How Much Do You think You Need to Retire? What Age Will You/Spouse Retire? Investment and General Retirement Issues (Part 3)

[Hoggirl]

I don’t understand this. My advisor runs everything by me before making any trades. I, too, have significant, long-term capital gains in my brokerage account. We allow for a certain amount of capital gains to be taken each year IF he wants to change anything. Some years he doesn’t, but he knows the amount we have built into our planning.

Can your mom not say, “Don’t do that”??

I do understand this issue. I am definitely overweighted in equities in this account, but we achieve a proper balance across all our assets - not just within this one account.

[busdriver11]

I don’t feel like I remember the advisor asking about rebalancing in the brokerage account before. I think that Vanguard will rebalance automatically, with their advised accounts, maybe if it hits a certain percentage of equities, based upon risk. The fact that he’s even asking is great, I’m guessing the amount stuck out to him.

We did ask him about not doing any rebalancing because of taxes, and I’m quite curious what he’ll say.

It’s good your advisor asks you. Nobody wants a big tax surprise.

[bluebayou]

what is in her IRA? Is it already 100% fixed income? If not, rebalancing should start there, as it’s tax-deferred.

OTOH, any available 0% cap gains bracket should definitely be used. Even filling the 12% bucket is fair game, as her heirs (you and sibs?) are likely in a higher bracket than 12%.

And if she is charitably inclined, she can donate appreciated stocks from her taxable account.

[busdriver11]

Her IRA looks like it’s all bond ETFs and mutual funds.

She would be at the 15% capital gains rate for any rebalancing of her brokerage account. As far as tax rates, I would be in a higher bracket, but I’m not sure about my sister. But because of the step up in basis, we wouldn’t pay any taxes upon her brokerage account after inheriting it, besides some Washington state estate tax. So it’s not like she’d be saving us taxes by paying them herself from the brokerage account, though she’d save us taxes by taking more out of her IRA. I don’t even like to talk about end of life issues with her, actually, it makes me uncomfortable. Funny, I’m happy to talk about it all day with my kids.

[bluebayou]

if she won’t likely ever need the funds, why not just let it ride, i.e., maintain a more aggressive portfolio? (Personally not a fan of paying taxes when one doesn’t have to, and as you note, you will receive step up upon death.) And she can always sell a few thou next year if she has an unexpected need (new roof, ac, etc.).

[busdriver11]

I don’t see a situation where she will ever need to sell these funds. She saves money every month after SS and pensions, with a low standard of living and other substantial savings. Just don’t see a good reason to pay more taxes, so I agree…let it ride.

[Iglooo]

I don’t need money but still rebalance as a precaution. Too heavily weighted on equity.

[SOSConcern]

Appreciate all the feedback - that is why I bounced my information off to this group.

”Invest in what you know” - and on the long term, stocks outperform bonds. The 5 funds we sold were 29% of this stock account. Two funds sold were Redwood RWDYX and RWMIX and both had notations on the cost basis with a W “previous wash sale disallowed” notation, so will see what happens on the tax situation for losses (only one of the 5 funds had a gain from purchase price in 2022).

I am fine with money sitting in money market until I figure things out - have some other things to do which are time-sensitive (company coming and need to get things done at our home). Just caught that when we opened this Fidelity stock account in 2022, we didn’t designate beneficiaries, so did that today. Our daughters will appreciate that when the time comes….

Yes, will look at index funds and other things. Will also tap into a personal friend at the tail end of my action item with this fella who does a lot on the stock market every day and does very well with it. Has multiple degrees from MIT and enjoys what he does with the markets.

Interesting report on the Percentage of US Equity Funds Underperforming their Benchmarks. IDK how much ‘risk-adjusted’ comes into play. Will discuss this report with FA in our July meeting.

I know our primary account in 401k is doing very well (I do check that periodically and we also look at monthly line items on our balance sheet- since 2016, the S & P 500 outperformed JGVVX, JP Morgan Growth Advantage R6 fund 4 years – this fund also did better on 10-year, and 3-year, while the S & P 500 did better on 1-year and 5-year. The difference on the 10-year was 3.42% (JGVVX better than S & P 500), and since inception 2.61% better returns than S & P 500. The 3-year and the 5-year differences are both about 1% (S & P better on the 5-year). We haven’t been in it all the years with 401k - it is different investment choices and what has performed better. This fund is Morningstar 4-star rating, has turnover 36%, inception date 12-13-2013, annual operating expense of 0.61%, and net expense ratio of 0.5%. With Empower/Employer 401k we have a limited number of investment choices. Employer had moved 401k over the years from Dreyfus to Prudential right in the midst of Nov/Dec 2009 and we had very poor reporting information for a pretty long period with the big slide on losses. Got almost back up to our 2007 balance by the end of 2010 (and that was with employer and DH continuing to invest). 2011 had .94% return, 2012 had 12.88% return, then a terrific year of 2013 with 25.87% return. Employer changed from Prudential to Empower Dec 2018, so had to learn their ‘system’ - and look at the investment choices, tweaking those. I look at monthly, quarterly, 6-month, 9-month and annual returns.

