Should I change my asset allocation strategy?
I am approaching 50 years old, single, and have about $2,000,000 in total assets ($1,000,000 in a 401(k), $500,000 in cash, and $500,000 in stocks). I don't own a home but plan on buying one within the next couple of years. My monthly expenses are about $10,000 but if needed I could cut down to about $7,000. I have no debt. I am employed in a good position. Given all of this information, how well-positioned am I for the future? Should I be doing anything different with my asset allocation strategy?
Congratulations! You are well ahead of the curve for retirement as far as total assets. But, it would benefit you to sit down with a CFP® and review your income, expenses, and asset allocation. Whoever you sit down with will review the holdings in your 401(k) and look at which stocks you own. This will enable them to make sure you are properly diversified. They should also look at the yield you are earning on your cash. The next step will be to assess your risk tolerance, time horizon, and goals. With this information, they will be able to align your investment allocations more effectively.
That is great news that you have no debt. It would be helpful to know your gross monthly income. That will be a factor in determining how well-positioned you are for the future. It is also good to hear that you could cut your expenses down to $7,000. You will need to dial in your current expenses as that will help you estimate your expenses in retirement. Typically, you can estimate your retirement expenses to be 80% of your current expenses.
One thing to consider for retirement is the ratio of your expenses to your total assets. In retirement, a 4% drawdown is usually a pretty safe assumption. Therefore, if you have $2,000,000 in assets at retirement, you could, theoretically, withdraw $80,000 per year. Currently, you are spending about $120,000 per year. Therefore, you might benefit from reducing your expenses to about $6,500 per month (if possible) in retirement.
Congratulations on building such a nice net worth before turning 50 years old!
You don't mention your current asset allocation (how much in stocks vs. bonds), nor do we know when you'd like to retire. If we assume a traditional mid-60's retirement date, you're in great shape. You'd need about $3M in investments to generate $120,000 in retirement cash flow (the 4% rule). Assuming a typical asset allocation in equities, 15+ years should allow for your $2M to grow to $3M, although the large cash allocation will act as a drag on your overall returns.
Again, without more details, it's hard to recommend a specific asset allocation for your situation. A few investing fundamentals: Understand your risk tolerance, stay diversified, re-balance periodically, keep costs low and keep taxes low by properly locating your asset classes in the appropriate account (401k vs. your taxable account). You may want to contribute to a Roth IRA (if eligible) to further diversify your account types to create future tax planning opportunities.
Please feel free to contact me if you'd like to discuss your situation further. Thanks for your question.
Unfortunately, there's not enough information in your question. How is your 401k account allocated? Do you have 100% in stocks? If you own bonds in your 401k, what kind of bonds? Why do you have so much cash?
One thing you can do to really get a good idea of where you stand is to do a financial plan. A financial plan can project your future needs and give you an idea of where you are and what you may or may not need to do in order to achieve the retirement you want. Just keep in mind that many planners will charge you to do a financial plan. If you're willing to take the time to do one yourself, we offer a FREE online financial planning lab that you can go through and generate a financial plan. If you're interested, you can click on the link below:
You are well positioned. Do not know what the allocation of the 401k plan is, but if one assumes it represents some version of a balanced portfolio, and some or all of the $500,000 in cash is earmarked for a house, things are looking good. Cash positions in after-tax accounts have a tough time generating a positive real rate of return once you consider tax on the interest earned and the impact of inflation. That's why cash in a portfolio is most often considered a short-term parking place.
When you ultimately buy a house, would assume that the interest "write off" for taxes would be helpful, and if borrowing rates stay at these levels, having some debt on the house probably makes some sense. So in the next 2 years you will need to consider the expected differences in the financing rate and home prices. Your analysis of where the world will be in the next two years, may cause you to want to buy a house sooner or later....just make sure you like the house!
At a spend rate of $10,000/month, you are spending $120,000/year, which means you would need about $3 million ($1.5 mil in a 401k and $1.5 in a taxable account) to fund the $120,000 annual spend w/o (in most cases) invading principal. Your effective tax rate could increase or decrease the $3 million estimate, as would the actual blend between 401k and regular assets at retirement.
Hope this helps,
Great job on your accumulation so far! Considering you still have some time to "retirement age", you may want to put those funds to work and target growth with a goal of extending your savings in retirement. The $500k in cash especially should be invested in a moderately allocated portfolio as it is losing value each year due to inflation. You might want to consider diversifying risk with a managed ETF portfolio.