Paralyzed by Investing Fears with $2M+ Post-Divorce

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Unicorn1
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Joined: Tue Jan 23, 2018 10:08 am
Location: Northeast TN

Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Unicorn1 »

Hi everyone,

Been off the board for a few years, but making a comeback and would like to seek opinions re: my current financial situation.

• Recently divorced 50yo man, no minor children, single-member LLC owner. Divorce monies are settled.
• Annual owner draw is 500k average.
• No debt, renting (5% rent-to-income).
• Maxing out 401K/HSA contributions, including $30,500 to 401K on personal side (including catchup contribution), $46,000 to 401k on business side, and $4,150 to HSA ($80,650 in total).
• Contributing $180,000 per year ($15,000 per month) to a taxable brokerage account.
• Current assets: 2.35M (401k/HSA at Fidelity; >90% in SPAXX due to selling from divorce). Taxable (1.52 million), 401K (660K), HSA (16K). At Truist, personal checking (75K), business checking (75K).
• Planning to work FT for 10 more years (until 60), maxing eligible contributions each year, and with 180K to taxable. Then 50% time until 65, still maxing out 401K/HSA, but 90K each year to taxable.

I used to only invest in equity index funds 100%, buy and never sell, didn't even look at the market.

But after the divorce and with the significant assets, I feel like my risk tolerance for any more loss is shot, and the idea of earning 4-5% risk-free sounds awfully attractive.

I know I NEED to slowly work my way into a 50/50 AA or something less risky than before, but I just can't pull the trigger on equities at all. The idea of sinking everything into CDs and treasuries seems appealing to float me through the next 10 years even though I understand how such a strategy barely keeps up with inflation.

Any ideas on how to overcome this mental block between what I know I need to do vs. actually doing it?

Suggestions or prior experiences on how to slowly dip my toes back in the water so I can feel like my funds are well invested AND I can sleep at night?

Thank you very much.
stan1
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by stan1 »

One important thing to do next: What are your annual expenses going forward? How might they change after you retire keeping in mind there are some things like retirement contributions and FICA that might be less if you retire.

Then: when you say you are going to retire at 60, does that mean no further W-2 and 1099 income or do you expect to have income from consulting or other investments that you'd still have? Today people often use the term "retire" to describe situations where they stop their primary job but continue to earn income, sometimes a lot of it that covers most or all expenses.

You have the income part down, and have a plan. Next comes the expenses including taxes which may be significantly changed after the divorce. That will help you figure out what level of risk you need to take.
muffins14
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by muffins14 »

This isn’t meant to be too sarcastic, but what about just buying the stocks and bonds?

Rip off the bandaid and go in like 50/50 stocks. Make your bonds half nominal and half TIPs.

if you had a portfolio, would you sell everything tomorrow to go to cash?
Crom laughs at your Four Winds
Mike Scott
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Mike Scott »

Taking some time to recover and make a plan is OK. Can you buy in small steps at 1% or 10%? Maybe buy a balanced fund in a tax advantaged account? Have you considered therapy?
Auro
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Auro »

You’ve just experienced significant trauma. Give yourself some time, please. Let your money stay in CDs or treasuries for a year. You have plenty of money for the future and you’re clearly successful at your job.

Take the year to let go of your trauma. See a therapist if you need to. Talk to a financial advisor if you need to. And WHEN you’re ready, start tip toeing back into the market.

All the best,
Auro
HomeStretch
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by HomeStretch »

Are your annual living expenses ~$100k?
= $500k of income minus $260k of savings minus estimated taxes of $140k.

Assuming your total retirement expenses (living, taxes, healthcare, etc.) are ~$125k, your current portfolio of $2.35 million represents 19x gross spending before taking into account SS benefits and sale of your business, if that’s possible. Going forward, you plan to save 2x annual gross expenses. So in 7 years, you should be at 33x annual gross expenses before taking into account earnings.

You are on track to having a well-funded retirement in probably 5 years. You plan to work 10 years. You can go with a conservative or moderately aggressive equity allocation. But your current 10%(?) equity allocation is not going to help your portfolio keep up with inflation over your remaining years. Consider increasing your equity to a minimum of 30-40% now. Then see how that feels before increasing it further to at least 50%.

A portfolio with 0% equity is not “safer” than a portfolio with some equity %. Take a look at EarlyRetirementNow’s withdrawal table here:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/?
A portfolio with a 0% equity allocation has a much lower withdrawal rate with a 100% success rate for 30-40 years of retirement than a portfolio with equity of 25% or more.
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cchrissyy
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by cchrissyy »

an idea for a mental trick that might make it easier to stomach
for the retirement account, instead of choosing a stock or bond fund or money market, find a target date fund that manages it for you and where you trust the name. it could be you like the sound of it because the target date is 10 years from now like your retirement goal. or it's something with a conservative sounding name like balanced fund or conservative growth fund or whatever. i'm trying to get at the psychology here, so that at least your tax-advantaged retirement account is invested appropriately for your time horizon while you take more time to adjust yourself for handling the rest of your money.

an example of the same thing, which i have in the taxable brokerage, would be Vanguard Tax Managed Balanced Fund. it's 50-50 and i can't say if it suits your needs i can only say it makes me feel comfortable.
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aristotelian
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by aristotelian »

Put at least 30% in stocks to hedge against interest rate risk and at least some of your bond allocation in TiPS. You have high income and $2M so whatever you do you will be fine at the end of the day so you do not have to put money at risk of doing so goes against your inclination s
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goingup
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by goingup »

You have to be who you are. If you’re conservative right now that’s OK. But you can use automation to help. Set your 401k to invest 100% SP 500 fund and just don’t look at it very often. Automate purchases in your taxable account to 100% stock as well.

