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Happily Ever After

Jonathan Clements

INVESTING IS ABOUT finding a strategy that’ll allow us to meet our life’s goals—and which we can live with along the way. That brings me to a major portfolio change I made two years ago, and a series of changes I’m planning for the years ahead.

In late 2021, I split my portfolio in two. One part I’ll use to fund my retirement, while the other part I’ll leave to my two kids. This “bequest” portion consists of my three Roth accounts, which are roughly a quarter of my overall portfolio. Because I don’t foresee ever touching this money, I’ve invested the entire sum in stocks.

I settled on a single fund, Vanguard Total World Stock Index Fund, which is available as both an exchange traded fund (symbol: VT) and a mutual fund (VTWAX). I view it as the ultimate in stock market diversification, owning all of the world’s publicly traded companies of any significance, with 61% currently in U.S. stocks and 39% invested abroad.

In the two years since, financial markets first nosedived and then recovered. There’s been all kinds of horrific mayhem, not least in Ukraine and Israel. Concerns have been raised about the return of inflation, the sustainability of U.S. government spending, the impact of rising interest rates on stock market valuations, and the prudence of investing in authoritarian China.

And yet, through all this, I’ve given scant thought to my Vanguard Total World holdings. At this point in my life, that’s exactly what I want. I have no clue which parts of the global stock market will shine in the years ahead, so I’m happy to own the whole shebang, confident that—while companies and even entire markets will fall by the wayside—the global economy will keep chugging along, and Vanguard Total World will go along for the ride.

Looking up. What about my portfolio’s other three-quarters—the money that’s not part of my “bequest” Roth accounts? Today, I own index funds focused on the total U.S. stock market, total international stock market, U.S. large-cap and small-cap value stocks, international value stocks, emerging markets and foreign small-cap stocks, plus a couple of short-term bond funds focused on conventional and inflation-indexed government bonds.

I’ve owned these funds for years and I believe all are worthy long-term investments. But after two pleasurable years of ignoring my Vanguard Total World holdings, I’m just not sure I want to be bothered anymore with most of these other funds.

I’m not claiming Vanguard Total World is the right stock fund for everybody. It’s marginally more costly than owning the world through two separate total market funds, one targeting U.S. stocks and the other owning foreign shares. Vanguard Total World also isn’t the best holding for a taxable account, because right now holders won’t qualify for the foreign tax credit. And its basic investment mix will strike many folks as uncomfortably risky, thanks to its 39% allocation to foreign shares.

But the way I see it, the fund is the least risky stock fund you can own. It isn’t overweighting anything, but rather simply holding the world’s stocks according to their importance, as measured by market value. Whatever happens in the years ahead, the fund will continue to do just that, with no need for me to rebalance or make any other tweaks. That’s why I’ve decided that Vanguard Total World should be my sole stock market holding, not just for my “bequest” accounts, but also for the “pay for retirement” portion of my portfolio.

Looking down. That still leaves the small issue of actually paying for retirement. I’m about to turn age 61, and I still earn enough to cover the bills, so I’m not yet dependent on my portfolio for spending money. But in the next few years, that day will come—and I’ll need spending money that isn’t subject to the vagaries of the stock market.

In recent years, as I’ve looked ahead to my eventual retirement, my target for the “pay for retirement” portion of my portfolio has been 80% stocks and 20% short-term bonds. My thinking: If I was withdrawing 4% of savings per year and I wanted enough set aside to ride out five rough years in the stock market, I’d need five times that 4% in bonds, or 20%.

To be sure, once I’m fully retired, it could be that 20% strikes me as an uncomfortably thin safety net, and perhaps I’ll want, say, seven years of spending money, or 28%, in short-term bonds. The fact is, it’s hard to know exactly how I’ll feel about investment risk once I no longer have any earned income.

On the other hand, I may decide to keep even less in bonds—for two reasons. First, when I claim Social Security at age 70, my benefit is currently slated to be $55,000 a year, figured in today’s dollars. I feel like I live pretty well, traveling and eating out often. But maybe I need to step up my game—because that $55,000 will cover the bulk of my spending.

Second, to cover the gap between what Social Security will pay me at age 70 and what I spend, I plan to make a series of immediate-fixed annuity purchases from different insurers that’ll pay me lifetime income. The upshot: Once I make those annuity purchases and once I claim Social Security, I may need zero dollars from my portfolio each year for spending, and hence I could potentially keep far less than 20% in bonds.

