Portfolio review for a low-budget retiree

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Kevin K
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Portfolio review for a low-budget retiree

Post by Kevin K »

I guess I should preface this by saying that I know full well the standard advice on these forums for someone in my financial situation would be to go back to work and save a multiple of what I have, but corporate downsizing and industry changes rule that out in my case. I've read enough investing books to know that I'm trying to walk a tight rope between what Dr. Bernstein calls deep risk vs. shallow risk. What makes it more challenging of course is the unprecedented low interest rate/high equity valuation environment we're in.

Emergency Funds: yes - included in portfolio.
Debt: none
Tax filing status: Married filing jointly
Tax rate: 12% Federal, 3.34% State (AZ)
Ages: 65, 58 (DW)

Desired asset allocation: unsure - see below
Investable assets: ~900K total: 300 my traditional IRA, 100 in hers. Remaining 400K in joint brokerage account + 40K in iBonds at Treasury Direct

Social Security will cover 100% of essential expenses and ~ 80% of our desired budget at full retirement ages. No legacy goals, average life expectancy.

Current portfolio: slightly modified Golden Butterfly (see link below): 20% each Vanguard Total Stock Market ETF (VTI), Vanguard Small Cap Value ETF (VBR), iShares Gold Trust (IAU), 30% Vanguard Intermediate Term Treasury ETF (VGIT), 10% iBonds and high-yield online MM account.

Portfolio recommended by a Boglehead independent FA: 50% Vanguard Intermediate-Term Treasury ETF (VGIT), 20% Vanguard Short-Term TIPS ETF (VTIP), 15% each Vanguard Total Stock Market ETF (VTI) and Total International (VXUS) - i.e. 70:30 bonds:equity. Then rising equity glide path until full retirement age for DW (9 years from now) with final allocation 60-60% stocks (same funds and 50:50 US/Int’l as now), rest in intermediate Treasuries.

I plan on drawing about 4% per year (net - not inflation-adjusted) from the portfolio until SS kicks in at 70 for me and 67 for DW).

Needless to say (at least I hope so on this board) the simplicity of the FA's recommended 3-4 fund portfolio is appealing but its historical returns and drawdowns are vastly inferior to my current allocation whether looking at the initial 30:70 or eventual 60:40:

https://www.portfoliovisualizer.com/bac ... tion5_3=20

Have thought about going 100% Wellesley or LifeStrategy Conservative growth but same issues with historical returns on these largely reflecting a bond tailwind that seems to be over for good plus other problems (active management fickleness with W and super-concentrated asset bets, excessive international in LIfeStrategy and Vanguard's proven eagerness to monkey with its component funds).

Any thoughts welcome and appreciated.
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Sandtrap
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Re: Portfolio review for a low-budget retiree

Post by Sandtrap »

Here's the portfolio review format.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212
You can edit using the "pencil icon" as you wish.

Projected annual expenses in retirement?

Since you mention balanced and target funds, have you considered a single balanced fund such at the low cost Vanguard Balanced Index Fund at 60/40 without a glide path (set and forget = less stress and simplicity) ?
Why? Why not?

j :D
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Dude2
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Re: Portfolio review for a low-budget retiree

Post by Dude2 »

I like Sandtrap's simple solution based on the OP criteria. Balanced fund lacks international exposure which sounds like it fits. OP is worried about bonds not cutting it going forward, and he/she has a sizeable slice of gold. Nevertheless, the advice stands. There is both risk and reward to consider. More stocks, more risk, more rewards. More bonds, opposite. Dropping down to 30% stocks, to me, says that you've won the game, stop playing. On the other hand, it sounds like we aren't sure we've won the game, and we have to consider keeping the risk level up. Traditional 60/40 is a nice spot. Easy for somebody else to say. I'm much more risk-averse than this, despite not having won the game either. It's your call...

Another subject is that it seems a large chunk is in taxable account, no? Wouldn't want to rebalance that and incur capital gains taxes, right? The assets in taxable are somewhat unclear to me is what I'm trying to say. Best left alone, I think.
Then ’tis like the breath of an unfee’d lawyer.
Northern Flicker
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Re: Portfolio review for a low-budget retiree

Post by Northern Flicker »

My first comment is that you are not a low budget retiree. It appears that you have more than enough to fund a successful retirement at your desired standard of living.