Our Balance Sheet since we retired has stayed about the same - we are content with what we spend, we spend on things we want. Our primary residence move to another state will take up time/energy/money - and am moving out funds from 401k what we can within our tax situation (from before taxes to our stock account which is taxable) - we need these funds to be accessible with the primary residence move. In a few years we will be with RMDs. Expect to be in new state, new residence, and have things settled down - might look at setting up a trust. We have pre-tax Annuities and this 401k. We draw monthly off most of our Annuities (we just invested in a new Annuity after the maturing of another and have to wait a year to draw down on that one).

I had clipped an article July 2024 out of the Twin Cities Pioneer Press “Your Money” which was written by two FAs that co-host a radio program - and they had this in the article:

”To achieve financial wellness, try ‘practicing’ some or all of the following activities….” and they had comments after each of these main points:

1 Increase your financial literacy

2 Create a net worth statement

3 Track your spending

4 Reduce unnecessary spending

5 Increase retirement savings contributions

6 Pay off bills

7 Set up or add to an emergency fund

8 Check your credit report or score

9 Review your asset allocation

10 Work with a financial advisor

”…and pay attention to your overall physical health. Soon you’ll develop confidence in your ability to achieve and enjoy the financial success you deserve.”

[DadTwoGirls]

@Iglooo

Too heavily weighted on equity.

I remember a rule from many, many years ago that a person or a couple’s percent in equities should be “100 minus their age”. Thus if you are 30, you should be 70% in equities, but if you are 70, you should be 30% in equities. Based on this rule we too are overweighted in equities.

However, inflation seems to have become pretty solidly entrenched in our world. One thing I had not thought about ahead of time, but we might have seen over the past few years, is that when you have inflation driven by an increase in the money supply, some of that increase in the money supply seems to affect the price of stock.

One impact is that every time I go to the grocery store I am dumbfounded by the price of pretty much everything, but then I think “oh, we can afford this, and this is just what stuff costs now”. I am wondering where prices will go over the next ten or twenty years.

On the one hand this seems to me to suggest that an overweight in stocks might be useful as a hedge against inflation. However, this also means that there really is no investment that is safe, because stock prices can plummet and cash in the bank can be wiped out by inflation.

Perhaps we each just do the best that we can and hope that we come out lucky in the end.

And it is not clear to me what percent we want in equities right now. I no longer trust the old rule.

[bluebayou]

the old rule of thumb – Age in Bonds/Fixed income – was rather conservative. I told my 30-year old kids that they s/b 100% in equities at their age.

That said, the best Asset Allocation rule is whatever helps you sleep well at night.

[beebee3]

@bluebayou

That said, the best Asset Allocation rule is whatever helps you sleep well at night.

[SOSConcern]

If the apartments my parents owned were in the city 50 miles away, our family would have kept them and have an apartment manager/maintenance person for them - very well built and city where properties go up in value.

Some on this thread have various investments. Sometimes commercial properties are excellent.

If DH and I lost half of our net worth we would still be OK if we didn’t have health crises that required a lot of out-of-pocket expenses. As it is now, we hope to pass on funds to children/grandchildren as my parents did.

SWAN is important, and some of that is having funds with comfortable risk/return.

Taxation has to be on your sightline - and some places are getting so expensive to be retired for a lot of reasons including taxes and perhaps crime/safety.

[Data10]

@SOSConcern

Two funds sold were Redwood RWDYX and RWMIX and both had notations on the cost basis with a W “previous wash sale disallowed” notation, so will see what happens on the tax situation for losses (only one of the 5 funds had a gain from purchase price in 2022).

They both have a 2.x% expense ratio, which seems high for a fixed income fund. Not surprisingly both had returns well below macro index benchmark (below both junk bond and short term bond indexes for the volatility fund that chooses between these 2 groups) during the period since 2022, after this high ER.

@SOSConcern

Interesting report on the Percentage of US Equity Funds Underperforming their Benchmarks. IDK how much ‘risk-adjusted’ comes into play. Will discuss this report with FA in our July meeting.

I pasted the risk adjusted table earlier, as that seemed like more of an apples to apples comparison. Looking at nominal returns without risk adjustment, the results are similar, as listed below.

@SOSConcern

I know our primary account in 401k is doing very well (I do check that periodically and we also look at monthly line items on our balance sheet- since 2016, the S & P 500 outperformed JGVVX, JP Morgan Growth Advantage R6 fund 4 years – this fund also did better on 10-year, and 3-year, while the S & P 500 did better on 1-year and 5-year. The difference on the 10-year was 3.42% (JGVVX better than S & P 500), and since inception 2.61% better returns than S & P 500.