This brings me to a point I’ve made before, but it bears repeating. Others view delaying Social Security and buying immediate annuities as somehow cheating their heirs. I’d argue just the opposite is true. As long as I live into my 80s, my strategy will potentially mean more wealth for my heirs—because it’ll allow me to allocate far more of my portfolio to stocks, while also drawing little or nothing from savings from age 70 on.

Yes, I’ll need to start taking required minimum distributions from my IRA. But there’s no law that says I have to spend that money. I’ll likely use part for qualified charitable distributions and part for gifts to my kids, while reinvesting the rest in my regular taxable account.

Getting there. That brings me to a second small issue: putting my plan into action. As a first step, I need to swap out of my current index-fund holdings in my “pay for retirement” portfolio and into Vanguard Total World.

Problem is, that means abandoning my portfolio’s overweighted positions in value stocks, smaller companies and emerging markets. These holdings fared well in the current century’s first decade, but not so well over the past dozen years—and that gives me pause. While I claim no crystal ball, I’m also loath to give up on these overweights at what feels like a bad time in the market cycle, so I plan to make the shift slowly over perhaps a handful of years. And, no, this isn’t a tax issue: Almost all of these funds are held in a retirement account, so moving money around won’t trigger any tax bill.

What about buying the lifetime income annuities? Folks have suggested that I should buy now, while interest rates are relatively high. But my inclination is to wait until I have a firmer retirement date. Interest rates may indeed fall in the meantime, but delaying also means sellers of immediate annuities will pay me more because I’m closer to death. That’s the dubious privilege that comes with getting older, and I figure I might as well take advantage.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X (Twitter) @ClementsMoney and on Facebook, and check out his earlier articles.

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Mark
10 months ago

Soc Security is the World’s best annuity. Tax favored, guaranteed, inflation-indexed. How could I possibly improve on this? Why double down on the Insurance industry? Why do I need to pay up for “guaranteed income” ?
If you are a conscientious , long term saver, the likelihood of becoming wildly extravagant is nil. It is not in your DNA.
Mike Piper’s newest book “More Than Enough” is fantastic. Essentially over a certain age you are investing for your heirs. If you die at 90, you will be passing on your Wealth to 60 year old children who may be in retirement themselves. Better to pass it on when they are young and can use it.
I find every year represents new opportunities. Tax laws change, expenses change, Health changes. No way I can predict my situation even 2-3 years out. Review “cash for clunkers” if you don’t believe me.

Jonathan, thank you so much for your writings and your wisdom.

jack facts
10 months ago
Reply to  Mark

Don;t know where you got your “facts” but I think SS is the worst annuity available. It is weighted to provide a higher % return to lower income participants, it takes after tax dollars then makes receipt of all benefits subject to income tax. I would be much better off to have invested all those withholdings in any kind of deferred annuity, stock funds, etc.

Ben Rodriguez
10 months ago

Perhaps what I admire most about you, Jonathan, is that you are living your values. Practicing what you preach, so to speak. I’ve found in my spiritual life that it’s useful to not just hear a rabbi preach what should be done, but to also live that out. So, you’re the Retirement Rabbi in my life.

Michael1
10 months ago

I’m encountering this:

Problem is, that means abandoning my portfolio’s overweighted positions in value stocks, smaller companies and emerging markets. These holdings fared well in the current century’s first decade, but not so well over the past dozen years—and that gives me pause. While I claim no crystal ball, I’m also loath to give up on these overweights at what feels like a bad time in the market cycle, so I plan to make the shift slowly over perhaps a handful of years.”

In looking at moving from active to index funds in IRAs, I come to funds that have my own small and value tilts, and see that they’re doing better than their indexes, in some cases much better. They’re rated gold or silver by Morningstar. I’m loath to get out at this time too, especially in cases where they’ve been sprinting over the last year.

Ben Rodriguez
10 months ago
Reply to  Michael1

Illustrating that there’s no good time to sell: If they’re up, you can’t sell now, they’re doing great! If they’re down, you’d be crazy to sell at fire-sale prices!

jack facts
10 months ago

As a pro, you obviously thought of everything – almost. I believe we should not only think of our family as heirs, but also others. If we are reading your column, our family has probably already benefitted from our financial situation. Along the way we hopefully have been supporting charities we deem worthy, Our death should not change our perspective.

