Finance
We are “healthy boomers” in our 60s with a net worth of $4.2 million. Is it time to diversify?
Dear Quentin,
We are a healthy, retired couple (69 and 64 years old). We have always managed our investments ourselves.
We currently have 60% in equities and 40% in cash equivalents in our investment portfolio. Based on the “100 minus your age rule“we would be considered overweight equities; even with the newer version of ‘120 minus your age’ we push it. However, we continue to calculate and do not understand what we may be missing.
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Our total net worth is $4.2 million. We have $300,000 in non-retirement funds (60% cash), $1 million in a house, retirement accounts with $1.1 million in CDs and $1.8 million in stock funds. We have no debt and live comfortably on $150,000 a year. My husband will start taking Social Security benefits of $55,000 per year in 2025, and I will collect $28,000 in 2027.
In the worst case, we fear a stock market crash. There could be a situation, or at least a significant downturn. In that case, we have more than a decade of cash to draw on when the market recovers. Otherwise, we could continue to benefit from market growth and slowly reduce our share ownership percentage as we get older.
Please let me know what I may have left out of our consideration.
Healthy Boomers
Dear healthy boomers,
Ten years is a long time to weather a stock market crash.
Let’s tackle your worst nightmares first. After the market crash of 1929, when the stock market ultimately lost roughly 90% of its value, it took more than 25 years (November 23, 1954) for the Dow Jones Industrial Average DJIA to close above the level it closed at that fateful time. day. But analysts say it was really necessary five to ten yearstaking deflation into account.
One of the many lessons from the Great Depression (and the 2008 financial crisis) is that one man’s meat is another man’s tofu, with one person seeing stability while another expecting chaos. Yale economist Irving Fisher once said that stock prices had reached “what appears to be a permanent high plateau.” this report dated October 16, 1929 in the New York Times.
In the meantime, in a bulletin on March 25, 1929, the Federal Reserve warned that “excessive or too rapid growth in any area of credit, whether commerce, industry, agriculture, or securities dealing, is a matter of concern to the Federal Reserve system . Too rapid an expansion of bank credit in any area could lead to serious financial disorganization…’
It took more than five years for the market to recover from the 2008 financial crisis, which was caused in part by predatory and subprime lending in the mortgage market and a lack of financial regulation. Diversification is also critical to weathering such storms: many companies survived the financial crashes of 1929 and 2008, and yes, some don’t.
The complexity of a money buffer in retirement
You have no debt and your Social Security gives you an income of $83,000 per year, more than half of your pre-retirement expenses, not counting your $2.9 million in retirement accounts and CDs. Moreover, you do not have a mortgage. You’ve worked hard and planned wisely for a comfortable retirement and peace of mind. You can afford both.
Some people writing to this column are comparing and despairing. You don’t have that problem, so you don’t have to worry as much about what you may or may not have missed. The average retirement income for adults age 65 and older was $83,085 last year, adjusted for inflation. according to Retireguide.com. And the middle income? That’s $52,575 per year.
For others reading this, you must also be 62 to claim Social Security spousal benefits or have a child under age 16 or already receiving Social Security. The amount also depends on whether the higher-income spouse started claiming benefits at age 62 or waited until full retirement age. (Sounds like your husband is waiting until he turns 70).
Now that I’ve congratulated you, which seems appropriate given the circumstances, let’s talk about the $67,000 shortfall, which amounts to 2% of your portfolio, according to Paul Karger, co-founder and managing partner of TwinFocus, a wealth advisory firm. “This should be easily achievable given current interest rates and a balanced portfolio approach to stocks and bonds,” he says.
For the most part, you’ve protected yourself from a major stock market downturn, given your current allocation of stocks and cash, and your age and risk profile. “We recommend using taxable funds to cover any shortfalls before entering your retirement accounts, given the tax-advantaged nature of your retirement assets,” Karger says.
He has one caveat: “We would suggest starting to nibble on longer-term bonds, perhaps government bonds,” he adds. “While short-term bonds and money market funds offer attractive returns, and in many cases higher returns than longer-term bonds due to the inversion of the yield curvethis may turn out to be a shorter-term phenomenon,” Karger adds.
Because most of your assets are in retirement accounts, this means distributions are taxed as they are withdrawn. “This reduces available after-tax funds and requires a thoughtful distribution strategy to minimize the amount of taxes paid each year,” says Michele Martin, president of wealth management firm Prosperity in Minneapolis, Minnesota.
Increase your amount of fixed income investments: your shares And bond allocation will create a “smoother trajectory” over time, she says. Martin suggests creating a more diversified allocation to bonds and fixed income investments. “If interest rates fall, the return on cash in lock-step will fall and that is defined as reinvestment risk,” she adds.
“The distribution mode is the opposite of dollar-cost averaging,” Martin says. “If you take distributions out of your portfolio in falling markets, the impact is magnified. A more conservative portfolio that generates recurring income actually delivers similar returns to a more aggressive portfolio because it moderates drawdowns in volatile market conditions.”
In other words, you’ve mastered the “accumulation” portion of your retirement plan, and now it’s time to focus on the “distribution” strategy. Bottom line: Martin says a high-level asset allocation of 60/40 is sufficiently diversified given your age, and it may not be necessary to reduce the amount of equity exposure if you’re comfortable with the variability of investment returns .
How will the current stock market bubble end?
About that potential stock market crisis. Only stock market columnists, economists, analysts and psychics are allowed to make predictions and I do not give odds based on any of the above parties. These predictions compiled by State Street Associates, based on research by Professor Robin Greenwood of Harvard University, rates such an outcome as low.
MarketWatch columnist Mark Hubert predicts that the current stock market bubble will occur end with a slow deflation instead of a bang. He does not foresee a so-called crash – defined by some economists as a 40% drop in prices over the next two years. He recently wrote about the “huge return difference” between the cap-weighted S&P 500 SPX and the equal-weight version.
“So far this year, the capitalization-weighted index (the index quoted daily in the financial press) has outperformed the equal-weighted version by more than 10 percentage points,” he adds. “Last year, the outperformance of the cap-weighted version was more than 12 percentage points.” (The equal weight version gives each company the same weight regardless of its size.)
“This difference suggests that the performance of the capitalization-weighted version has become increasingly dependent on the largest stocks in the index, and many analysts believe that such a concentration is a sign of an unhealthy market that is particularly vulnerable to a decline” , Hubert adds. “But my analysis of data since 1970 does not support this.” He opts for a whimper rather than a crash.
So enjoy these wonderful years – and send us all a postcard.
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