$1 million invested over next 20 years; help with AA

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1030danielle
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$1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 7:44 pm

Hi gang,

One of my financial goals is to take $1M from inherited assets (in my taxable brokerage account) and make it last as an income source for me over the next 20 years. I am 47 now. In 20 years is when social security and pension will kick in, and when I plan to start drawing from my Roth, tIRA and / or 401(k) as needed. (Side note: My retirement goal is a different matter, but it seems on track.)

To achieve the goal of making the $1M last, I’m eyeing a 50/50 asset allocation between VTSAX (total Stock market index) and either VBTLX (total bond market index, ER 0.05%) or VWALX (high-yield, tax-exempt bond, ER 0.09%). I have emergency funds elsewhere.

The reasoning for the high-yield- tax-exempt bond fund is that it came with the inheritance and sits at around $300K already. Also, since the account is taxable, I thought it might help offset taxes. Taylor once posted a link to bankrate.com to illustrate that tax-exempt bonds are not necessarily beneficial compared to total bond market (it had to do with the TEY, tax equivalent yield, but I’m afraid I couldn’t make heads or tales of it.

Comparing expense ratios alone (using the online calculator https://www.nerdwallet.com/blog/invest ... alculator/), there’s about an $1800 difference in favor of total bond. I input a dollar amount of $500K over 20 years.

I also realize the high-yield bond fund is riskier than the total bond fund. As I am seeking income, I am wondering if a) my asset allocation is too high and b) whether the high-yield bond would not do enough to offset the risk of the stock side of the portfolio.

I would like to get about $40-$50k/annually from this income source. It is not out of the question to work part-time, but I would like to try and swing just the income from this source.

Federal tax: 22%; no state tax for me. I’m 47, single.

I do have a much longer post in the Asking Portfolio Questions format if you feel that will help.

Cheers,

Danielle
Three-funder with a tech tilt.

JBTX
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Re: $1 million invested over next 20 years; help with AA

Post by JBTX » Fri Jul 31, 2020 9:05 pm

I don't have the numbers, but I would think a 50/50 allocation of stocks and conventional bonds could pretty safely get you a 20 year withdrawal rate of 4-5%, which is your goal. To extent you can modify your withdrawal slightly downwards during a market downturn you can pull out a little more.

I'd be very wary of "high yield tax exempt". I have no idea what that may be. It might not be at all what you think and could be fairly risky. I lost about $15k in the fund linked below. Bottom line I really didn't know what was in it. It just seemed like if it was "municipal" it would be safe. Big mistake.

https://www.wsj.com/articles/SB973204807223861825

At 22% and no state tax I probably wouldn't worry with tax exempt anyway. They are usually only advantageous for people in higher tax rates and/or with state income tax.

For the bond portion, given low rates, I may also consider ibonds, cds, TIPS (if tax deferred account).

Also, you are at the age where an eebond annuity could make a lot of sense.

https://www.forbes.com/sites/theboglehe ... 374bf87ba3

This is kind of between your 20 year goal and retirement. With bond rates near zero, eebonds, if kept 20 years, earn about 3.7%. Perhaps delay social.security to 70.
Last edited by JBTX on Fri Jul 31, 2020 9:10 pm, edited 1 time in total.

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geerhardusvos
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Re: $1 million invested over next 20 years; help with AA

Post by geerhardusvos » Fri Jul 31, 2020 9:07 pm

1030danielle wrote:
Fri Jul 31, 2020 7:44 pm
Hi gang,

One of my financial goals is to take $1M from inherited assets (in my taxable brokerage account) and make it last as an income source for me over the next 20 years. I am 47 now. In 20 years is when social security and pension will kick in, and when I plan to start drawing from my Roth, tIRA and / or 401(k) as needed. (Side note: My retirement goal is a different matter, but it seems on track.)

To achieve the goal of making the $1M last, I’m eyeing a 50/50 asset allocation between VTSAX (total Stock market index) and either VBTLX (total bond market index, ER 0.05%) or VWALX (high-yield, tax-exempt bond, ER 0.09%). I have emergency funds elsewhere.

The reasoning for the high-yield- tax-exempt bond fund is that it came with the inheritance and sits at around $300K already. Also, since the account is taxable, I thought it might help offset taxes. Taylor once posted a link to bankrate.com to illustrate that tax-exempt bonds are not necessarily beneficial compared to total bond market (it had to do with the TEY, tax equivalent yield, but I’m afraid I couldn’t make heads or tales of it.

Comparing expense ratios alone (using the online calculator https://www.nerdwallet.com/blog/invest ... alculator/), there’s about an $1800 difference in favor of total bond. I input a dollar amount of $500K over 20 years.