I am leaving about $200k of immediate inheritance to each child, and then enough in a trust for each to receive about 20 yrs of $50k starting at age 60, which they can use then to perhaps retire early or save for more flexibility when retire. The remainder of my wealth will go to designated charities through beneficiary and trust designations. I believe this provides an adequate legacy, but also prevents my children from blowing through a wad of cash that I accumulated through frugality and prudence. However, it will be enough to make a meaningful difference on their options. Similarly, there are so many worthy causes out there with people needing so many services that I would rather they receive life changing benefits rather than my children getting some unnecessary perks.

Morris Pelzel
10 months ago

Thank you Jonathan … this post connects with my situation on a number of points. I just turned 64 and plan to work full time a couple more years or so. Like you, I plan to defer Social Security until age 70, and am projected to received a similar household benefit (mine plus spouse) of about 55K per year. That amount would pretty much cover our current living expenses.

Currently I also have my portfolio in a roughly 80/20 split between equities and short-term safe assets (T-bills, CDs, HYS, and TIAA Traditional). My plan is to use those assets to fund the bridge from retirement to Social Security claiming, which will be a period of about four years. Like you, I would like to keep about five years of living expenses in these kinds of safe assets, and put everything else into equity index funds. Once SS begins, there will of course be much less need to draw from the portfolio for yearly expenses.

My wife believes that we have “enough” and should sharply reduce our equity exposure going forward. She is perhaps channeling Bill Bernstein, who as we know has advised those who have “won the game” to stop playing. I prefer the “barbell” approach, which also seems to describe what you are doing: keep 5-7 years of expenses safe, and put the rest in stocks. She says “why take the risk?” and “what about Japan?” etc.

To be fair, I do think there are some deep risks out there, especially the US federal debt level and, even more so, the threat of an authoritarian political regime taking hold in this country. And those Social Security benefits could be reduced. But, my response is that we still have to consider at least a 30 year time horizon and need to keep investing for growth, given the risks involved, for at least a couple of reasons. One, I would like to be as generous as possible with our daughter and with charitable contributions. And two, we are self-insuring for possible long-term care expenses, and who knows what those might be like in 30 years?

I don’t really have a good answer to the “what about Japan” question, other than to say that, historically, stocks broadly have always returned positive results when you get out to 15/20 time periods. In other words, I’m comfortable staying at an 80/20 allocation … but I wonder if others consider that too risky and aggressive?

Regarding fund simplification … while VTSAX and VTIAX are still my core holdings, I do also plan to keep some tilt toward small cap, value, emerging markets, and REITs. Yes, having half a dozen index funds is a bit more complicated that just having one, but I don’t really find it adding to my cognitive load, at least at this point.

Finally, I do take a different stance with regarded to SPIAs … I have no plan to purchase annuities, beyond the relatively small portion of my TIAA-CREF that is in traditional. Social Security is already the world’s best annuity, and I’d prefer to manage the rest of my portfolio myself rather than turn over chunks of it to an insurance company … and risk losing a major part of it should I die earlier than expected. But I can recognize the appeal of SPIAs for those who prefer to go that route.

Thanks again for a thoughtful post and the valuable information that Humble Dollar continues to provide us.

Last edited 10 months ago by Morris Pelzel
Rick Connor
10 months ago

Excellent article Jonathan. It’s generated lots of interesting discussion. I strive for simplicity but sometimes find I add a fund or ETF and complicate things. I think my 2024 resolution will be to rationalize our portfolio, and organize our financial plan after purchasing a new home and rearranging our lives.

haliday11
10 months ago

I love reading yours posts and especially appreciate how you break down the decisions you’ve made. I quit work at 67 and used cash to fund our full-time travel lives. I lost my house/equity due to timing of a divorce and melt-down of the housing market in 2008-11. So we own no real estate.

I also opted to wait to get SS and it’s a very lovely $51K net. This plus my husband’s 18K covers 70-80% of our expenses while we travel. We figure when health/attitude/desire can no longer support this kind of life, our annual expenses will drop by $20-30K.

I have my investments split between a dividend fund (IRA rollover, Thomas Partners at Schwab) and two Schwab Intelligent Investment Portfolios (1 is moderately aggressive, 1 is moderately conservative reflecting me and my husband’s respetic risk tolerances). I also have a small Roth filled with speculative stocks (EVTOLs and quantum computing!). It looks like my RMDs in 3 years will fund about half of the income we need beyond SS.

And while I love my son and my husband loves his daughter and we hope they get some money when the last of us dies, our spending plan does not PLAN for that. We are spending MORE than we “should,”in the next 5-7 years, e.g. 6.5% of our investments, full well knowing we will be spending less when we “settle down”.