I would arrive at an allocation using a bucketed income flooring approach.

Bucket 1 - funds to cover living expenses while social security is delayed.

Bucket 2 - funds to cover essential expenses after SS is started. SS is projected to cover it, but this can be re-evaluated when you start taking SS.

Bucket 3 - funds to cover the 20% of budget that is desired but not truly essential.

Bucket 4 - funds to cover untargeted liabilities, including residual inflation risk, deviations from the targets for buckets 1-3, potential shortfall of income after first spouse dies and SS and tax brackets change, unpredictable expenses like long-term care, major home repair etc.

Bucket 1 could be funded with a bond/CD ladder with funds to cover living expenses realized annually as bonds/CDs mature. These could be in a tax-deferred or taxable account. You could also put 1 year's worth in a high yield insured savings account and the rest in a ladder in an IRA built with iShares iBond ETFs, which are diversified corporate bond portfolios that liquidate at par on a fixed date similar to a bond maturing. A stable value fund in a 401K also would be suitable.

Bucket 2 and 3 could be funded with a SPIA (lifetime income annuity). I would probably use IRA funds for this since you have to do RMDs anyway so will be taxed on withdrawals either way.

Bucket 4 is the remaining assets. It could be invested more aggressively than 30% stocks because your income floor protects against sequence of returns risk. Perhaps 60% stock, series I savings bonds, and the rest split 50/50 between intermediate treasuries and intermediate TIPS.

If you are concerned about low returns, don't hold more than 5% in gold. It is a net drag on expected returns.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Mike Scott
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Re: Portfolio review for a low-budget retiree

Post by Mike Scott »

It sounds like you are in really good shape overall. There is nothing low budget about having more than enough.
It sounds like you are more concerned about your investment structure; ie moving away from the butterfly. One of the balanced funds or target date funds for everything would be easy. You can build a 2 or 3 fund portfolio for better tax efficiency. It probably does not make a lot of difference which one you choose considering you have a set of reasonable options to choose from. However... you believed in the butterfly and it worked for you... why change now?
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JoeRetire
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Re: Portfolio review for a low-budget retiree

Post by JoeRetire »

Kevin K wrote: Wed Oct 13, 2021 10:45 am I guess I should preface this by saying that I know full well the standard advice on these forums for someone in my financial situation would be to go back to work and save a multiple of what I have, but corporate downsizing and industry changes rule that out in my case.
If you want to work, there are plenty of jobs available. No need to stay within your company or industry.
Ages: 65, 58 (DW)
Investable assets: ~900K total: 300 my traditional IRA, 100 in hers. Remaining 400K in joint brokerage account + 40K in iBonds at Treasury Direct
Social Security will cover 100% of essential expenses and ~ 80% of our desired budget at full retirement ages. No legacy goals, average life expectancy.
I plan on drawing about 4% per year (net - not inflation-adjusted) from the portfolio until SS kicks in at 70 for me and 67 for DW).
Assuming Social Security+4% of your portfolio fully covers your desired budget, it looks like you'll be just fine.
No need for anything fancy portfolio-wise.
Just remember: it's not a lie if you believe it.
Escapevelocity
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Re: Portfolio review for a low-budget retiree

Post by Escapevelocity »

How much will your SS benefit be as a couple at age 70? I think you are surely in fine shape. My only advice would be to delay SS to age 70 and also spend MORE than 4% between now and your SS start (next five years). If your enhanced SS covers 100% of essential expenses at age 70, then maybe your portfolio only needs ~ 2% WR to fund the discretionary stuff. If that means you withdraw 6% for the next 5 years, I wouldn't hesitate to do so. Delaying to 70 also gives you a nice COLA-secured longevity income stream.

Why? In order to level out your annual spend before and after SS and also to not waste these best years of your remaining life by living on a potentially constrained budget.
Topic Author
Kevin K
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Re: Portfolio review for a low-budget retiree

Post by Kevin K »

Sandtrap wrote: Wed Oct 13, 2021 11:08 am Here's the portfolio review format.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212
You can edit using the "pencil icon" as you wish.

Projected annual expenses in retirement?

