It’s been some time since I shared聽my asset allocation.
In fact, my last update was just after I retired. Now that I’ve been retired some time and am getting used to it, I’m looking at my assets with new purposes in mind.
Given this plus the fact that one of my 2017 financial resolutions is to review my investments, I thought I could kill two birds with one post. 馃檪
As an added benefit, I can get your thoughts and ideas on where I might be able to make improvements.
Retirement Changes Purposes for Assets
Much of my financial planning now revolves around my retirement budget. Ultimately I want to maximize income and minimize expenses to create a good cash cushion in retirement. I’d also like to be able to do this without spending any of my assets (just spending the income my assets churn off), but that’s not a necessity. I’m ok with spending assets as long as I’m not burning through them at a fast rate.
As I pointed out recently, my current budget is solid. Better yet, it’s headed in the right direction. Income will likely go up (as my assets and this blog grow) and expenses will go down as the kids move out over the next couple of years.
So my gap is growing. Good stuff, right?
But the question remains: How should I deploy my assets given what I want to accomplish?
Up to this point they have been deployed for mostly growth with some income (especially as I transitioned towards retirement). But now they should probably change with my life change, right?
Let’s take a look…
Current Assets
I’ll begin by looking at how my current assets are divided.
These numbers are net of expenses. For instance, I don’t include our 529s as assets but also don’t count the liability of college costs for the kids. In other words, these are assets I own free and clear. Here they are in descending order:
- Retirement Accounts — $1,522k. These include a rollover IRA which I’ve dumped all my 401ks into, a rollover IRA my wife had from a 401k 25 years ago, and a SEP IRA I started 10-15 years ago.
- Investment real estate — $579k. These are my rental properties and main source of my retirement income.
- Brokerage account — $565k. Invested in Vanguard index funds.
- Non-working assets — $414k. Cars, our home, and an investment partnership.
- Cash accounts — $181k. Savings and checking, both personal as well business (rental units).
- P2P Lending — $136k. In two accounts — one at Lending Club and one at Prosper.
- HSA — $32k. Currently with an online company used by my former employer.
Actions for Each Asset Group
Now that we see what we have to work with, here’s what I’m thinking for each:
- Retirement Accounts — This is the growth portion of my portfolio and my plan is to leave it as is. I will keep these accounts invested in index funds (US stock market and international markets) at least for the next seven years (when I will pass 59 1/2 and have access to them without the issues associated with early withdrawal). I’ll probably let them grow longer but let’s say seven years for now. If they grow at 7% for 7 years they will be worth $2,444k when I get to 59 1/2. Currently these funds churn off just over $30k per year in dividends (which are reinvested, of course). If they grow to $2,444k then I’d expect around $48k in dividends. Or I could change the investments to dividend-producing options. If I could earn 3% on $2,444k that would be $73k per year in income without touching the principal. Thoughts on what I should do?
- Investment real estate — Not planning on doing anything with these assets. I have probably five years or so before I’ll need to do any major capital improvements since I did tons of work when I bought these four years ago. But when the time comes, I’ll likely have to do some more investing here as things wear out.
- Brokerage account — This currently serves several purposes: 1) it churns off $10k in dividend income per year which is a decent portion of my retirement income, 2) it serves as a way for us to give — by donating appreciated funds to our donor advised fund we can avoid capital gains plus give out of assets (versus income), and 3) serves as a large “emergency fund” in case we need extra money. Not planning on doing anything to change this.
- Non-working assets — Not much to say or do with these. We could sell the house (and may one day) and move to a smaller place, but we currently love where we live. Plus with my parents still in limbo about retiring and potentially moving out here any change for us would be premature at this point.
- Cash accounts — This seems like a good amount to have on hand in retirement (over two years’ of living expenses). Most is in two “high-earning” savings accounts (at 1% per year, ugh).
- P2P Lending — I will be withdrawing from Lending Club to get it to $50k and investing another $25k in Prosper to give them each $50k in assets ($100k total). I hope to earn $7,000 per year in income from these two.
- HSA — $32k. I’m thinking of moving this to a low-cost provider (the current place has fees) and just letting it grow. Or I could simply spend it as needed on medical expenses just to get rid of it. It’s a small account just to have around and manage. Thoughts?
There you go — those are my plans. What are your suggestions for improvements or options to consider?
photo credit: Ervins Strauhmanis Benjamin Franklin via photopin (license)
To your cash account comment, rates are on the rise… could get 1.25% 馃檪
Your analysis makes sense. On the retirement account front, focusing on income through dividend paying companies would be a prudent move. Also, muni bonds would be an option given the tax benefits.
Another thing you could do, is a 1031 exchange with your properties if they appreciate to a certain level. I won’t go into the details here, but essentially, you can sell your properties and use the proceeds to buy a property of equal value in 45 days, you can avoid taxes.