Rick Thompson
10 months ago

Great article, Jonathan! Living on $55,000 would be quite lavish for me. It helps that my last mortgage payment was in 1975 and I have yet to eat out, get food delivered or travel this century (all my preference).

Matthew Cort
10 months ago

I have a tangential question related to “bequest” Roth accounts. I assume you are giving it as a lump sum to your kids because you feel they are wise with money and you are their father/teacher. However, my 24 yr old daughter (I am 74) has personal struggles, will never be a high wage earner, and is not a responsible financial planner. I now fund her Roth account each year. In terms of bequest, to be funded by my Roth, I have set up a Revocable Trust that will automatically pay her 1% of assets per year, with optional additional payouts authorized by the (now 60 yr. old) Co-Trustee, whom my daughter will obviously out live. Who then manages the investments and acts as the Sole Trustee? I’ve talked with Vanguard and Schwab, who each charge about 0.5% of assets (and have different investing approaches, and loyalties). Any other suggestions? And what stock/bond split do you think would be appropriate to grow the invesment but also allow for her yearly, possibly irregular, withdrawals? I hope this is not too off topic.

jack facts
10 months ago
Reply to  Matthew Cort

From my queries, .5% is as good as it gets except for friends/family – but you need the corporate fail safe standby. The trustee should have discretion on the allocation. Vanguard, and probably others, doesn’t vary much vs standard model, but you can’t anticipate what the future will hold.

James
10 months ago
Reply to  Matthew Cort

Matthew – Doesn’t the Roth need to be fully depleted within 10 years, regardless of whether it’s in a Trust or not?

DrLefty
10 months ago
Reply to  Matthew Cort

We’re in a similar situation with our daughter. Love her dearly, but she’s not launching well as an independent adult, and that’s putting it politely. We found a good estate attorney this year. All of our assets are in a trust, and we set up a trust in her name, too. When both of us pass, our trust will roll into hers. The trust is set up to give her a percentage of the assets every decade until she turns 60 and can also be petitioned for more as needed. She gets full control at 60. This helps ensure that she’ll have some assets to count on as she heads into her own retirement years. (Your idea to fund a Roth for your daughter is good, as well, but of course there’s no way to prevent her from spending that down the line, as it’s hers.)

The key for us was hiring a local fiduciary firm as the trustee rather than a friend or family member. They get paid hourly as they work on the file/estate. It was $200 to set it up, and then $120/hour billed to the estate as needed. Our finances aren’t complicated, so it shouldn’t be that time-consuming. They can also manage the account if one or both of us is unable.

This was important to us because (a) this plan is set up for decades, so anyone we know now whom we might trust (e.g., one of our siblings) is likely going to be long gone by the time our daughter is 60 and (b) she might not be happy about this arrangement, so we didn’t want a family member caught in the middle of it.

Dan Malone
10 months ago
Reply to  DrLefty

Mind sharing who your local fiduciary firm is, or how to locate a similar firm? I am not familiar with this arrangement, and neither was an estate planning specialist lawyer in my top 10 population U.S. city .

Jonathan Clements
Admin
10 months ago
Reply to  Matthew Cort

Unless you have a trusted and knowledgeable friend or family member who can serve as trustee, it sounds like you need to go the corporate trustee route. If the trust is only paying out 1% a year, it seems like you could opt for an aggressive asset allocation. After all, based on what you say, the fund might only pay out 10% of assets over 10 years.

Matthew Cort
10 months ago

Jonathan; The corporate trustees I’ve interviewed charge 1% of AUM, which is twice the fees charged by the trustee services of Vanguard or Schwab, 0.5% (noted above). Over 45+ years this compounds to a significant amount of “lost” money. I don’t see their advantages, except perhaps more personalized contact with my daughter. Also, my Trust instructs payments for HEMS (Health, Education, Maintainence, and Support), which could substantially increase payments in some years.

Jonathan Clements
Admin
10 months ago
Reply to  Matthew Cort

I would consider Vanguard and Schwab to be corporate trustees. If you have no choice but to pay their 0.5%, well, you have no choice. I’m not sure it’s worth agonizing over an issue where there’s apparently no viable alternative.

Ed Kierce
10 months ago

Has anyone looked at Pacer Funds such as CALF, it is a small cap value ETF noted for holding companies with superior cash flow, thus a superior ability to maintain and grow dividends. The downside is if the economy struggles in the next six months as it absorbs the new much-higher interest rates.

