HTG Investment Advisors Inc.
Senior Wealth Advisor
Lex Zaharoff specializes in helping corporate executives make the right financial decisions as they go through job transitions - a busy time, often filled with uncertainty and emotions for both executives and their spouses.
Lex's specialization is based on 33 years of experience analyzing the complexity of corporate-derived wealth as well as his personal experience as a corporate executive who has gone through similar transitions. He is a guide and sounding-board for his clients, helping them stay the course through volatile times – a role which often feels as if he is their investment therapist.
Since job and career transitions raise financial issues that are complex and interdependent, clients benefit from the resources of his whole firm. Lex and his team are twelve professionals with complementary skill, working in a friendly, collaborative environment and drawing from their firm’s 22 years of experience helping more than 200 clients with issues such as these.
Lex is also fortunate to co-teach the MBA course, Wealth Management and Private Banking at NYU's Stern School of Business. For Lex, it is particularly gratifying to share thirty years of lessons learned to help his students better advise their clients.
BSE, Engineering, Princeton University
MBA, Harvard Business School
The stock market has returned to what has historically been a normal level of volatility which leads to the important issue you raise as to how much exposure to stock markets do you need to take in order to maintain your spending needs and, equally important, how much are you comfortable taking. The latter is important since what you don't want is to find that you don't have the emotional tolerance to stay the course now that we have returned to a more normal level of volatility. Since your plans are to draw $30,000 from a $800,000 portfolio, which is about 3.8%, you could have some of the portfolio invested in the stock market. Since you are only 70, you and or your spouse are likely to be drawing from this portfolio for at least a decade and quite possibly more than 20 years. That is a long time horizon during which inflation will erode the value of a low volatile portfolio of only high quality fixed income funds. Some stock market exposure would make sense to maintain given your time horison, but each of us has a different capacity and tolerance for volatility. Any shift should be gradual and one should always try to avoid the temptation of trying to time when to enter or exit stock markets.
Both are fund structures with many similar regulations. The main differences between ETFs and mutual funds are pricing and trading.
Mutual funds are only purchased and sold at the end of the day, after the Net Asset Value (NAV) of the underlying portfolio of securities is determined, and are thereby always priced at exactly NAV. Mutual funds incur no additional cost due to a bid/ask spread or possibility of trading at a premium or a discount.
Exchange-traded funds (ETFs) are pooled investment vehicles that can be traded on the stock exchange like a single stock. Similar to stocks, ETF shares are priced and traded continuously throughout the day, with their price determined by investor demand. As a result, ETF shares could be priced higher or lower than their underlying securities’ values, known as the fund’s net asset value (NAV).
ETFs and mutual funds both have internal expenses (expense ratios) so in comparing similar funds, it remains important to compare fees. Both structures can have equally low fees. For example, Vanguard's equivalent ETF and indexed mutual fund have the same fee.
While ETFs provide intra-day liquidity for investors who trade often, long-term investors who do not have a need for this benefit can achieve the same result by using open-ended mutual funds with similar features. By using mutual funds, an investor avoids the need to monitor bid-ask spreads and premiums/discounts of an ETF.
You are absolutely correct in considering a well established, highly diversified equity investment as a great way of investing for fifteen years and have it on auto pilot. The strategy is low cost if you choose a very low cost index fund and have all dividends reinvested.
What you should focus on is how broad an index you want to choose. Generally, the broader the better since you want to set it and forget for fifteen years. The S&P 500 is focused on U.S. registered large, publicly traded companies. It represents about 70% of the U.S. public equity market and the U.S. market represents a little over half of the world equity markets. So, if you really want to be as broadly diversified as possible, you may choose a global equity index fund. A well established global equity index is the MSCI All Country World Index, abbreviated as ACWI. Investing globally means you will be exposed to a wider array of markets and will have exposure to foreign currencies. That may sound risky, but over time, currencies fluctuate in relationship with each other and generally adjust.
An "in between" level of diversification is to stay in the U.S. market, but expand beyond just the largest companies to include small and medium sized companies in the remaining 30% of the U.S. market. A well established index for the entire U.S. market is the Russell 3000.
If you just look at recent past performance, the S&P 500 index will have outperformed the more diversified solutions discussed above. That will not always be the case and certainly it is likely that over a fifteen year period, smaller companies will outgrow larger ones and the U.S. will not always be the top performing market.
The general rule of thumb is to access any accounts which are already taxed savings, such as a bank savings account or mutual funds held in your name first; then your tax deferred accounts such as 401(k) or Traditional IRAs, and delay taking Social Security until you are 70 unless you know of a major health issue. The reason for delaying Social Security is that its value to you increases by approximately 8% for each year you delay and that is a much better Government guaranteed rate of return than you can find elsewhere.
As regards your pension, every pension is different so it depends on whether there is any benefit to you in delaying it and whether you need pension payments now to meet your spending needs.
Of course, the above is just the general rule of thumb and the answer might be slightly different depending on your health, tax rates, spending needs, and overall wealth level. For example, if your 401(k) is large and if your Required Minimum Distributions (RMDs), which start when you are 70 1/2, will push you up in a higher tax bracket (of course we have no idea what will be the tax brackets seven years from now), then there is a strategy to take some from your 401(k) now and pay tax as long as you are and remain in a lower tax bracket than when RMDs start in seven years.
I teach the MBA course, Private Wealth Management at NYU Stern School of Business. While there is no consistent objective number used by economists, we have a subjective definition we use in the course; rich is having more financial assets than you can reasonably spend to support your lifestyle in your lifetime.
This subjective definition of rich shifts the focus from funding retirement living expenses to allocating one's financial wealth between, 1) personal lifetime spending, 2) transferring it to your kids and future generations, 3) supporting your important charities and, 4) for family businesses, reinvesting it in the business. In order words, rich is having significant assets left over after taking care of all your needs during your lifetime.