Retired at 66 with substantial portfolio

[tim47]

I am a newbie trying to persuade my wife to move into a more passive asset allocation. She fears the HBPP is to volatile to move into at this stage of our lives. We are debt free, and have approx $2.5 M in Tax deferred account and $1 M in a taxable account. She is 8 years younger than me and in better health and genes. She wants to have an adventurous retirement, which I like and support. We are not inclined to indulge with inheritances but we are considering leaving money to Salvation Army, Veterans, etc.

I am looking for thoughts on how to talk to her, including other possible modified versions of HBPP with less volatility and income possibilities. We have been conservative investors, and not being a real numbers guy, want to move a much less active role with our portfolio, which is mostly cash and SPLV right now.

I would appreciate your advice, guidance, direction, etc. Happy Easter. 

[Pointedstick]

Tim, congratulations on being so financially well-prepared for retirement! 

The PP should be less volatile than the typical in-retirement portfolio recommendations.  If you want to reduce the volatility further, you can simply increase the cash allocation.  For example, instead of 25% in each asset, you could put 40% in cash, and 20% in each of the other three (gold, long treasuries and equities).

Indeed:

http://www.riskcog.com/portfolio-theme2 ... f5p05p85pc

[notsheigetz]

I recommend Craig and MT's book and you can also go over on Amazon and read my review where I talked about my parents conservative investing philosophy of staying in cash. This may be "conservative" but if your wife thinks it's without risk she ought to think again. With 2.5 million you probably won't end up like my parents but I don't think I would want to take that chance.

[sophie]

The PP is admirably suited for retirement.  With the 25% cash position, you'll be able to ride out fluctuations in the other three assets easily.  The idea is to let dividends and interest pile up in the cash allocation, and rebalance when you hit the 15% band.  Or you can rebalance annually, to spread out the tax hit.  The portfolio is also very tax efficient, more so than a cash-heavy portfolio where all the gains are taxed as ordinary income.

The charts in Craig and MT's book, showing fairly steady 3-5% real returns contrasted with the huge fluctuations in equity returns, are definitely going to help when you talk to your wife.  The best way is probably to implement the PP in only a small part of your savings, like 10%, to let her see how it works for a year or two.  It's a very counterintuitive mix, and until you see how it works in real life it can be hard to believe that three such scary sounding assets can give you such even performance.

[MachineGhost]

The bottom line is if you and your wife cannot stomach losing 25% for a year or two with the PP before a hopeful recovery (the past is no prediction of the future...), then use the cash as a volatility-decreasing knob.

[dualstow]

I am looking for thoughts on how to talk to her, including other possible modified versions of HBPP with less volatility and income possibilities.

Is your wife interested in staying with SPLV, or does she have other ideas?
Start by asking her to think of the HB portfolio as a package. Yes, some of the components look volatile in isolation, because they *are*. However, the package is anything but volatile.

Income possibilities: high-quality munis?

We have been conservative investors, and not being a real numbers guy, want to move a much less active role with our portfolio, which is mostly cash and SPLV right now.

A less active role? Cash and SPLV aside, are you trading something frequently?

[clacy]

This is a very relevant question, and it's quite easy to tailor the PP to your risk appetite, IMO.  It may not be the standard 4 x 25% but you can still stay within the general principles in many different ways.

As others have stated, just increase the cash, decrease the other assets.

Or you could substitute less volatile instruments such as high yield bonds instead of stocks.  They're very highly correlated with stocks but substantially less volatile.  Intermediate treasuries instead of LTT and so on.

10% VTI
15% High Yield Bond Fun

10% LTT
15% Intermediate treasuries

10% Gold
15% TIPS

25% Cash

That will give you a slightly lower return, but reduces the volatility by 42% (relative), reduces Max DD by 25% and gives you a higher Sharpe Ratio.

I'm not a big fan of "one size fits all".  IMO, you're far better off just using what will make you and your wife comfortable, rather than trying to sell her on an investment strategy.

That portfolio is just an example of how you can construct a portfolio that stays within the general framework of the PP, but strays enough to fit someones risk appetite.

[sophie]

The bottom line is if you and your wife cannot stomach losing 25% for a year or two with the PP before a hopeful recovery (the past is no prediction of the future...), then use the cash as a volatility-decreasing knob.

But what would happen to cash if inflation took off?  The real return losses on a cash-heavy portfolio could get pretty bad too.

With 25% cash, there would be no need to sell off the volatile assets during a 25% (hypothetical) 2 year drawdown.  In fact, you'd be rebalancing into the volatile assets, and then cleaning up after they recover.  See 2009.  A lot of the people on this forum were very happy that year.