The other Pacer Fund is COWZ, invests in large/mid-sized US companies with high free cash flow.

I am a Vanguard investor and dislike straying away from their funds. VIG and VDADX offer good results.

Thank you Jonathan and other HD members for sharing your thoughts on your investment practices.

Michael1
10 months ago

Great article Jonathan. Lots of food for thought as usual. 

Here as tax time approaches I can absolutely relate to the desire for some simplicity. Just today I was kicking myself a bit for letting this portfolio sprawl over the years. It’s tempting to target some capital gains harvesting toward reducing the plethora of small positions. Instead will probably use it to reduce an active fund or two. 

Several people mention the possibility of future cognitive decline as a reason to simplify. I agree, but I could take some simplicity now even with most of my faculties still in place. 

Question – if you didn’t have a legacy motive, would you still place great importance on Roth conversions just to reduce the impact of RMDs?  

Jonathan Clements
Admin
10 months ago
Reply to  Michael1

With Roth conversions, the goal should be to even out your tax bracket over your lifetime — or over your lifetime and 10 years of your heirs’ life, assuming you have a bequest motive. Don’t have any heirs? Roth conversions now may still make sense if they could help you avoid a much higher tax bracket once, say, RMDs start.

Michael1
10 months ago

That’s a good way of looking at it. I need to get a better handle on our future RMD burden. Social security is easy to predict, but future RMDs have proven elusive. I’ve tried a couple of calculators but remain unsatisfied. Any suggestions are welcome.

Randy Dobkin
10 months ago
Reply to  Michael1

Have you tried NewRetirement?

Michael1
10 months ago
Reply to  Randy Dobkin

I haven’t, thanks

Andrew Forsythe
10 months ago

Thanks for this, Jonathan. I’ve always especially enjoyed the articles where you share what you’re doing with your own money. It’s definitely more meaningful when the writer actually has “skin in the game”.

snak123
10 months ago

What you are proposing (for retirement income generation) is basically what we’ve done since retiring 10 years ago (at age 63). When I retired, I estimated my SS benefit at my full retirement age (FRA) of 66. After determining what our essential expenses were, we purchased sufficient SPIA income such that the combination covered those expenses. However, we limited the SPIA purchases to less than 1/3rd our portfolio in order to maintain financial flexibility. I set up a CD ladder to get to FRA, where each rung covered the shortfall of not taking SS (at the FRA rate) and our estimated discretionary spending. Each year from age 66 to 70, I reassessed the “need” to start my SS benefit but was able to hold off until age 70. I kept extending the ladder to guarantee that any anticipated shortfall in income (for essential spending) was met with fixed-income assets. In the meantime, we maintained a 70/30 asset allocation for the past 10 years (with our asset mix being close to what you indicated except less international but with an REIT fund). As a result of waiting to age 70 to claim SS benefits, our lifetime income covers all our expenses (essential and discretionary) except for major international travel. Alternatively, we could also consider this “excess” lifetime income (discretionary portion) available to compensate for the lack of COLA for the SPIA income. At 3% inflation, I estimate that this lifetime income will continue to cover essential expenses minimally through 2028. Another interesting outcome is that my SS benefit (as the higher income earner) plus our (joint-survivor) SPIA income plus (our current) RMD is more than the cost of a skilled nursing facility in our area. This was not planned but I thought it was an interesting coincidence.
 
Since all IRA withdrawals are for discretionary spending (except for planned major expenses such as a new car), it has provided peace-of-mind, allowed a variable savings withdrawal rate, and mitigates sequence of return risk. With the heavier weighting in equities, we have being able to achieve an annualized rate of return of 8% since retiring. As a result, our portfolio continues to grow each year and we will (despite our spending) most likely die at our highest net worth. Our 20-30% bond allocation also allows us (if necessary) to draw on non-equity assets for 10-15 years, allowing the equity funds to stay invested for the long term. While we initially averaged close to 6% withdrawal per year, a good portion of that withdrawal rate was for travel (visited 27 new countries since retiring) and six years of paying large Roth conversion taxes. Those conversions reduced our T-IRA balance by almost 40%, making a big dent in our RMDs, which also got us below the Medicare IRMAA thresholds. For the past two years, we have not had to withdraw more than our RMD (which only applies to 60% of our portfolio). I estimate that our children will inherit our assets with 66% of such assets tax-free.
 