JGVVX is a large cap growth fund. It essentially invests in tech. ~Half of the weighting is in the following 8 companies – Nvidia, Apple, Google, Broadcom, Microsoft, Amazon, Meta, and Tesla. It’s not surprising to me that a tech heavy fund outperformed S&P 500 in recent years, with the AI boom. The tech sector may or may not continue to overperform the overall market, but overweighting this sector in your portfolio increases risk. Over the past 10 years, the JGVVX fund has had a near identical overall return to VIGAX (monthly returns have 98% correlation), which is a passive fund that tracks the CRSP US Large Cap Growth Index . This implies that the higher return than S&P 500 primarily relates to the tech sector overperforming, rather than the active management.

[SOSConcern]

“active management” - they are choosing these funds as part of their portfolio.

”The tech sector may or may not continue to overperform the overall market, but overweighting this sector in your portfolio increases risk.” That is OK because we believe the portfolio managers are going to properly assess which tech stocks to buy/sell as part of the portfolio turnover. If the fund doesn’t do as well as other options in our Empower/employer 401k, we can change our investment choices.

Nice suggestion on the VIGAX. I will look into that.

[Data10]

@SOSConcern

That is OK because we believe the portfolio managers are going to properly assess which tech stocks to buy/sell as part of the portfolio turnover.

If you mean the portfolio managers for JGVVX, they don’t seem to be any better at avoiding losses during downturns than the large cap growth index fund referenced in my earlier post. JGVVX didn’t exist during severe downturns, such as when tech sector lost >80% of share price during the Dot Com Crash, so only recent smaller downturns are available. A comparison is below, listing peak before downturn to lowest point of drawdown.

Iran War Downturn – JGVVX down 23%, Growth Index down 17%
Liberation Day Downturn – JGVVX down 23%, Growth Index down 22%
2022 Downturn – JGVVX down 43%, Growth Index down 36%

[shawbridge]

I think those rules of thumb about allocation between debt and equity may have originated in a time when we did not live so long.

@SOSConcern, I know a number of people who invest their own funds. In an earlier life, I worked for a family office that invested capital for a family and later co-founded a quantitative hedge fund. I know how much work and how hard it is to outperform. I don’t invest solely in indices – I invest in some instruments designed to take advantage of particular skill/connections (e.g., VC fund run by founders with deep industry knowledge and a clear thesis; PE fund focused on infrastructure fund run by group with deep political connections; private credit fund with a very low risk strategy). Much of the rest is in indices, though I will make particular asset allocation choices. A few years ago, I thought we were going to enter a higher inflation environment and asked my FAs to help position for that. More recently, I have increased exposure to stocks that pay increasing dividends and companies in the water business (the latter through a couple of ETFs that imperfectly match my investment thesis). I use FAs but less for investment advice and more for risk management and administration.

[gpo613]

Inflation is one thing I don’t fret over in the future. I still have time until I retire, but the plan is to retire with no house payment nor a car payment. The only inflation I am worried about is medical costs, but I am doing everything possible to keep myself healthy going into retirement. Of course nothing is certain and even the healthiest people can easily end up needing medical care. But overall in a two person household everyday items should not cause us financial ruin. I can remember my Dad complaining heavily when gas hit $4 a gallon the first time back in like ‘09 or something. I said to him that if gas were $10 a gallon it wouldn’t affect his life much as he drove less than 5K miles a year.

I have for years ran scenarios on the portfolio and always used 7.5%-9% rate of return before retirement and then 4-5% during retirement. Things pretty much always work out. I know we have the portfolio more conservative when we retire. We have already started that to some degree. Some of our investments have guardrails on them at the bottom and top.

[shawbridge]

@gpo613, fixed rate mortgages are actually a good thing in an inflationary enviroment. I have a 2.625% 30 year mortgage and I wish I could have borrowed more than the conforming mortgage limit at the time.

In addition to health care costs, we have seen pretty high inflation rate for services, but the inflation I would be concerned about is the inflation rate for services. As we get older, we will require more services. You might mow the lawn today but might not want to when you are 75. You might not be able to cut your toenails and would need to go to a nail place. You might need someone to lift heavy things as part of errands or cleanup. This would also be related to the cost of the non-medical aspects of health care for aging folks.

[blueberriesforsal]

A small flag I throw out there when planning one’s financials on “not having a mortgage when I retire…” only as an older friend of mine forecast his retirement budget and subtracted his “mortgage payment” from it, as he said his 30 year mortgage would be paid off by then.

But…until I asked, he had forgotten that his property taxes and homeowner’s insurance were bundled into what he thought of as his “mortgage payment.” He’d mistakenly dropped those both in his planning.

[oldfort]

I have never understood why people feel they must have their house all paid for when retired. It is not the the best investment strategy, must be psychological.