What concepts can I use to guide the allocation of assets in my portfolio?
I am 65 years old. I have $1,500,000 from divorce proceedings. What concepts can I use to guide the allocation of my assets in my portfolio?
It's been said that one's asset allocation determines up to 90% of your portfolio's returns, so this is a very important question. To answer this, we can go from the simple to the more complex.
One often-used rule of thumb is to allocate 100 minus your age in stocks, in this case, 100 - 65 = 35% in stocks, and the rest in bonds and cash. The reasoning for this is because as we get closer to retirement, we want to reduce the risk of a big decline in asset values, which is what occurs when we shrink the allocation of stocks as we get older. This means that your allocation to bonds will also correspondingly increase as you get older to give you some more stabillity of capital.
But since this is a one-size-fits-all approach, it often does not take into consideration one's unique circumstances, like risk tolerance or cash flow needs, and so this approach should be taken with a grain of salt.
One approach that would be a bit more tailored your specific circumstances is to take the online questionnaire that Vanguard provides for free:
Vanguard manages over $5 trillion in assets, so I would be open to using the results of the questionnaire as a very good starting point for your asset allocation.
Within one's allocation of stocks and bonds, you'll need to determine what stocks and bonds to own. Should you own an index fund or individual stocks? Research suggests that index funds are very good vehicles, since they have tended to outperform actively managed funds over long periods of time (about 80% of the time). Should you own US stocks? International stocks? Growth stocks or value stocks? Large, medium, or small company stocks? What kind of bonds should you own? Should you own taxable or municipal bonds? Short term bonds, intermediate term bonds, or long term bonds? Investment grade or high yield? Short term interest rates are rising meaningfully, so it may make sense to consult with an advisor regarding what kind of bonds would make sense for your risk tolerance and tax bracket.
Please feel free to reach out to me if I can assist you further.
There are a lot of things to look at when you allocate your investments. The markets are complicated and circumstances change daily. One thing that is important is to look at things in totality. The economy, earnings, valuations, and markets all provide important information, but they each have their weaknesses as well. If you only pay attention to one of these components, you may not get the whole picture. I just finished my 2Q18 Outlook titled How to Navigate an Aging Bull Market. The video can be accessed with this link:
How to Navigate an Aging Bull Market is a 50-min video that takes a deeper look into important factors to consider when making investment decisions and how to segment your portfolio to reduce emotional decisions. I hope this helps you and if you have any specific questions, please feel free to email me at email@example.com.
For someone age 65 and divorced there are several key concepts to consider: Social Security, liquidity, income sources first 10-12 years, longer term investments (10+ years), Long-term care risk.
Social Security: if you were married to your ex-spouse for at least ten years and they are at least age 62 you might want to see about claiming spousal benefits on their record if it would mean a higher benefit than you can get on your own benefit. If you have not claimed on your record yet you might be able to claim on your ex’s benefit and leave your benefit alone until at least your Full Retirement Age (FRA) or even until age 70. From FRA until age 70 benefits grow at 8% annually plus inflation adjustments. Your spouse does not have to know you’re claiming or even have claimed yet themselves. It won’t affect their benefits or their current or even other ex-spouses. You cannot be remarried at the time you collect on the ex-spouse.
Liquidity: always keep at least 6 months living expenses in liquid assets (cash, short CDs, etc.) on hand for emergencies. If you have planned expenses coming up soon keep the funds for those liquid as well. You can keep more in liquid assets, but the interest rates are pitiful, taxable, and may not keep up with inflation. In short more comes at a price. Liquidity and safety are the pluses here.
Income sources or money you may need over the next ten to twelve years should be in relatively safe investments such as investment grade bonds, stocks or in mutual funds, or fixed indexed annuities with large financially sound insurance companies. For income, look for annuities that incorporate guaranteed lifetime income options. Variable annuities can also be used but have much higher expenses. These investments are not as liquid as the previous group but pay a higher return and might offer substantial income guarantees. What you are doing is purchasing an investment horizon of at least ten years in the next group.
Longer term (10+ years): go for growth. Don’t plan on needing these funds for at least ten years so they will have plenty of time to weather the market volatility. The purposes for these are to outpace inflation, build your nest egg, legacy planning, and planning for long-term care expenses should they occur. Typical investments are mutual funds, stocks, some annuities, Indexed Universal life or whole life policies that permit zero cost tax-free loans, long-term care benefits, as well as the death benefit.
One last thought. You still have until age 70 before having to take Required Minimum Distributions (RMDs) from IRAs. The ideal amount to keep in the IRAs is an amount that will not result in RMDs larger than your standard deduction. This way they will be offset by the Standard Deduction (currently $25,300 for a single person over age 65). The beginning RMD now for someone age 70 ½ is about 3.65% so $500,000 might be a good limit on IRAs. If you have more in your IRAs start making conversions to a Roth IRA now so income later is non-taxable. Your goal is to have as little taxable income as possible while receiving Social Security.
I’ve covered a lot and it might seem like drinking from a fire hose but these are things that a financial planner specializing in retirement cash flow should be able to help you. Let me know if I can offer more information.
Bill Garrett, CFP professional
Having a large amount to invest can be an opportunity to put youself ahead of the game if you can make smart decisions and count on the right advice. To simplify what can be a detailed planning process, address the following 3 questions as a way to guide you:
1. What do you want that money to do for you over the next 1, 5, and 10+ years or more?
2. How do you feel about the risk associated with your value going up and down?
3. Who do you know, trust, and feel comfortable in approaching to sit with to give you the advice suited to your needs?
Understanding your income needs initially while getting the concept of risk (what worries keep you up at night?) in order can help you convey to an Advisor the goals you have with this sum of money. Your objectives can then be placed within the concepts of diversification of your money, investment management control and costs, a long term planning and monitoring process, and accessiblity of funds over the coming years. Using someone you trust to help manage this plan should outweigh the cost and help you live stress free with the funds you now have to invest.
Before you invest, I'd figure out a return objective. How much do want/need to earn on the portfolio? Do you want to just preserve and steadily grow the money? Or something more?
I recommend taking a risk questionnaire and putting together with a comprehensive financial plan. There's some great technology that can run simulations on what to expect within a 95% confidence interval. $1.5M is enough money that you don't want to mess around with.