I also realize the high-yield bond fund is riskier than the total bond fund. As I am seeking income, I am wondering if a) my asset allocation is too high and b) whether the high-yield bond would not do enough to offset the risk of the stock side of the portfolio.

I would like to get about $40-$50k/annually from this income source. It is not out of the question to work part-time, but I would like to try and swing just the income from this source.

Federal tax: 22%; no state tax for me. I’m 47, single.

I do have a much longer post in the Asking Portfolio Questions format if you feel that will help.

Cheers,

Danielle
Do you have retirement income besides Social Security after the 20 years? What’s your total net worth? What do you currently spend per year? What do you want to spend in retirement?

At first glance, seems like you’ll be fine and I would recommend a 70/30 or 60/40 as higher equity will help you go the distance since you have emergency funds as cushion already
VTSAX and chill

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1030danielle
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Re: $1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 9:27 pm

geerhardusvos wrote:
Fri Jul 31, 2020 9:07 pm

Do you have retirement income besides Social Security after the 20 years? What’s your total net worth? What do you currently spend per year? What do you want to spend in retirement?

At first glance, seems like you’ll be fine and I would recommend a 70/30 or 60/40 as higher equity will help you go the distance since you have emergency funds as cushion already
Hi.

Yes. Besides Social Security, I have a pension. I currently have about $300,000 in my IRAs and 401(k). I plan to invest those over the next 20 years at about 80/20 asset allocation and slowly lower that to 60/40 as I get closer to retirement.

Current net worth is about low seven figures, with recent inheritances. I spend about $50 grand annually, a lot of it discretionary. My boyfriend and I are about to move in together, so that will likely lower my expenses. It’s hard to say what I want/need to spend in retirement, but I’m guessing roughly about what I spend now, and likely more with medical expenses. Just to cover my butt.

I’ve also using portfolio visualizer like a mad woman, testing out various asset allocations, but I don’t think it’s really helping me. LOL . I keep on choosing the “five worst years first”, and that scares the pants off me.

I like the idea of maybe raising the asset allocation, though, because as you say, the emergency funds can help if I need it.
Three-funder with a tech tilt.

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1030danielle
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Re: $1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 9:29 pm

JBTX wrote:
Fri Jul 31, 2020 9:05 pm
I don't have the numbers, but I would think a 50/50 allocation of stocks and conventional bonds could pretty safely get you a 20 year withdrawal rate of 4-5%, which is your goal. To extent you can modify your withdrawal slightly downwards during a market downturn you can pull out a little more.

I'd be very wary of "high yield tax exempt". I have no idea what that may be. It might not be at all what you think and could be fairly risky. I lost about $15k in the fund linked below. Bottom line I really didn't know what was in it. It just seemed like if it was "municipal" it would be safe. Big mistake.

https://www.wsj.com/articles/SB973204807223861825

At 22% and no state tax I probably wouldn't worry with tax exempt anyway. They are usually only advantageous for people in higher tax rates and/or with state income tax.

For the bond portion, given low rates, I may also consider ibonds, cds, TIPS (if tax deferred account).

Also, you are at the age where an eebond annuity could make a lot of sense.

https://www.forbes.com/sites/theboglehe ... 374bf87ba3

This is kind of between your 20 year goal and retirement. With bond rates near zero, eebonds, if kept 20 years, earn about 3.7%. Perhaps delay social.security to 70.
Hadn’t thought about CDs. I like the idea of TIPS in general, as a hedge against inflation. It is a taxable account, though. So I’m not sure if they would be appropriate?
I’ll read up a bit more about the EE bond annuity. Thank you.
Three-funder with a tech tilt.

JBTX
Posts: 6470
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Re: $1 million invested over next 20 years; help with AA

Post by JBTX » Fri Jul 31, 2020 9:36 pm

1030danielle wrote:
Fri Jul 31, 2020 9:29 pm
JBTX wrote:
Fri Jul 31, 2020 9:05 pm
I don't have the numbers, but I would think a 50/50 allocation of stocks and conventional bonds could pretty safely get you a 20 year withdrawal rate of 4-5%, which is your goal. To extent you can modify your withdrawal slightly downwards during a market downturn you can pull out a little more.

I'd be very wary of "high yield tax exempt". I have no idea what that may be. It might not be at all what you think and could be fairly risky. I lost about $15k in the fund linked below. Bottom line I really didn't know what was in it. It just seemed like if it was "municipal" it would be safe. Big mistake.

https://www.wsj.com/articles/SB973204807223861825

At 22% and no state tax I probably wouldn't worry with tax exempt anyway. They are usually only advantageous for people in higher tax rates and/or with state income tax.

