I have been sitting on $500K in a money market fund for a year after firing my ineffectual financial advisor. I am 86 years old and unmarried with financially independant heirs. I would like to at least gain an amount equivalent to my RMD.
The following is my tentative selection of ETF funds that I am considering investing 25% each: VOO,VIG,PFF,VEA.
I am inviting any carefully considered suggestions or comments. Thank you and a Happy and prosperous New Year to all.
Comments
That's a bit ambitious, according to market expectations over the next few years.
You've suggesting fine, broad based ETFs, but they'll be as volatile as the stock market (e.g. see today), which can create difficulties in taking RMDs. Specifically, the RMD is based on your Dec 31st balance. A down or volatile year can have you withdrawing a higher percentage (since your portfolio may be below that mark when you decide to take your RMD). You can mitigate that by keeping some assets (at least a year's worth of RMD) in something less volatile - cash or short duration bonds.
One question: well really more than one.....more like four.....have you ever done investing before? Why would you not want any bonds (individual)? Not funds.....they're steady. And, why do you need so much return? And, at 86, why do you want the volatility? You come to market at a bad time JMO. What time frame will you be putting this money into the market (weeks, months, years)? Do you have other money to live on (Social Security, pension)? Have you talked to another advisor or Fidelity? They can help. For me, I need to know more to give an opinion.
God bless
the Pudd
I would consider a portfolio consisting of: VMNVX (50%), GLIFX (20%), and QMNIX (30%). As a whole, this portfolio would provide relatively low volatility and reasonable returns. Other funds that I would consider would be VMNFX and QLEIX. The institutional AQR funds are available at Scottrade for $100 minimum in both taxable and retirement accounts.
Kevin
For a more serious income stream, you might put money into some REITS.
LXP yields 8.37% right now.
NNN yields 4.36%
WRI yields 4.04%
RPT yields 5.07%.
HCN yields 4.83%.
Now I've shot all my bullets. "Break a leg."
You are going to go from all cash to 100% equities (I consider the preferred stock ETF fund to be equity-like in its behavior) after a seven-year bull market that has taken the S&P 500 from 666 to 2011 (as I type this) ??
Uh, no. Try again.
Based on your advanced age, you impose a high target returns requirement, a high hurdle that gets higher each year as your RMD increases annually, on your portfolio.
I completely agree with MFOer msf with regard to scoping the problem by consulting the government RMD tables which are tied to life expectancy.
Numerous academic and industry retirement studies have concluded that a withdrawal rate of about one-half your RMD goal is a doable target that results in high portfolio survival odds over extended timeframes. The usual outcome from Monte Carlo simulations is that a 4% drawdown over a 30 year retirement period generates portfolio survival odds that are in the 95% and higher range.
Given your age, the anticipated portfolio survival timeframe is more like 15 years. This shortened period changes the calculus considerably. Some additional calculations are needed.
Nowadays, these calculations are easily and rapidly done with some simplifications that should not significantly impact any conclusions from the analyses. Since learning to fish is more useful than being gifted a fish, I suggest you do the analyses yourself.
One tool to do a respectable Monte Carlo analysis can be found on the MoneyChimp website. Here is a direct Link to the Monte Carlo calculator on the helpful site:
http://www.moneychimp.com/articles/volatility/montecarlo.htm
Please exercise it to get an informed feeling for the likelihood of a successful accomplishment of your goals.
For a representative portfolio with an 8.5% annual average return and a standard deviation of 12%, a survival likelihood of 98% is anticipated for a 15 year period. If that period is extended to 20 years, the portfolio survival likelihood decreases to 86%. If the portfolio volatility is increased from 12% to 15% annually, the portfolio survival probability is deceased from 98% to 93% for the 15 year timeframe.
Parametric analyses like these help an investor to get a feel for the soundness of his plan. These general cases seem like attractive potential outcomes from a portfolio survival perspective. However, note that MoneyChimp does not provide the end value of the portfolio. If a single dollar remains in the portfolio after the designated period, MoneyChimp scores that as a portfolio survival instance.
If you want more detail, please give the Portfolio Visualizer version of Monte Carlo a test run. Here is a Link to that site:
https://www.portfoliovisualizer.com/
This excellent website will allow you to back-test generic and specific portfolio asset allocations, and also to do a Monte Carlo simulation that outputs portfolio survival odds and average portfolio end wealth values.