One thing to keep in mind is that there is only one economic condition when the volatile assets will all be declining:  a tight money recession, which is a time-limited event.  In all other conditions, at least one asset will be doing well enough to carry the portfolio.  The moving parts in the PP do not exist in isolation, nor do they fluctuate independently.  That's important to remember when imagining worst-case scenarios.  I imagine the PP as a pigpen with 4 feeding troughs.  The market is like pigs running between the different troughs.  Right now, people are piling into stocks with money taken out of cash, bonds, and gold.  As soon as stocks drop, which they will eventually, people will sell the stocks, and what will they do with the proceeds?  Buy bonds and gold of course!  The whole thing is kind of fun to watch.

Of course if you tell your wife about the pigs and troughs, be sure to tell her where you got it from so she doesn't think you've gone nuts :-)

[Thomas Hoog]

Advice 1: never mention your absolute amount of money on public fora. It is just not safe

[notsheigetz]

Advice 1: never mention your absolute amount of money on public fora. It is just not safe

Not to mention it can be depressing to those of us nearing retirement who haven't been quite as successful.

[moda0306]

Tim,

Since others are covering the topic of portfolio allocation so well, I figured if give you my 2 cents on your vehicle allocation. Specifically, are you using te right tax vehicles to maximize flexibility and minimize taxes.

It appears to me you have $2.5 million in a pre-tax IRA or something similar.  Is any of this Roth?  If not, I would definitely suggest to start doing Roth conversions... The size of which would depend on where your tax situation would end up as a result.

As you do this, draw down your taxable assets first, and do not take any distributions from tax sheltered accounts.

You very likely have a situation where tens of thousands of dollars easily are on the table if you attack this right.

Have you elected social security yet?

If not, your situation lends itself extremely to deferring your SS election as long as you can. Your spouse's election is probably one you'd want to do the "spousal election" as early as she can (her full retirement age... Probably 66).  She will continue to receive your increased benefit after you pass... That is, unless she has paid in a good chunk more to SS than you over time.

If you want some more detail on how to scheme this out without broadcasting a whole lot more of your individual situation, you can message me directly. If you're merely curious why I make these assertions, I can dive into more detail.

[MediumTex]

Advice 1: never mention your absolute amount of money on public fora. It is just not safe

He may have already thought of that and instead of telling us about his actual $50 million nest egg he just threw out $2.5 million as a random figure.

[tim47]

Thanks everyone for your generous support, advice, coaching, informing etc. My wife and I just returned from a family Easter outing, and we really enjoyed reading your posts. We both are clear that years and years of experience and knowledge were passed on to us over the weekend, and we greatly appreciate it.

BTW, MT was spot on, although a bit exaggerated in his numbers. And yes, posting numbers are very risky and stupid.

I am reading the book and I have shared various points and charts with my wife.  As MG suggested, she thinks this market is totally unpredictable and never experienced before, and therefore fears a supstantial loss in the near (3-5 years) that will impact her more than myself.  Basically, since the Tech Boom, I have invested in a small collection of the lowest votility (short and long term) Junk and HiYield Bond mutual funds, taking action when any hit their 30 Day MovAvg. A 6% loss in 2008 really spooked her. I have had a decent and smooth ride with this formula. She is not attached to SPLVX since it is a tactical investment. She eats and appreciates pork!!!!  She is totally happy with a low six figure $ portfolio that she can trade stocks she hears about with no accounting to anyone!!!!

Honestly, I think she would prefer what I have been doing (with more monitoring since I am retired)  than try a new horse at 66. I continue to remind her that the Bond Donkey we used was nearly blind and is not really suitable for the future.

She likes the idea of using more cash in the allocation and looking at less volitile allocations as many of you suggested. She is smart and tough, as evidenced by her breaking the Glass Ceiling at one of the largest US defense companies where she was the first female CEO and President of one of their Subsidaries.

I need to digest your posts now.  Thanks again for all your support.

[rocketdog]

I am a newbie trying to persuade my wife to move into a more passive asset allocation. She fears the HBPP is to volatile to move into at this stage of our lives.

That's funny -- I consider the HBPP to be too conservative for me with 15+ years to go until retirement!  I'm looking to shift my retirement funds into the PP as I approach retirement, to minimize volatility.  I'm keeping most of the volatility in my VP. 

Keep a portion of your funds in a VP and tell your wife not to worry so much about the PP side of things. 

[annieB]

Tim:

I think that the more you study the PP,the more you'll appreciate its conservative bent.
Playing the bond funds is going to get more risky going forward.
Best of luck in your planning.

[dualstow]

She is totally happy with a low six figure $ portfolio that she can trade stocks she hears about with no accounting to anyone!!!!

Well, you did say she wanted an adventurous retirement.

She is smart and tough, as evidenced by her breaking the Glass Ceiling at one of the largest US defense companies where she was the first female CEO and President of one of their Subsidaries.

Wow, it seems like there are a lot of women at the helm of defense co's. Phebe Novakovic at General Dynamics,  Marilyn Hewson at Lockheed...
Cool.