Dwayne, Denver Colorado. The high city. Mile high? He starts it with “hi.” (laughs)
“Hi!” Hello Dwayne. “I’m 53 years old, looking to retire at age 60. Married,
wife 50. We currently have $1.5 million in retirement accounts. I envision needing $100,000
a year. My question is, given those broad parameters, what would be a current, or appropriate
amount of bonds and stock allocation both now and the next five years? Also, we have
only remaining home debt of about $135,000, which will be paid in full in seven years.
Thanks.” All right. So Dwayne’s 53. Looking to retire at age 60, he’s got $1.5 million.
He wants $100,000 from that account. What should be his stock-bond allocation?
That’s a great question. So I’m just of sort of gonna paraphrase. It looks like, Dwayne,
you’re planning on having your mortgage paid off, I guess by the time you retire,
which is fantastic. And I don’t know… Pretty good at the math. (laughs)
Yeah I’m really right with it today. (laughs) He says, “I envision needing $100,000.”
I’ll assume that’s over and above, that’s not including the mortgage, because the mortgage
will be paid off. I’m gonna make that assumption right now. What I don’t know Dwayne is how
much you’re saving currently. So you got a million and a half, and so the
million and a half… Let me see your calculator real quick.
Yeah, you calculate while I’m talking. But a million and a half, and let’s just say
you’re maxing a 401(k), $24,500, and maybe Joe, put in6% or 7%, something like that.
What does that come out to be? So if he’s got $1.5 million and he’s got
7 years, let’s say he gets 6% on the money and he’s saving $24,500?
Yeah, let’s go with that. That’s $2.4 million.
$2.4 million. Okay… Look at that Dwayne, we just got you $2.4
million. All you gotta do is max out your 401(k) and get 6% over the next seven years.
If you take 4% on that, that’s $98,000. Yeah. We’ll call it a hundred. We’ll round it.
Boom.
Yeah and then there you go. What stock-bond allocation does he need? Well,
I think he can play it conservative now, because let’s say if he if he targets a 6% rate
of return, then he’s home free. Now, if he has pensions and Social Security, that’s
going to be gravy on top of that. But he’s 60 years old when he retires, so he’s got
to bridge that gap. So he’s got to look from 60 to 67, potentially, to get Social
Security, or if he’s going to push it out to 70.
Right. So based upon our assumptions, I personally would probably do 60/40 – 60% stocks, 40% bonds.
Yeah, I think that’s right in line. I think
anywhere between 40% stocks and 60% stocks. I agree. You probably don’t need more than
that, in terms of stocks, and if you want to play it safer, go 50/50. And I’m not
even opposed to 40% stocks, 60% bonds. But I agree, somewhere in that range, based upon
what we know about your situation. Right. Because he doesn’t have to shoot
for the moon here. He’s already done a really good job, he’s 53 years old, wife’s 50,
they got a million and a half saved? And that’s not even including Social Security
or pensions. So, a lot of this, as you say, Joe, might be gravy.
Right. So I think Dwayne, congratulations. I would not say “all right, 100% stock portfolio,
or 100% bond portfolio.” I think you still need risk in the portfolio to get a target
rate of return. You need 6%. Yeah. And something else you might think about
is, if you want to go 60% stocks now, as you get right to retirement, you might dial it
back a little bit, maybe 50/50, maybe 40% stocks 60% bonds. But you still need stocks,
because chances are you’re going to live – one of you is going to live into your
90s, so that’s 30 years. And that’s where people make mistakes, Joe, is they think,
“OK, I’m retired so I can’t take risk anymore, because I can’t make the money
back.” Well yeah, you definitely want to make sure you have a portfolio that you can
draw upon in bad markets. But the fact of the matter is, you may live for another three
decades or more, and that’s your time horizon – it’s not like one year, it’s 30 years
or more. Right. And with the amount of information
that we have, I think that’s the best way to go. Our advice could completely change
if, Dwayne, you have a pension at age 60 that’s paying you $80,000 a year and you want $100,000.
So now you only need $20,000 from the overall portfolio. Then it gets into a little bit
different type of discussion. Well it does, and so now I think we’d have
a lot more latitude. So you don’t need to take a lot of risk, so if you want to be conservative,
10%, 20% equities, then fine. On the other hand, because you don’t necessarily need
this money, what’s it for? Is it for the kids, is it for charity? Maybe take a little
bit more risk, because you can afford to. Right or maybe you look at it and say, you
know what, I don’t know. Maybe $100,000, that’s the baseline. Some years it’s going
to be $150,000 because we want to go on a cruise, or we want to do this. I dunno, listen
to Suze Orman, you probably need $30 million, because you’re going to have a catastrophic
event that of course is going to happen to you…
So I guess the point is, there’s a lot of variables and we don’t really know your
situation fully, but just based upon what we know, probably 40 to 60% equities would
probably be a good place to be. Now Dwayne, now let’s take this to the next
level here, Alan. Wow, OK we’re going deep.
Yeah because he still has 7 years – he’s 53 years old, he’s got $1.5 million in retirement
accounts. He never specified what type of retirement accounts are these? Is it all IRAs,
is it all 401(k)s, is there any Roth in here? Or does he have a brokerage account that he’s
labeling for retirement, or is everything in a retirement account? So if he continues
to save the $24,500 in the retirement accounts and gets 6% over the next seven years, we
just did the calculation, approximately, roughly, it’s no guarantees, blah blah blah, of about
$2.4 million. Well if that’s all in a retirement account, that’s all going to be taxable
income. If you want to spend $100,000 a year, well then now, hey, you’re going to be in
a little bit higher tax bracket versus if you wanted to spend let’s say $60,000 a
year. And then you’re going to have Social Security on top of that, and if you have any
other pensions, all of that kind of layers on top of each other, where that could pop
up into even a higher tax bracket than he is now. So that’s where diversification
of taxes come in. You have 7 years, so if $24,500 is that savings number, how much of
that is he going to be putting into retirement accounts? How much should he be putting in
a Roth? Does a Roth conversion make sense? Can he broaden that $1.5 million out get a
little bit more diversification tax-wise, because if that’s the case, well then he
doesn’t necessarily have to accumulate that much, because a lot of it is going to him,
not to taxes. Yeah, and that’s a really good point
because right now the 24% tax bracket goes up to $315,000 taxable income for a married couple.
If you had that kind of income last year, 2017, you’re probably subject to alternative
minimum tax, and you probably were in a 35% effective rate. So this is 11% lower tax for
many. And then you think about, well you know what, this tax law, at least at the moment,
it’s going to sunset. So 2026 we go back to the old rates, where you might be in the
25 or 28% bracket or worse. So it’s like, I totally agree with that. It’s like, make
sure you get tax diversification in addition to the savings plan.
Right. So he needs a savings plan, how much is it going to save? Where’s it going to
save it from a tax perspective? And then from there, what does that allocation look like?
I think he’s skipping a beat here by saying, “Well show me the allocation first.” Well
no, let’s look at, what’s your fixed income sources, what’s your income going to look
like in seven years? Where’s that money held right now? And then break it out a little
bit more from a tax perspective, and then from there, that’s when you can start really
dialing in your overall allocation. So Big D from Denver.
It’s a great question. Dwayne from Denver. Colorado.
Mile high. You been there? No, I have not.
I have been there many many times. It’s a great place.
I know you have. You’re a big fan. Buffs. Yeah Buffs, Rockies, whatever.