In our mid-70s now, I am working on further simplifying our portfolio, not unlike what you have proposed. One strategy I recently explored with our CFP is transitioning toward generating more dividends to create an income stream to satisfy our RMD. While I have always been more of a total return person, this strategy (at this stage of our retirement) would pretty much eliminate the need to decide what to sell or buy, rebalance, or replenish buckets. I can even have our RMDs computed and distributed monthly with no intervention on our part. In parallel, I have also set up an automated cash flow and autobill payment on the expense side. But that is another story.

UofODuck
10 months ago

Your plan sounds fine, but I have never been a fan of annuities. The fees are high and they achieve their payout through a return of capital and investments in the same market as you’re investing in. Seems to me that you can produce an annuity-like return through your existing investments, without the expense of an annuity. Sure, your investments are subject to market fluctuation, but if you have saved enough, the volatility shouldn’t be a problem and you still have access to 100% of your principal..

Jonathan Clements
Admin
10 months ago
Reply to  UofODuck

You say the fees on annuities are high. That might be true for variable annuities and equity-indexed annuities. But it isn’t true for immediate-fixed annuities. In fact, the reason insurance agents don’t push immediate-fixed annuities is because the sales commission they can potentially earn might be just 1%. Meanwhile, as much as I love the mutual fund business, there’s one thing it can’t deliver–which is guaranteed lifetime income. Fund companies tried to engineer their way there with managed payout funds, and it’s been a disaster. In fact, Vanguard pulled the plug on its offering not so long ago.

batperson
10 months ago

Saint Jack was never a fan of investing internationally. His opinion was that US stocks provided sufficient international exposure. What is the “international component” of the US Total Stock Market (Index)?

Jonathan Clements
Admin
10 months ago
Reply to  batperson

I’ve read that large U.S. companies typically get 30% or 40% of their revenue abroad. But that doesn’t mean they’re a good substitute for foreign stocks. A question worth pondering: If U.S. stocks truly give investors international exposure, why do U.S. stocks have radically different returns from international stocks almost every year?

Jack Hannam
10 months ago

Over time I have folded my non-Berkshire equity investments into VTWAX, partly because I crave simplicity. A simpler approach means fewer opportunities for me to screw things up. You have often referred to the peace of mind one gets from holding a specific number of year’s worth of withdrawals in safe assets, making it easier to take stock market fluctuations in stride. You have suggested 5-7, while I like 12 years. This is a reflection of our individual risk tolerance and it reminds me of JP Morgan’s famous advice to “sell socks down to the sleeping point.”

I appreciate your succinct and useful suggestions. As many commenters have written, hearing certain basic principles repeated is valuable. I agree. And for what its worth, each author may phrase an old idea differently, and when one is worded in such a way that it resonates with me, its easier
to both grasp and remember. Thanks for creating and maintaining Humble Dollar!

Kenneth Tobin
10 months ago

Just own US Total Stock and Bond and read Simple Wealth by Nick Murray
Stay 100% equity until 5yrs pre retirement if you have the stomach to withstand a 50% loss

Randy Cook
10 months ago

Good thoughts. One comment, just an opinion.

Index funds have been great for the past 20 years. ALL of them now are very top heavy, depending on the performance of 7 stocks, even the ‘global’ ones.

Consider low cost managed funds. Yes you are paying 0.5% and not 0.05% management fees. No strategy works forever, and I believe the index and forget one has run its course. Small caps and emerging markets require expertise and local knowledge. Large cap indexes have the risk of the ‘magnificent 7’ stocks.

Over 20 years, either strategy will likely have significant gains. But, a major downturn will crush Indexes. If it happens sooner than later, future values will be likewise crushed. Managed funds should avoid at least some of the carnage.

On annuities, you are betting that the selling company will stay in business. No different than buying corporate bonds. Likely many other considerations, so I will leave that asset class to the experts.

August West
10 months ago
Reply to  Randy Cook

VWENX fits well.

Jonathan Clements
Admin
10 months ago
Reply to  Randy Cook

I’ve heard predictions of doom for index funds for decades. It’s not going to happen. Investors collectively earn the market’s return — before costs. After costs, investors will inevitably earn less. Yes, some active investors will shine, and we’ll be able to identify them after the fact. But as a group, these active investors will trail market-matching index funds with their far lower expenses. That’s not an opinion. It’s math.

What about the “magnificent seven”? The market has always been driven by a minority of stocks, a phenomenon known as skewness. The most a stock can lose is 100%, but the potential gain is unlimited. Every year, the market’s performance is driven by a small number of stocks with extraordinary gains. Again, that isn’t an opinion. It’s math. Want to own those stocks with extraordinary gains? The only surefire strategy is to own total market funds.