Best of luck – Erik
I’d take the cash account and roll it into a CD ladder with low early withdrawal fees. You’ll get a better return. Not sure how many years of expenses this equates too. I’d keep 3 years liquid and start to setup a ladder of three years of CDs. A question, what is the investment partnership under non working assets and why is it non working?
I’ll consider the CD ladder, thanks.
The partnership. Ugh.
The short version: The owners of the company I used to work for set up an LLC to buy real estate in our area. Specifically, there was this one piece of property that was a “can’t miss”. They wanted to buy it and invited others to join. I took a 10% stake (this was before I get into RE investing myself).
It’s been anything but “can’t miss.” It’s gone down in value and was have cash calls to service the debt twice a year. We’re looking to dump it asap. Thank goodness I didn’t go for more!
Just a couple thoughts from me: First, that’s a lot of cash on hand. I understand the security blanket it offers, but the opportunity cost of having it sit at 1% is staggering over time.
Secondly, I don’t have an P2P experience. I’ve kept my distance from that for various reasons. But if you are only expecting a 7% annual return from that and have unknown risk of how it goes down in a bear market, is it worth it to you to keep? I’d plug that into more index funds.
Lastly, I think your setup for the first four accounts listed is perfect! 馃檪
Yes, I’m currently pulling money out of LC for sure and am looking at lowering my P2P commitment. I’ve read a lot about the risk associated with the loans and while my loans are scattered among thousands (all at $25 each), it’s something I’m concerned about.
I too have approximately that much cash available. And I sleep veeeery veeeeery well at night. What is the opportunity cost of anxiety? Likely much greater long term than an extra 1% yield, even compounded…
I suspect out humble blogger feels the same way.
I think you can easily achieve a 3% dividend yield with stable businesses that have a history of raising dividends, thus ensuring your yield on cost keeps climbing. Take your time to leg into stocks one by one as valuations become attractive. Start reading more blogs on dividend investing to get the feel for this. The Conservative Income Investor, Dividend Mantra and others are a good start. David Fish’s Dividend Champion, Contender and Challenger’s list is also a great place to look for stocks that go on your watch list.
Nothing but upside for you in terms of increased cash flow, and you have plenty of time to learn this. You can start creating a dividend portfolio of individual stocks right now in your retirement account and have more annual income to keep reinvesting back into the portfolio.
Good luck.
-Mike
I’m waiting for you to start your dividend blog. I’ll be the first subscriber!
I’m with you, ESI. I wrote a comprehensive “Bucket List Strategy” post, and have been working on filling Bucket 1 with 3 years of cash expenses (my FIRE date is June 2018). In this over-valued equity market, and with interest rate risk on bonds, I think it’s best to err on the side of caution. Sequence of Return risk is real, especially given the current market. I’ve been skimming some profits, and moving to cash. Not a time to get greedy, or too aggressive.
Loved this post, and the way you look at your asset allocation. We’re philosophically aligned, and it’s interesting to see your thinking on a topic that’s important to us all as we transition into retirement.
I recently invested a small amount in a dividend index that is paying 4-5%. Thought that would make more sense than bond investment and diversifies a bit of the risk with the Trump rally.
Having $181K in cash seems very high to have it not working for you. I know you said expenses were about $90k a year but maybe you can find ways to cut that since kids are working. We live in HCOL area and do trips to HI, China and Galapagos this year and we spend about 50K a yr. Use cc miles and airline points to save on travel costs.
Can you expand a little more on your SEP IRA? I’ve been thinking of setting one up since I have a side business. did you set it up when you first started the other blog or when you did your real estate investing? Based on timeframe of real estate being recent, I’m assuming it was for blog and referring… but not sure. I’m asking because I’m not sure if there is an income cap. I generate about $2k from side business but would like to add more retirement investments than 401K and IRA. Thought I recall you saying that real estate came from IRA $$. Is that still the case? I met someone recently that did an 401K rollover and is putting that $ into IRA that invests in real estate near him in Tampa.
Sorry for all of the questions, I know you wanted feedback. My only comment is that Lending Club has looks iffy because of this https://www.bloomberg.com/news/features/2016-08-18/how-lending-club-s-biggest-fanboy-uncovered-shady-loans
I started with SEP when I had the former blog. It had years where the earnings were quite high and allowed me to sock away some extra money, so I did.
I like the concept of a reserve, floor and upside.
The floor should be designed to cover your lifestyle fixed expenses for life without risk ( bonds, CD’s., dividends, annuity, reverse mortgage).
The upside ( in broad index funds) provides growth, inflation protection, and legacy with associated risk and could be lost in a downturn without affecting your lifestyle.