For the bond portion, given low rates, I may also consider ibonds, cds, TIPS (if tax deferred account).

Also, you are at the age where an eebond annuity could make a lot of sense.

https://www.forbes.com/sites/theboglehe ... 374bf87ba3

This is kind of between your 20 year goal and retirement. With bond rates near zero, eebonds, if kept 20 years, earn about 3.7%. Perhaps delay social.security to 70.
Hadn’t thought about CDs. I like the idea of TIPS in general, as a hedge against inflation. It is a taxable account, though. So I’m not sure if they would be appropriate?
I’ll read up a bit more about the EE bond annuity. Thank you.
TIPS for a taxable account aren't typically ideal, but it probably depends.

While the idea of bucketing can make it easier to get your arms around matching your portfolio with you time frames, I wouldn't let it dictate to the point of inefficiency. For instance, if you have retirement accounts, perhaps put the TIPS there.

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geerhardusvos
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Re: $1 million invested over next 20 years; help with AA

Post by geerhardusvos » Fri Jul 31, 2020 9:38 pm

1030danielle wrote:
Fri Jul 31, 2020 9:27 pm
geerhardusvos wrote:
Fri Jul 31, 2020 9:07 pm

Do you have retirement income besides Social Security after the 20 years? What’s your total net worth? What do you currently spend per year? What do you want to spend in retirement?

At first glance, seems like you’ll be fine and I would recommend a 70/30 or 60/40 as higher equity will help you go the distance since you have emergency funds as cushion already
Hi.

Yes. Besides Social Security, I have a pension. I currently have about $300,000 in my IRAs and 401(k). I plan to invest those over the next 20 years at about 80/20 asset allocation and slowly lower that to 60/40 as I get closer to retirement.

Current net worth is about low seven figures, with recent inheritances. I spend about $50 grand annually, a lot of it discretionary. My boyfriend and I are about to move in together, so that will likely lower my expenses. It’s hard to say what I want/need to spend in retirement, but I’m guessing roughly about what I spend now, and likely more with medical expenses. Just to cover my butt.

I’ve also using portfolio visualizer like a mad woman, testing out various asset allocations, but I don’t think it’s really helping me. LOL . I keep on choosing the “five worst years first”, and that scares the pants off me.

I like the idea of maybe raising the asset allocation, though, because as you say, the emergency funds can help if I need it.
You are safely financially independent! Congratulations :beer
VTSAX and chill

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1030danielle
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Re: $1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 9:43 pm

Are EE bonds the same as I bonds, as below?
https://www.bogleheads.org/wiki/I_Bonds_vs_TIPS
Three-funder with a tech tilt.

mikeyzito22
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Re: $1 million invested over next 20 years; help with AA

Post by mikeyzito22 » Fri Jul 31, 2020 9:47 pm

I really don't mean to be a downer. However, if you worked say another 5 years there wouldn't be any question on this forum that you could "make it 15 years." If you quit now, do you know how much your pension will be? I would guess it would be a lot smaller than if you worked another 5 years, heck even just until 50. Just putting it out there as an option. Who knows, a lot can happen over a 20 year time frame. Otherwise 50 VTSAX and 50 VBILX would be my choice. I mean really, there are many options for bond funds. Good luck!

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1030danielle
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Re: $1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 9:52 pm

mikeyzito22 wrote:
Fri Jul 31, 2020 9:47 pm
I really don't mean to be a downer. However, if you worked say another 5 years there wouldn't be any question on this forum that you could "make it 15 years." If you quit now, do you know how much your pension will be? I would guess it would be a lot smaller than if you worked another 5 years, heck even just until 50. Just putting it out there as an option. Who knows, a lot can happen over a 20 year time frame. Otherwise 50 VTSAX and 50 VBILX would be my choice. I mean really, there are many options for bond funds. Good luck!
I hear ya. Unfortunately, that Pension ship has sailed ... It was from a job I left about three years ago. I had been slightly worried that the Social Security income would drop dramatically, but it won’t make that much of a difference, according to a tool that someone had posted here on the forum. As you say, a lot can happen in 20 years. I’m just trying to get a good idea of an income stream.
Thank you :)
Three-funder with a tech tilt.

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1030danielle
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Re: $1 million invested over next 20 years; help with AA

Post by 1030danielle » Fri Jul 31, 2020 9:52 pm

1030danielle wrote:
Fri Jul 31, 2020 9:43 pm
Are EE bonds the same as I bonds, as below?
https://www.bogleheads.org/wiki/I_Bonds_vs_TIPS
Never mind. I see that they are not. :-)
Three-funder with a tech tilt.

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