Last edited 10 months ago by Jonathan Clements
Olin
10 months ago

Enjoyed reading your thoughts on where you like your investments to reside for the future!

I’ve never been a WSJ reader, so I didn’t know about you until the last couple of years. Guessing that you probably had helpful information from others in the financial world, does your asset allocation and choices of funds fall in the neighborhood of what many “experts” have for themselves, or is it something you’ve learned over many years what’s best for you?

I gather you may not be married as there wasn’t any mention of spousal income, IRA or SSA for the future years in retirement?

Along with you and HumbleDollar for a daily read, there is another person I look forward to reading monthly. Many readers here may know of George Sisti. I read his December newsletter yesterday and thought it was one of his best.
https://oncoursefp.com//images/Vectors%20Dec%2023%20Final.pdf

Jonathan Clements
Admin
10 months ago
Reply to  Olin

Most folks I know are indexers, but I don’t know of any “experts” who share my fondness for Vanguard Total World Stock. Perhaps you can’t be a self-respecting “expert” and advocate such a simple portfolio!

Last edited 10 months ago by Jonathan Clements
Susanne Krivit
10 months ago

OK, what does “But maybe I need to step up my game” mean?
Also, can anyone explain how to deduct foreign income from a mutual fund or ETF on your federal taxes using Turbotax? I have read endlessly on the subject and still when I get to Turbotax to actually have it calculate my taxes I can’t make sense of it. For the sake of argument, let’s say the fund is 100% foreign and I want to take the tax credit not the tax deduction. Thanks!

Jonathan Clements
Admin
10 months ago
Reply to  Susanne Krivit

I’m not a TurboTax user, so others can tackle that one. But, in this context, “step up my game” means spend more.

Kevin Knox
10 months ago

Thank-you for this wise and timely post Mr. Clements!

Not only do I resonate with your desire for simplicity, I appreciate (and need to learn from) your careful, measured approach to implementing portfolio changes. Why rush the transition from your tilted, slice-and-dice portfolio to VT when international, small and value could be poised for a comeback (based on valuations)?

My situation is different from yours – I’m older (67) fully-retired and have a very modest nest egg and even more frugal lifestyle than your admirably balanced one (we live on $3500-4000 a month). With my 60 year old wife still on an ACA plan we have to manage our taxable income carefully in order to qualify for subsidies so no Roth conversions for us.

We own just 4 ETFs: VTI and VXUS (70:30) for equities, and equal amounts of two short-term Treasury ETFs (Schwab’s SCHO and Vanguard’s VTIP short-term TIPS ETF). Lacking the ability let alone the willingness to take the kind of risks you happily embrace we’re 50:50 stocks:bonds, with a couple of years of living expenses in a Treasury money market account.

After years of following the conventional advice to keep bonds in tax-deferred accounts and total-market equity funds in taxable I realized that with our modest assets we’d be better served by having the same portfolio in all three accounts (two IRA’s and a taxable joint). It makes rebalancing a snap (If we can’t handle what we have then cognitive decline really has set in!) and will also make dealing with RMD’s a non-issue when they kick in for me a few years down the road.

Whatever appreciation I have for value of elegant minimalism and simplicity in investing – not to mention appropriate humility about the markets and investing – is largely due to your work over these many years Mr. Clements. Thank you.

Tom Byrne
10 months ago

I can certainly relate to simplifying stock part. I am curious since VT is a simple stock allocation, if you do the same thing with short term bond funds? You mention TIPS so you must have at least a couple of bond funds that you choose for this part of the allocation. How do you make that part simple? Thanks again for great article.

Jonathan Clements
Admin
10 months ago
Reply to  Tom Byrne

I own two Vanguard short-term bond funds, one focused on conventional government bonds and one on inflation-indexed bonds. If I opted for a single fund instead, I’d move everything into the short-term conventional government bond fund.

Steve Skillman
10 months ago

Instead of purchasing an annuity, I’m thinking of structuring an interest-only mortgage, with a balloon payment later, for a child who lives in a very pricey part of the country. This would take the place of my current allocation to Treasury bills. Win-win in my book. And keep the money where it belongs — in the family — even after my death. Details to be worked out later.

Stacey Miller
10 months ago
Reply to  Steve Skillman

Interesting…our youngest son lives in NYC. so I can relate to expensive housing.

