I am a 56-year-old retiree, single with no dependents, living on $30,000 a year, but I would like to raise my risk level to accommodate a $40,000 annual drawdown. How should I reallocate my portfolio? (My grandmother lived to be 100!) Thanks for any ideas for the next half-century.
All cash investments are in money market mutual funds earning between 5.9% and 6.1%. I planned to put a chunk of cash in Schwab's special money market fund, which is paying around 6.7%. The fund has a $25,000 initial purchase minimum, then a $20,000 minimum thereafter. My thought was to put $30,000 or so there to cover living expenses and to put a little toward a new car. I started this portfolio by saving $1,000 a year from my $11,000 salary as an underpaid liberal arts professor, finally able to plunk down the then-minimum $5,000 to open a Merrill Lynch cash management account. When Schwab opened its doors, I opened an account there and was one of the first customer accounts to trade online at Schwab. So I can appreciate your advice telling younger readers to sock it away. As things stand, I am eligible for Social Security monthly benefits of $843 at 62, $1,119 at 66, and $1,477 at 70. -- D.R.
You've got a portfolio worth more than $800,000. You need to earn less than 5% after taxes to justify withdrawing $40,000 a year without reducing the value of your portfolio. You're earning about 6% pretax in cash. You've got my permission to give yourself a raise from $30,000 to $40,000.
The stock market can go up, down or sideways, but you've got a long enough investment horizon to accept some volatility in the stock market without worrying about having to give back your raise down the road.
Though it looks as if at some point a broker sold you some load mutual funds (funds for which you pay sales charges), you've got a good hand in selecting mutual funds. But a lot of them are investing in the same stocks, and the overlap calls into question the need for such a long list of funds. For example, let's look at one of your stock holdings,
, a red-hot issue that investors are bidding up for its fiber-optics capabilities. It's a major holding of three of your mutual funds and a minor holding of two others.
For more guidance on how to reduce the overlap in your fund portfolio, see this recent
On the fixed-income (bond) side, you also have the right instincts. I actually like the shorter maturities now. The 30-year Treasury bond is only 1.25 percentage points above its all-time low yield, yet we're creeping up on $40-per-barrel oil. That's why I don't see a whole lot of upside in the bond market right now. The yield curve is still mostly inverted, meaning that shorter-term T-bills are yielding more than the longer maturity notes and bonds. The
Fed may be on hold for any further increases in the
fed funds rate this year, and its next move could be to ease interest rates. But that doesn't mean the Fed is ready to ease just yet. That makes the short end of the curve a comfortable place to be, and you're there in force.
I've talked up the
Series I Savings Bonds in recent columns. Now I want to talk about those savings bonds' kissing cousins,
Treasury Inflation-Indexed (TII) notes and bonds. I've liked these securities since they were first issued about three years ago. They pay a coupon rate that is determined at auction, but the principal (face) amount is adjusted semiannually for changes in the
Consumer Price Index.
The securities aren't that popular because if you hold them in taxable accounts, you have to pay taxes on both the coupon interest and the inflation adjustments in the year they occur. But you don't realize the inflation adjustments until you sell the security. Investors hate paying taxes on money they haven't yet received. Despite that problem, these notes are a natural for the fixed-income component of a tax-deferred retirement account.
Fixed-income investors have always gotten the fuzzy end of the lollypop when it comes to investments that preserve their purchasing power. These securities guarantee that your purchasing power is protected. Whether you buy TIIs (also known as TIPS) as five-year notes, 10-year notes or 30-year bonds, you can currently earn almost 4% interest income on these securities.
If inflation starts to heat up, those yields could drop as investors bid up the price of these securities, giving you a nice gain on the purchase. So consider moving some of your cash position, say $25,000 to $50,000, into TIIs as a hedge against inflation.
Your idea of keeping this year's living expenses in cash is a good one, and if you can earn 6.7% doing it, so much the better. Harvest some of your portfolio's losers and use the capital losses to offset the distributed gains and any other tax liabilities from your taxable portfolio. You've had a much better year in your mutual funds than you've had in your individual stock holdings, so decide which stocks you want to hold into the next year. As
explains in her
Tax Forum column, you can always sell the stock to take the tax loss and buy it back 31 days later to avoid the
wash sale rule.
Don't wait until age 70 to start collecting
. Apply for Social Security at 62, but meet with a retirement counselor before signing up for the payments. Yes, your benefit payments are lower if you begin taking them earlier. But you get more of them. I looked at the three different payment streams, starting at different ages. The values of the payment streams were close enough that you should go with the bird-in-hand theory and take distributions at age 62.
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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at