Since you mention balanced and target funds, have you considered a single balanced fund such at the low cost Vanguard Balanced Index Fund at 60/40 without a glide path (set and forget = less stress and simplicity) ?
Why? Why not?

j :D
Thanks very much for the feedback. Didn't find a listing for projected annual expenses in the portfolio review format post but admittedly I didn't fill out the form completely. Projected essential expenses are 35K in retirement; desired additional spending would push that up to ~45K. SS at FRA will be 35K total for the two of us.

Regarding Vanguard Balanced Index fund, of course the simplicity is appealing but 0% international and long-duration, relatively low-quality bonds are not. The FA I consulted with (a protégé of Rick Ferri's) was pretty adamant about 50:50 domestic to international or close to it on the equity side and intermediate Treasuries only for bonds.

I'm comfortable with up to 1/3 of the stocks in international and in any case have a ton of unrealized capital gains in the VTI in my taxable account so it's going to have to be some sort of 3 or 4 fund portfolio if I abandon the Golden Butterfly. Hard to do so however given the nearly identical returns between it and Balanced Index Fund with far lower drawdowns and much shallower losses. Having lived through a couple of market crashes while fully retired I don't trust myself to weather a 30%+ drawdown without panicking.

https://www.portfoliovisualizer.com/bac ... tion6_2=20
Topic Author
Kevin K
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Re: Portfolio review for a low-budget retiree

Post by Kevin K »

Thanks very much to everyone who's responded here for your comments. You've given me a lot to think about. If nothing else, bucketing things the way Northern Flicker suggests is going to be very helpful for both my wife and I and the suggested alternative portfolios all make more sense to me than the rising equity glide path approach suggested by the FA I hired.

I'm most grateful for your time and collective wisdom.
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Sandtrap
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Re: Portfolio review for a low-budget retiree

Post by Sandtrap »

Suggest reading:
The Ages of the Investor: Life Cycle Investing” by W Bernstein—Amazon softcover.

j🌺
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wolf359
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Re: Portfolio review for a low-budget retiree

Post by wolf359 »

Social Security will cover 100% of essential expenses and ~ 80% of our desired budget at full retirement ages. No legacy goals, average life expectancy.
Projected essential expenses are 35K in retirement; desired additional spending would push that up to ~45K. SS at FRA will be 35K total for the two of us.
I think this is a key point.

While staying with your existing investment style that you're comfortable with, you can pull 5% ($45,000) until your Social Security kicks in (in 5 years), then reduce the amount to reflect the amount paid by each Social Security check when they start.

5% is a reasonable draw for 5 years, because that draw only stays at that level for a short time. When your spouse's Social Security starts in 9 years, your draw may be down to 1-2% of your portfolio.

I don't think you need to complicate things too much. The bucket strategy is good for peace of mind, but simple is better.

Don't ramp up your spending when you hit full Social Security because you should account for the potential haircut that may occur around that time. (Absent changes, the Social Security Trustees report projects a reduction in payouts around 2030-2033.) Wait until you see the impact of that before adjusting spending.
Last edited by wolf359 on Thu Oct 14, 2021 7:59 am, edited 2 times in total.
dbr
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Re: Portfolio review for a low-budget retiree

Post by dbr »

I suggest looking at a couple of the retirement spending models like www.firecalc.com. The point is that the model is set up to enter what you want to spend, what your income streams like SS are and when they start (not necessarily the same day you retire), what your assets are, and how far ahead you want to look. The model then takes account of variability in returns and inflation and gives you an estimate of whether or not you can expect the plan to work.

Just off hand with $45k in probable spending and $35k to come from SS when it starts in five years and $900k in assets you should be just fine. You can explore whether postponing SS to age 70 would help. You can also try increasing the proposed spending to observe at what level you are not ok anymore. Firecalc does not let you track a varying asset allocation over time. Maybe some other planner does. But I think 60/40 all along for purposes of model is completely reasonable. It could be the rising glidepath when your withdrawals are a little more comes out with some advantage, but I bet it is not much.

I ran a quick and dirty in FireCalc and can see by that model you could be spending $60,000 per year, increased by inflation each year, for up to 30 years and not experience a failure, just for perspective. You can be very comfortable with the margin you have to that number.

If you want a back of the envelope calculation just take $45k x 5 years = $225,000 off of $900,000 and realize that five years from now you will only be trying to take $10k/year from a portfolio of $675k. And the SS is inflation indexed.

