Author Topic: Your thoughts on my portfolio investment plan from VG...  (Read 2466 times)

Holyoak

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Your thoughts on my portfolio investment plan from VG...
« on: March 26, 2015, 10:12:34 AM »
I had Vanguard produce a complementary investment plan, and I'm sorta puzzled by their methodology and asset allocation.  I have about $850K with VG, $750k of which in taxable accounts, the rest in IRA's, 80/20 stock bond allocation for all investments.  The rest of my other investments are with Hewitt ($80k 401k) that is mostly low cost big cap index funds, and an inherited IRA worth $125k held with TIA-CREF in their stock and guaranteed fund with about $3700/yr RMD taken in Dec.  VG (of course) wants these to come over to VG too.  Cold hard cash held in reserve to buy a home and emergency fund is about $185k.  Total NW is about $1.35MM, I have no debt, and currently live on about $15k/yr.

VG used what I wrote above, and I told them how about using $23k/yr to live on, and not include $100k cash max for a home purchase (I hope soon).  They know I am retired at 48, and this portfolio evaluation and guidance did not include SS.  I am really kinda surprised at what they told me, and when condensed looks like:

They factored the investment plan based on a 100 year life span, and a 60/40 stock to bond mix for a 99% chance of success.  Said if I bumped it up to a inflation adjusted $30k/yr, the success drops to 95%...  100 year life span?  99% with what they calculate a mean ending balance of $15-$25 million?  For my ER situation (age 48), invested net worth value as invested as I have, low annual spending, and assuming a reasonable life span, how would you do it?  I have contemplated maybe drop to 75/25 or 70/30...  60/40 seems a little too conservative IMO considering my factors and time horizon.  I get they want to use bonds to smooth things out, seem less volatile, but 40%?

What do you folks think about what I have written?  I have a phone call with VG tomorrow, so will get actual human commentary then, but would like your thoughts and ideas to run past him.  The last third of the plan was promoting them as going over to paid management for me, and felt kinda selly, something I have never experienced with VG in over 20 years.

Thanks for reading my post, and thanks a lot for your insight.


Aphalite

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Re: Your thoughts on my portfolio investment plan from VG...
« Reply #1 on: March 26, 2015, 11:12:52 AM »
I think they just default to 60/40, you should do what you feel comfortable with - 75/25 is a pretty popular mix, as is 75/25. As long as you have a small emergency cash cushion you should be fine, since at 1.3m your portfolio is putting out dividends in excess of 20k annually - you won't even have to draw down your principal.

A word on bonds - historically, bonds have smoothed out the dips, but we're at the lowest interest rate environment we've been in about 35 years (since peak interest rate 1981). If you are going to allocate to bond, please insist on intermediate maturity dates. Buying long term 30 year bonds now doesn't make sense

Scandium

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Re: Your thoughts on my portfolio investment plan from VG...
« Reply #2 on: March 26, 2015, 11:18:21 AM »
What is your problem with the 100 year life span assumption? Since the average age for a US male is 76 and you made it to 48 I don't think 100 is totally unrealistic. Maybe a bit optimistic, but not unreasonable. Remember that the average includes people who die before age 1. Who knows what medical advances can do in the next 52 years. What did medicine look like in 1965..?

If you can have 40% bonds and fund your life style with 99% success, or double it with 95% success, why do you really need any more stocks? I'd guess vanguard assume most people in this situation would rather have a more stable portfolio, rather than more volatility to earn more money that they don't need. And frankly I'd tend to agree with them

skyrefuge

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Re: Your thoughts on my portfolio investment plan from VG...
« Reply #3 on: March 26, 2015, 11:52:30 AM »
They factored the investment plan based on a 100 year life span, and a 60/40 stock to bond mix for a 99% chance of success.  Said if I bumped it up to a inflation adjusted $30k/yr, the success drops to 95%...  100 year life span?  99% with what they calculate a mean ending balance of $15-$25 million?  For my ER situation (age 48), invested net worth value as invested as I have, low annual spending, and assuming a reasonable life span, how would you do it?  I have contemplated maybe drop to 75/25 or 70/30...  60/40 seems a little too conservative IMO considering my factors and time horizon.  I get they want to use bonds to smooth things out, seem less volatile, but 40%?

It seems like on one hand you're saying Vanguard is being unnecessarily extreme in its assumptions about the future ("I won't actually live to be 100!" "I don't need a 99% success rate!" "I don't need an ending balance of $15-$25 million!"), but then your response to avoid that "more than I need" result is to complain that their portfolio suggestion is too conservative? Huh?

It seems like Vanguard is simply saying "you're rich, your money will totally cover your needs, so there's no need to take on much risk". Makes sense to me. If you want to avoid such a huge ending balance, you should invest even more conservatively than they recommend, not less. Keeping at 80/20 would do the opposite, and probably leave you dying with $25-$50 million!

In a case like this where you have already "won the game", there are two equally-defensible, but opposing options. You can reduce your portfolio risk, because you don't need the extra return that comes with that risk. Or, you can increase your portfolio risk, because you have money you don't actually need anyway, so if it disappears in a puff of smoke, no big deal.

The second option would be chosen by someone who wants the opportunity to leave a large bequest, while the first would be chosen by someone who just wants to get through their life and not care about money any more.

GGNoob

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Re: Your thoughts on my portfolio investment plan from VG...
« Reply #4 on: March 26, 2015, 12:19:39 PM »
So you currently have about $1,055,000 in investments, not counting your cash. And you currently live off of $15k a year. That's a withdrawal rate of 1.4%. The Lifestrategy Growth Fund (80% stock, 20% bonds) has a yield of 2.07%. So with that, you could easily live off of dividends alone and never have to sell a single share and never run out of money. Even VTSAX yields 1.79%. So it's up to you. You could easily live off of 100% stock and only withdraw the dividends.