For one test run, Portfolio Visualizer yields a 96% survival likelihood for the 15 year period with a 50% US Stocks, 25% Large Cap Value, and 25% International Stock portfolio allocation. A 37,000 dollar average annual drawdown rate was assumed.
The median portfolio end balance was 1.1 million dollars, and both the 25 percentile and 75 percentile end values were provided. Since these are Monte Carlo simulations, results will change a little with each running of the code.
These estimates were done using historical base rate returns. Given the current investment environment, you might want to do the simulations using slightly more muted market return projections. You can input your own predictions and do some sensitivity scenarios.
If you don’t like the specific outcomes, these Monte Carlo tools allow you to play endless what-if options to explore allocations that might improve the projected results. The work is easy and even fun. Enjoy.
I edited to convert my original post from MRD to RMD. Sorry for the nomenclature error.
Best Wishes.
The RMD simply moves a specific amount between the tax-free to the taxable arenas. If the desire is to generate enough income to offset the newly-imposed taxes so as to maintain the accumulated savings level, that would be a substantially smaller amount than the RMD itself, let's say roughly 25 or 30% of the actual RMD, depending on the tax specifics.
I constructed my initial reply to your investment desires without challenging or questioning your stated objectives. Your goals and preferences are yours alone. Given your age and the steeply progressive RMD requirement, your bottomline objective is extremely bushytailed.
I agree with the several MFO contributors who suggested the difficulty, perhaps impossibility, of satisfying them. It is a tough nut to say the least.
Given the progressive character of the government RMD schedule, I believe the task is almost impossible using the historical returns of any major market investment categories.
Today, your RMD is 7.1%; 5 years from now that RMD grows to 9.3%; 10 years from now the RMD has escaladed to 12.3%. The number of investors who achieve this level of returns approaches zero. It might be a good idea to reconsider your objectives.
If you disliked my earlier post that recommended deployment of Monte Carlo codes, you’ll hate my following suggestion that statistically backstops the futility of your tentative plan. The tool that I used to reinforce my assessment uses market average return and standard deviation data. It is the Bell (Gaussian) curve.
Market rewards do not exactly follow a Gaussian distribution, especially because of fat-tails, but are close enough for modeling purposes. The fat-tails make the Bell curve too optimistic in terms of real as opposed to projected returns. By the way, some Monte Carlo codes adjust for the fat-tail effect.
Your problem is much more demanding than a simple negative market year. Your portfolio must not only accommodate that probability, but it must also generate a return that exceeds your escalading RMD. Market volatility (standard deviation) kills. Diversification can help here by reducing portfolio standard deviation, thus dropping the likelihood of not meeting your high target.
How much does reducing standard deviation help? The Bell curve tables yield an approximate answer. The good news is that these tables have been graphically programmed on the Internet. You can determine the cumulative likelihood (the probability) of any event by simply knowing its projected standard deviation. Here is a Link to one useful graphic presentation prepared by the Math is Fun website:
https://www.mathsisfun.com/data/standard-normal-distribution-table.html
Please give this site a test run. Since your main interest is the likely cumulative failure rate to satisfy your RMD target, please click on the “Up to Z” button on the graph. Now simply move the standard deviation marker to determine the cumulative probability of the event to the desired level of volatility.
For example, suppose your portfolio has a projected return of 8.5% with an anticipated standard deviation of 12%. That’s a realistic projection for a diversified portfolio that is heavy into equities. Now assume that your RMD is at the 7.1% level. That’s 0.12((8.5-7.1)/12) standard deviations below the expected annual return.
What is the likelihood of that happening? Place the moveable marker at the -0.12 level. The probability of that happening is about 45%. Not good news.
Alex, this type of analyses strongly suggests that a cash reserve is warranted if you do not want to sell funds from your proposed equity portfolio. You have many options. A low cost short term government bond fund is one such option. As suggested by other MFOers, you might want to reformulate your objectives. As always, the choice is yours.
Edit: I was too hasty in my initial posting here and made an error in my example problem. I've corrected it. Sorry about that.
Best Wishes.
Well after the last couple of days I hope you are still in your money market.
At 86 years old, you might consider putting some of it into an immediate annuity. The balance will vanish when you do but the payout starting at your current age should be pretty high. I was quoted about a 6% payout and I'm 25 years behind you.