The reserve is an emergency fund with a year or two living costs
What would you do if 2008 happens again and your retirement and brokerage accounts lost 40%? Would that affect your lifestyle? You need to protect against that.
I agree that the cash should be put in a CD or Bond ladder to boost the yield.
I don’t think much would change for us if another 2008 hit — as long as our rentals stayed full.
I do need/want to diversify income sources though for this very reason. Relying too much on one source is not good.
I’ll comment on the HSA – moving to a lower cost provider makes sense, but don’t use the money just to get rid of it. I’m guessing you are no longer eligible to contribute to the HSA but if you are, you should max it out every year thanks to the Triple Tax Benefits.
I have an HSA and plan to use it in retirement, when I’m sure you’ll need it as well. For now I’m socking away as much as I can there as another form of retirement savings.
I’m waiting to see what happens with the new healthcare laws coming from Washington. I don’t want to make any moves now and have them all be negated soon thereafter.
So I’ll keep an eye out for now.
Who will manage your HSA when you move it? I am looking for a new administrator when I leave my job and see there are many out there but not sure which one or ones are better.
Upon further review, it appears that my HSA isn’t charging ME anything (at least not yet).
When I had the exact same account tied to my employer, I had a charge. Now, nothing for several months. So I’m holding firm for now.
I use HSA Bank.
HSAs will turn into an IRA once you turn 65. I assume you can move it to whereever your portfolio is currently.
My only concerns would be the RMD’s you’d be facing and your withdrawal strategy and tax planning. My back of the napkin numbers look to be about ~$90K + your earnings and you’re looking at a hefty tax bill.
Great point. Maybe now is a good time to start transferring assets into backdoor roth ira?
Backdoor Roth is a great idea whenever you have a particularly low income year.
I’m not sure I’m going to have a low earning year. 馃檪
Of course most years will be lower than when I was working, but still fairly high relative to most US households.
You can use the Qualified Charitable Distribution to send part of your RMD to charity and keep it out of your AGI. 馃榾
Great idea!
Now is the time to make a bold move into Long-Term bonds.
Um, wait. That doesn’t sound right…
Seriously, ESI, you have a fantastic situation, right now. One thought that would have helped me greatly, and I’m doing now, is to take my risk-profile now, and 7 years from now. I am always moving my current asset mix into my desired 7-year asset mix, because risk-events move pretty fast. You have $2.1mm in index funds, now. You could take 10% of your IRA funds and shift to 10-year CDs (2.8% at Vanguard brokerage services), which is basically 4% of your portfolio, each year for a few years.
Your portfolio is fantastic, what percentage would you guess is due to savings? Whatever it is, you have been able to rebuild from 2002 and 2008 with savings from a great paying job. In times past, I always managed risk at the ‘time-now’ line; the price I paid for that strategy was pretty steep.
Also, some good tax news coming your way: Social Security is not taxed in CO. When you pull the trigger, you can place a risk-value of ‘zero’ on the income, and equivalent ‘shadow asset’ it would take to generate that income. We all get ‘old’ if we’re lucky, but ESI you are getting ‘great’!
Great suggestions! Thanks!
Not sure what % is due to savings and what % is due to growth…that might be a fun Quicken exercise someday. 馃槈
Always so insightful to see someone’s breakout. Your brokerage account dividend income is impressive. As soon as our house is paid off we are full steam on filling up our brokerage account.
thanks for sharing.
I am not familiar with how a brokerage account works other than for trading securities. Seems like ESI is getting a great dividend stream from his. Any suggestions of a good place to read up on this and learn more?
I have a brokerage account at Vanguard that’s invested in index funds.
Those funds churn out close to 2% in dividends annually.
Thanks for the information
My experiment with Lending club has not produced the results I wanted. The biggest problem is trying to liquidate my holdings without going to the after market to sell my notes at a discount. Unlike a mutual fund where you can say sell all you just can’t do that with Lending Club without a potential loss.
A suggestion seeing that you might have some more time in your retirement (that was a joke as you probably now are saying when did I have time to work) is exploring the different levels of bonds. To help you look at Vangard bond portfolios of Investment grade, Corporate in both Intermediate and Long term time spans. Also High yeild.Don’t bother when you see the word Government or Treasury as the returns ar etoo low for your age. These offer some good to OK returns but are very liquid which was my mistake in Lending Club if it did not work out. I am not ready to play the bond game as I am still growing but when the stock market was not producing, I was earmarking new contributions to these funds until we started to see a turn around and was doing well with a 4% to 5% growth in the bond funds while the market was stuck in the mud in negative territiory.
