Am I investing in the right types of funds to meet long-term growth goals for retirement?
I am 62 years old and planning on retiring at age 70 and collecting Social Security at that time. My equity allocation is under 20 percent. I am planning on adding with dollar cost averaging $10,000-$12,000 per year for the next eight years in to the following: two growth funds, two international funds, one total stock market index fund, and two balanced funds. I have three years worth of living expenses in cash. This would bring my allocation to 25 percent equities. Is this a good plan to meet long-term growth goals for retirement?
Several others have already provided some solid recommendations for you, so I’ll try to limit my comments toward areas that haven’t gotten as much attention in their posts:
- 3 years in cash: This is a fantastic “cushion” that can be tapped if any emergencies or job loss situations arise. My first recommendation here is to ensure that you have these funds in a savings account that pays a good interest rate. There are multiple options that you can find online (PNC Bank, Synchrony, Ally to name a few) that pay ~2.00% APY and sometimes more. Having the cash is great, but you want to keep up with inflation as best you can. Leaving it in a basic savings earning 0.01% APY is not the way to do this. You can also consider a CD ladder (buying CD’s of varying terms and rates) as an option to further increase your rate and keep up with inflation.
- In the event that 3 years of living expenses equates to more than $250k, open savings accounts with multiple banks to keep your balance under the $250k FDIC limit in each account.
- Allocation: Having a multiyear cash cushion, in addition to still being employed for several years, gives you the ability to be more aggressive with the allocation of your retirement funds. 8 years to retirement + 3 years in cash + maxing out social security makes it a lot less likely that you would have to pull significant funds from your portfolio in the next 10+ years. This means that you have the capacity to take on more risk in equities and grow your nest egg. Whether you have the tolerance for that volatility is something that only you can answer. Also, the status of your current portfolio relative to your retirement goals would have to be reviewed to more definitively say if you “should” increase your equity allocation. As others have noted, you may have already accumulated enough assets relative to your goals that being more aggressive doesn’t have clear benefits. In the football analogy, if you’re up by 40 points with a few minutes left on the clock, is there really a benefit to throwing the ball down the field?
Hope this helps and keep up the great work on your path to financial independence!
I don't think so. At your age you should have at least 75% of your savings in equities. Anything that is not in equities is pretty much guaranteed not to grow, at least not after taxes and inflation. If you plan to start withdrawing in eight years and take a sustainable amount each year, you have a very long time horizon and can withstand short-term volatility. I like the idea of dollar-cost averaging as it will allow you to buy more in bad markets, which is exactly the right thing to do. So as you add money, sell a little of your bonds too and buy equities. Don't try to time the market or get scared because you are afraid that now is not the time to be buying.
You mention that you plan to add $80-96,000 over eight years and if you buy equities, that will increase your equities by 5% of total. That implies that your savings today total about $1.8 million. Is that right? If so, and $1.5 million of that is in bonds, (yielding what? 4%?) you are facing a much poorer future than you would if you held about $1.4 million in stocks. I agree that some fixed income is appropriate to allow you to sustain your lifestyle through a stock market downturn -- so you don't have to sell at the wrong time -- but keep it to a minimum. You have a right to a comfortable retirement. After taxes and inflation, bonds have more or less a zero real rate of return.
The categories of funds you identified are mostly growth oriented, but the specific funds you choose will make a lot of difference in your expected return. It sounds like you have the basics of a good retirement plan between waiting until 70 to collect Social Security and having a significant cash buffer prepared for retirement. And based on the numbers you presented, it appears you have well over a million dollars set aside for retirement. In order to truly provide you with an answer I would need more information regarding your retirement goals, the growth goals you are looking to achieve, your desired retirement income, your risk tolerance, and of course your current portfolio. I do have a few comments you might want to consider.
- Consider decreasing your bond holdings and increasing your stock holdings
75% - 80% in bonds is a high for the typical 62 year-old, and you should re-evalute your risk tolerance and growth requirements. Being 80% allocated to bonds will hinder your stated goal of growing your retirement account. If growth is truly necessary for you to be able to enjoy the retirement lifestyle you want, then a higher allocation to stock may be necessary. Additionally, such a heavy weighting to bonds will put you at serious risk of running out of money in retirement due to inflation. Inflation is honestly a bigger risk for retirees than a potential market crash, although both risks are important to manage.
- The balanced funds may not be necessary
The advantage of a balanced fund is it allows you to invest in both bonds and stocks (equities) through the same mutual funds. Considering you currently have such a large allocation to bonds, adding more bonds into your portfolio through a balanced fund is likely redundant. Additionally, the balanced fund will further reduce your equity allocation below the 25% threshold you identified.
- Holding two growth funds or two international funds may not be necessary
It is very likely both growth funds will invest in the same companies in largely the same proportions. The same could true of the international funds if you are not identifying different regions of the world with each fund. As a result, you are not actually increasing your diversification by owning two funds that invest with the same investment strategy. Consider identifying another asset class to add to your portfolio or just combining the money you invest into the fund with the lower expense ratio to reduce your costs.
- Consider getting professional help
Getting advice from a fee-only and fiduciary financial advisor might be the best thing you can do to shore up your retirement plan in the final decade before retirement. Fiduciary advisors have a legal obligation to serve their client's best interests (most advisors don't) and the fee-only part means they don't earn extra money from kickbacks or commissions if you follow their advice.
The best way to determine your allocation is to understand exactly what you will need from your portfolio during the first year of your retirement. Household cash flow is the starting point for all of these decisions--it will determine how much a "paycheck" you need from your portfolio in retirement. From there you can estimate how much money you will have saved at retirement based on the calculation above. The rule of thumb is that your annual withdrawal during the first year of retirement should not exceed 4% of your total retirement savings.
For that reason, it's hard to say whether 20 - 25% equities will be a "good plan". If your retirement is overfunded (you have more money than you'll need), I would say 20-25% exposure to equities is fine becuase there is no reason to take on more risk than necessary.
If you're around a 4 - 6% withdrawal rate, I would imagine that you'll need a higher allocation to equities.
If you need to withdraw more than 6% in your first year of retirement, I would imagine that 25% equities is too low.
Again, need to know more about your income picture, but that's my advice there.
The dollar cost average methood will smooth out the volitility of the market place. My concern would be the three years of living expense that you have in cash. You could easily take
two years of that and deploy those funds as well and put yourself in a better position to improve you overall return.