I don't see any reason to start engineering buckets plans.
Dude2
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Re: Portfolio review for a low-budget retiree

Post by Dude2 »

Kevin K wrote: Wed Oct 13, 2021 3:13 pm Regarding Vanguard Balanced Index fund, of course the simplicity is appealing but 0% international and long-duration, relatively low-quality bonds are not. The FA I consulted with (a protégé of Rick Ferri's) was pretty adamant about 50:50 domestic to international or close to it on the equity side and intermediate Treasuries only for bonds.
Nobody knows nothing, but seems rather drastic to go from 0% international currently to a whopping 50% when the market weight is only 41%. From a purist Boglehead perspective, market weight is the upper limit, and most Americans don't go that high.

Now this concept that bonds are of low quality: They are still investment grade bonds that represent a total market approach. There would be very few Bogleheads willing to throw stones at the Total Bond Market Index. True that some people like to hold Treasurys. They like when stocks tank that a Treasury flight to quality gives a burst of return. That's usually short lived, and TBM holds up just fine. There are many good things to say about TBM. Don't throw out the baby with the bath water.

The other aspect to consider is that the larger the bond proportion, the more you'd consider having TIPS because you are much more exposed to inflation risk.
Then ’tis like the breath of an unfee’d lawyer.
HomeStretch
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Re: Portfolio review for a low-budget retiree

Post by HomeStretch »

As you/spouse decide what % is “safe” to withdraw from your portfolio to fund discretionary expenses in excess of the essential expenses funded by SS income, take a look at the following two scenarios (if you haven’t already) as they may impact your decision:

#1 - the “surviving spouse” scenario
A possible scenario is that the surviving spouse has less net retirement income due to:
(1) retirement income decreasing by 1/3-1/2 (due to the surviving spouse receiving one SS benefit (higher one), and
(2) retirement expenses decreasing by an amount less than the retirement income reduction.

#2 - one spouse needs (potentially expensive) in-home or in-facility long term care
How to fund one spouse’s incremental care cost in addition to the “well” spouse’s living expenses. This is less of a concern or a non-concern if you/spouse have good long-term care insurance. edit - or have a good facility nearby that accepts Medicaid on day 1 and has a short waiting list.
Last edited by HomeStretch on Wed Oct 13, 2021 6:49 pm, edited 1 time in total.
Topic Author
Kevin K
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Re: Portfolio review for a low-budget retiree

Post by Kevin K »

Sandtrap wrote: Wed Oct 13, 2021 3:20 pm Suggest reading:
The Ages of the Investor: Life Cycle Investing” by W Bernstein—Amazon softcover.

j🌺
I had to go back in my Kindle library and sure enough I'd read that book when it first came out - which was in 2012. Just re-read his advice about retirement and it's ruefully humorous to hear him grouse about low returns on TIPS and SPIA's when we'd all kill for such yields today.

Dr. Bernstein recommends individual TIPS, T-bills and CD ladders for the LMP and categorically says no equities whatsoever. Also interesting to me was the age qualifier he inserts before saying one needs to have a LMP of 20-25 years of RLE's: "by age 70." Sure seems excessively conservative to me given actual life expectancies.

It'd be great to see him revise this booklet to take into account that the only safe investments offering a real rate of return in 2021 are iBONDs.
Northern Flicker
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Re: Portfolio review for a low-budget retiree

Post by Northern Flicker »

FYI there has been research on the rising glide path approach in retirement, so the advisor is not coming from left field on that. Here is an article about it:

https://www.kitces.com/blog/managing-po ... -red-zone/

I prefer the income flooring method of dealing with sequence of return risk because it seems to be more precise. But if you calculate the overall allocation using the bucketing approach, it will implement a similar rising glidepath because you are funding the delay of SS with fixed income assets and consuming those assets, increasing the percentage of equities in the portfolio.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Topic Author
Kevin K
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Re: Portfolio review for a low-budget retiree

Post by Kevin K »

Thanks Northern Flicker!

Yes I'm familiar with Kitces' work and am knee-deep in Wade Pfau's new "Retirement Planning Guidebook" which also covers the rising equity glide path concept. Conceptually and for ease of implementation I prefer the bucket approach you described. Thanks again for taking the time to help me.
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