suggest you also consider SPIAs since you seem risk averse.
coachd50
Posts: 663
Joined: Sun Oct 22, 2017 10:12 am

Re: Retirement-size windfall and timing the market

Post by coachd50 »

wanson wrote: Mon Sep 13, 2021 10:53 am
...but you don't really get to pick how the markets behave while you happen to be an investor.
Here's a quote from "The Four Pillars of Investing":

These stories of financial excess, from the diving company bubble to the dot-com mania, are not just entertaining yarns, they are also a mortal warning to all investors. There will always be speculative markets in which the old rules seem to go out the window. Learn to recognize the signs: technological of financial "displacement," excessive use of credit, amnesia for the last bubble, and flood of new investors who swallow plausible stories in place of doing the hard math.

When this happens, keep a close hold on your wallet and remember John Templeton's famous warning: The four most expensive words in the English language are, "This time, it's different."


From my perspective, the signs are there (especially the technological "displacement" and use of easy money). I also feel like having a lower cost basis and weathering the storms (instead of having to deal with capital gains) is a bit different from entering the market at retirement.

Really just trying to get a reaction from so many experienced investors here :)
Members have already asked several pertinent questions to help you frame your thought process logically. You have not answered any.

1) If you hold your windfall in cash waiting for the market to "regress to the mean" and the S&P 500 is at 5,000 in a year, what will you do then? a 10% drop from there will still be higher than today.

2) If you had accumulated the sum you are discussing here over years and had them invested in an allocated portfolio now, would you sell?
Last edited by coachd50 on Wed Sep 15, 2021 6:30 am, edited 1 time in total.
helloeveryone
Posts: 905
Joined: Sun Sep 04, 2016 5:16 pm

Re: Retirement-size windfall and timing the market

Post by helloeveryone »

wanson wrote: Sat Sep 11, 2021 11:45 am We (46yo + spouse + 3 little kids) have been fortunate to receive a significant windfall from a sale of company stock [options]. 3% of the after-tax amount is enough for us to comfortably cover annual expenses + afford some luxuries. While we can continue employment for another year or two, both my spouse and I are planning to retire shortly. The question we have is about investment planning, and here are the concerns / discussion points:
  • The windfall amount is the amount we’re entering the market with. There will not be additional investments over time in the future unless we do DCA. Also, existing investments are not significant compared to the windfall amount.
  • If the investment portfolio drops 20-30%, we’ll survive but the 3% of the remaining portfolio won’t be enough to live as comfortably. Also, losing 20% of the portfolio in the first year or two is going to be a lot more painful than not earning an additional 20%. Not just due to psychology, but also because we’re at the beginning of a retirement with no further incoming money streams.
  • As the theory (eg. Bernstein) says, a good company doesn’t mean a good stock. The same can be said about asset classes at specific points of time. With prices/CAPE being where they are, we’re nervous about the possibility we’re starting retirement at outlier valuations.
I guess our questions are:
  • What would you say about giving it another year and not doing anything with the cash? We understand that some value will be lost to inflation. The hope is that at least some asset classes start reverting to mean. Yes, it’s probably timing the market, but the reward potential in the current environment doesn’t feel like it’s representing the risk.
  • Is it worth exploring other asset classes (other than [US] stocks/bonds) at this time? That said, most simple portfolios typically include US stocks, and having a semi-diversified portfolio without US stocks doesn’t feel quite right.
There is a free online book "We're Talking Millions" by Paul Merriman that has a chapter on this...(chapter 10 on page 67 of the PDF)
I just read it and it explained it nicely.

https://paulmerriman.com/wp-content/upl ... llions.pdf
Post Reply