This is new money, a new chapter in your life and “invest we must” Jack Bogle would say.

Leave the rest of your portfolio alone until you feel ready to deal with it.

That’s how I might cope anyways. Good luck.
CookieDough
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by CookieDough »

What I would do is set up a spreadsheet with accounts & assets as they are now, and then another with account & assets as you want them to be but are having trouble getting to. Sit with the proposed new AA and see how you feel. Try it on for size. Play with it, adjusting here and there to see what seems best.

I find that setting out a projected version helps me crystalize what I want to do in reality, and can help overcome my resistance. It helps me really visualize the changes.
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Meg77
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Meg77 »

The longer you're out of the market, the harder it will be to get back in. Bite the bullet - but in chunks.

STEP ONE - Immediately invest the 401k in the US total stock market index. That's $660K, a substantial portion of your total. You KNOW you won't touch that for decades as the prudent course is generally to spend down taxable in retirement before traditional before Roth. You KNOW the stock market will be higher decades from now. This is the easiest pot of money to just set and forget. Do not time the market, do not worry about where you're buying. Do this TOMORROW. You still have mountains of cash to figure out what to do with next.

YES the market is at all time highs. That happens regularly. And it tends to happen repeatedly and consistently in good years. Many many people missed out on the crazy run up over the last two years because they didn't want to "get back in near all time highs."

STEP TWO - Determine an overall target asset allocation. I'm not sure going from 100% equities to 50/50 is necessary, especially given how much you are investing each year. Your $2MM pile is a lot, but if you're pouring $256K into the market each year, that is going to move the needle more than what your AA is or what your fees are or anything else. Plus you're only 50. You could live another 40 years.

If it were me I'd aim for a 75 stock/25% bond split for the next decade while you're working, BUT you don't have to get there overnight.

STEP THREE - Implement the target AA. Maybe you start at the outset with 25% stocks /75% bonds. Again, your 401k is already in stocks per step one, so most/all of your taxable would then go to bonds to offset. This has the benefit of making you feel more peace of mind since the accessible funds are safest.

But then put ALL new contributions in equities until you reach your new target AA. That way you're dollar cost averaging into the stock market. THOUGH I'd also dollar cost average into the bonds over 6-12 months if it were me. Cash is still yielding more than fixed income so there is no rush. And short term rates could stay higher for longer than the market anticipates, as has been the case already for quite some time. I'd recommend setting up an auto investment from cash into a total bond market index. Maybe $100K a month.


To be clear, the "right" move is to invest all your cash today according to your long term target AA which in my opinion should be more like 5% cash, 20% bonds, 80% stocks for a guy your age with such excess cash flow and a huge savings rate. Statistically - and maybe mentally - that's your best bet. But it's OK to get there gradually if you'd rather.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Parkinglotracer
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Parkinglotracer »

Great time to add a 5 or 10 year treasury ladder for some ballast to your portfolio.
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Watty
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Watty »

It is a bit different situation but there is a wiki on investing a windfall.

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

One if the big points is that it is a good idea to put the money some place ultra safe for six months or a year while you get used to the money and get comfortable with a long term plan.

That might not have the optimal financial return over the next 40 years but you need some time to get through the transition and be comfortable with your choices so that you do not do something like sell all your investments if there is a stock market dip. A good first step in running a marathon is to not shoot yourself in the foot. :D

You also do not own a house now. It likely makes a lot of sense to not buy a house or condo anytime some but in maybe five(??) years you might be ready to buy property. This is important since if something like $500K of your money will likely be used to buy property in the not too distant future then that money should be invested conservatively. If this is the case then you don't really have $2 million that you need to figure out how to invest you really have something like a $500K house fund and another $1.5 million dollars that you eventually need to invest. In you are in an area where you are likely to eventually buy a million dollar property then you would only have $1 million to invest and if you want a 50/50 stock/bond asset allocation then you would only have $500K that you eventually need to get into the stock market. I don't know what your actual numbers are but when you consider possible future housing purchases you may not have a huge amount of stocks which you will need to buy.

You are obviously pretty stressed out. If I was in your position I would have no problem with just parking the money someplace ultra safe for six months to a year while you unwind and get comfortable with your new situation. In the meantime you could invest any new retirement savings into the stock market to start transitioning your money.
intendi
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by intendi »

OP, you might be on to something going conservative for the next 10 years.

Vanguard's updated 10-year annualized return projections:

Global bonds: 4.7%-5.7%
U.S. bonds: 4.8%-5.8%
Global equities (developed): 7.0%-9.0%
Global equities (emerging): 6.6%-8.6%
U.S. equities: 4.2%–6.2%
Topic Author
Unicorn1
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Location: Northeast TN

Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by Unicorn1 »

Thank you everyone for responding. I was actually hoping that by posting and receiving thoughtful replies, this would get my gears turning and motivate me to make a decision. I just placed buy orders for FSKAX that will bring me to ~20% equity exposure. All auto-investments this year will be in FSKAX, which will bring me to 30% by end of year. At that point, I will re-evaluate AA and will have had nearly a year to adjust to my new normal. It’s not an ideal text-book allocation, but it’s movement in the right direction. Thanks again everyone for your comments. It really helped me to take action on this.
HomeStretch
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Re: Paralyzed by Investing Fears with $2M+ Post-Divorce

Post by HomeStretch »

Thanks for the update on your quick progress! 20% - 30% is a good place to be for the year.
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