Have you ever found yourself at a crossroads, wondering how to determine the perfect mix for your retirement portfolio? The questions can be overwhelming. What stocks should I own? What bonds should be in my portfolio? Where should I allocate them? In this post, I walk through a real-life example to shed light on the steps taken to guide one couple through this intricate process.
Meet Todd and Katie
Todd, 66, and Katie, 63 approached us with a $3.2 million portfolio, feeling completely bewildered about its allocation. The confusion was understandable – the larger the portfolio, the more critical it becomes to make informed decisions. However, the principles we applied to Todd and Katie’s situation are applicable regardless of portfolio size.
Todd and Katie had diligently saved and invested, maintaining a sizable portfolio. Yet, as retirement loomed, they realized the financial uncertainties were magnified. They sought answers to crucial questions – Are we financially secure? Can we spend more in retirement? Are we optimizing our investments?
Building a Foundation: Goals and Income
In our comprehensive process, we delved into their goals. Todd and Katie aimed to retire immediately, with a monthly expense target of $8,500. Beyond basic living costs, they factored in healthcare expenses and ambitious travel goals. They wanted an additional $20,000 annually for the next 15 years to explore new experiences.
Before diving into their portfolio, it’s essential to highlight that our starting point wasn’t the investments. We began with their goals, income sources, and other considerations, understanding that a well-crafted portfolio isn’t just about owning good investments – it’s about owning the best possible investments aligned with your overall plan.
Understanding Cash Flows
Analyzing their income streams, Todd’s Social Security was projected at $3,400 per month, while Katie’s, with some years out of the workforce, was $825 per month plus a spousal benefit. These figures formed the foundation of their cash flows.
Breaking Down Expenses
Breaking down their expected expenses, we accounted for living costs, housing, healthcare (pre and post Medicare), and additional travel expenses. Moreover, we factored in potential long-term care costs to ensure their portfolio could support unforeseen circumstances.
Portfolio Allocation Strategy
Now, here’s the crucial part – determining the amount needed from the portfolio each year. In the initial years, Todd and Katie might require around $600,000. We strategically planned to source this from their taxable account to maintain flexibility for tax-related strategies, such as Roth conversions.
Crafting a Well-Diversified Portfolio
The next step was crafting a well-diversified portfolio that aligned with their goals. Recognizing the need for stability in the first five years of retirement, we proposed a mix that included conservative investments like short-term treasury and intermediate-term treasury funds. These would act as a buffer in case of market downturns, ensuring they could meet their living expenses.
Addressing Current Investments
Addressing their current investments, which were predominantly in large U.S. stocks, we proposed a shift towards an 80-20 portfolio – 80% growth and 20% stability. This adjustment aimed to strike a balance between growth potential and risk mitigation.
Account Allocation Strategy
It’s crucial to note that our recommendations weren’t limited to specific funds but rather an allocation strategy. The key was to ensure that each investment played a specific role in the portfolio, considering the goals and withdrawal plans.
In terms of account allocation, we emphasized the importance of placing conservative investments in the taxable account, which they intended to draw from in the initial years. This approach aimed to optimize tax efficiency and provide them with the needed stability.
Diversification Within Roth IRA
Finally, we touched upon the recency bias, urging Todd and Katie to diversify even within their Roth IRA. While tech stocks had performed exceptionally well recently, a broader perspective revealed that other asset classes had demonstrated better long-term potential growth rates.
Todd and Katie’s journey exemplifies the intricate yet rewarding process of crafting a retirement portfolio. By aligning investments with goals, addressing income streams, and strategically diversifying, we aimed to ensure they could enjoy a secure and fulfilling retirement.
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