Also I have it set up to have my distributions of my funds to go to my settlement account instead of reinvesting. ( this is in a roth and rollover accounts so no tax implications and a Vanguard Brokerage account) but then I take that money and distribute to rebalance my portfolio or invest into something new. Currently I am building up ETF’s with distributions from the mutual funds and is working quite nicely. Investing in Dividend , REITS, High Yeild and others. ETF’s trade like stocks and when you say sell or buy it is a market order so as long as you are funded you can execute at anytime the market is open unlike a mutual fund which is at the end of the day.
I am finding out the power of ETF’s and what you can and ca’t do.
Great post, I love your cash cushion, you must sleep well.
One cautionary comment about dividend stocks (I know this comment will be unpopular in the financial blog world). Dividend investors often sell the merits of dividend stocks as higher income and/or lower risk. They really do not offer any significant risk differences than the total stock market and the high income is just as much at risk as the low yield of an index fund, you just may not be relying on a low yield as much.
The Dow Jones dividend select index ( iShares DVY) is probably one of the best proxys for dividend stocks, it also has a fairly long track record if you want to do more research into dividend investing. It lost 50% of its value peak to trough in the global financial crisis, very much the same as the market as a whole. Not exactly less risky and certainly not a replacement for bonds or cash in a portfolio.
Dividend investors will often claim that they don’t care about price changes because ” at least they always get their dividends”. This is equally untrue, the Dow Jones dividend select index (DVY) decreased its dividend by 42% during the financial crisis. The income is also risky, just like the total stock market.
You also may pay more for it through a higher expense ratio on a dividend fund or more trading commissions and bid – ask spreads if you go the individual stock route.
I don’t have anything against dividend investing, I think emotionally it may be easier to stick to than investing in tech IPOs or other stock picking strategies. It is very important to understand there is not any meaningful risk reduction in a dividend portfolio. They are certainly not a replacement for bonds or cash in a portfolio.
There is no free lunch in investing, except diversification (which I think you have covered pretty well).
Cheers and great post!
The large cash balances bother me. That’s a lot of growth lost for a hypothetical emergency which may never come, Some cash is good, of course, but for a real unlikely emergency I keep an unused HELOC on my primary residence. If the stock market was strong at the time, I’d liquidate some brokerage assets, otherwise I could tap the line of credit until the market recovered.
You might consider https://www.realtyshares.com in stead of p2p lending. Similar idea but only used for real estate projects and you have collateral.
Have you considered annual Roth conversions? Your rental income may make this less attractive, but I had some clients who had very little taxable income in retirement and could do ~$20-30k in Roth conversions per year tax-free. Especially if you don’t plan to withdraw from them immediately, they have the potential to make your minimum required distributions sizeable. (If none of the accounts are Roth and they go untouched they could grow to $4M+ by age 70, making your first year MRD well over $100k, which can’t go into a Roth).
I’m about 20 years behind you but have budgeted to do some Roth conversions every year so that when I do get to 59 1/2, 100% of my retirement accounts belong to me.
If I have $150K in RMDs, I will just have to deal with it, :), but you can always take money out along the way to reduce the RMDs. You don’t have to wait until you are 70. We will move money out of IRAs to Roth, but not a ton. I would rather delay the taxes as long as possible.
I’d third the comment about reducing P2P exposure. The relatively low returns, lack of liquidity, and default risk seem like a poor combination to me. My wife (who works in credit risk management at a major consumer lender) lectured me that P2P companies have extremely simplistic risk modeling and insisted I ditch our holdings ASAP 馃檪
I agree with your cash position as it translates to restful sleep at night. You allocation is difficult to discern relating to equity/fixed income. I would suggest that you have won the game, so risk could be mitigated with a balanced portfolio. If the gambler in you won’t allow a balanced portfolio, then the cash makes even more sense. I also would not be a fan of P2P due to the risk involved. I would rather invest it in physical real estate.
Just make sure that you hold on to the real estate. This will provide the most income long term. Also, I agree that considering a Roth IRA might make some sense. Unless you have a high tax rate it should be a good move.
Thanks ESI for being so honest and putting it out there. This is very helpful for me. I am 49 years old and have a very similar portfolio in terms of both value and asset mix. I plan on firing in about one year and have been pretty nervous about doing so, but posts like these help tremendously. I agree with both you and @retirementmanifesto about the bucket approach. I am filling my last bucket which is two years of living expenses in a money market account. I do not view this as an emergency fund, this is a safe cushion so that you are not drawing down your securities in a bear market which could kill you in your sequence of returns early on. I think the security of that far outweighs the returns that you will achieve on several years of living expenses.
Fine job and I am really enjoying your blog.
I’d ditch the lending club. Put the money into a well run BDC company, instead. More transparency, professional management. Predictable returns.
I am pulling money out as fast as I can from LC. As soon as loans are paid off, I transfer the money out.
It will take a year or so at the rate the loans are maturing to get me down to where I want to be (in the $50k range).