Jonathan Clements
Admin
10 months ago
Reply to  Steve Skillman

I wrote a private mortgage for my daughter. Details here:

https://humbledollar.com/money-guide/my-story-a-private-mortgage-for-hannah/

LanceS
10 months ago

Thank you for taking the time in crafting this article, it’s reassuring to me. Over the years it was constantly a personal struggle in in the pursuit of the “Perfect” slice and dice allocation mix, which admit ably I tinkered with far too often. A year ago, I simply had enough of going mad and moved most equity into VTWAX; the remaining “equity” is still in VWENX which for some reason is hard for me to let go of. In this time, I’ve not tinkered again, am rarely bothered to even look at my portfolio, and am better off for it. Seven months out from retiring, and zero worries or concerns with VT/VTWAX into the future. There is Beauty in simplicity….

Harold Tynes
10 months ago

I’ll be 67 in January and deferring SS until 70. I made a move to holding 90% of the IRA balances to equity about 5 years ago. Balance is in TIPS. I’ve made a conscious effort to convert as much of the IRA accounts each year into Roth that will keep me in the same marginal tax rate (incl NIIT and IRMAA) as I would be with RMD’s. My goal is to have everything converted to Roth before I take RMDs. I don’t foresee spending the Roth accounts and they will pass on to the kids (plus growth) with taxes prepaid.

Jonathan Clements
Admin
10 months ago
Reply to  Harold Tynes

I suspect you have this all figured out. But I’m not sure I’d empty your traditional IRA entirely. First, you want to have some taxable income each year, so you at least take advantage of the 10% and 12% tax brackets. Second, if you have high medical expenses later in retirement that are deductible, you may be able to draw down your traditional IRA and pay little or nothing in taxes.

Jeff
10 months ago

I appreciate your sharing the thoughtful insights into your decision making process for long term financial survival. And I love how you essentially created a “bucket” for your heirs. One question, what was your rationale to arrive at a 5 (or 7) year safety net, as opposed to perhaps a 3 year cushion to ride out bear markets? And does this include rebalancing into the cushion during that time period?

Jonathan Clements
Admin
10 months ago
Reply to  Jeff

There have been very few five-year periods when stocks have lost money. Thus, if stocks tanked, I’d want to have the flexibility to hold off selling until share prices have recovered, which I figure could take as long as five years, hence the five-year short-term bond cushion.

billehart
10 months ago

I always learn so much, thanks Jonathan. I’ll have to think about annuities, I am so reluctant to buy them. But I’m in your camp—the complexity of my portfolio is wearing on me. I, too, plan to unwind my small cap value tilt, but now doesn’t seem to be the time.

PAUL ADLER
10 months ago
Reply to  billehart

I, too, plan to unwind my small cap value tilt, but now doesn’t seem to be the time.

Can you please explain why you think this is not the right time to get out of value?

Paul Stifel
10 months ago

Try to understand where Social Security + annuities/pension + RMDs will position you for IRMAA when all three are paying out. I’m in a similar position now–not needing the RMD to spend. I wish I had tapped the IRA between retirement at 55 and taking Social Security at 70, rather than taking withdrawals from my taxable accounts. If the IRA grows too big, the RMDs can trigger IRMAA. I’m not at that point, thankfully, but close enough to see it could be a problem.

Jonathan Clements
Admin
10 months ago
Reply to  Paul Stifel

With an eye to reducing IRMAA, I did an $80k Roth conversion last year and $50k this year. I plan to shrink my traditional IRA further between now and 75, which is my RMD age.

Cosmo DeStefano
10 months ago

Great article. As my portfolio size scaled, I too found much less need for bonds. I reimagined the “fixed-income” portion of my portfolio with dividends. I use CEFs and BDCs to generate steady cash in retirement. The dividends are more than what I need so some gets reinvested as well.

My legacy gift to my children will be a 100% equity-based cash flow machine–I just hope they don’t gum up the works!

David Lancaster
10 months ago

CEFs and BDCs?

Stacey Miller
10 months ago

Closed-end Funds and Business Development Companies.

BMORE
10 months ago

I was considering moving some of my savings into Avantis funds. These are low cost factor index funds that have gained 10 to 19% a year since their launch three years ago? Any thoughts on using these, perhaps in that “forget about it” fund? A Vanguard advisor supported 65/35 stocks/bonds and recently recommended taking advantage of the low tax window between retirement and age 73 when RMDs kick in and do big Roth conversions. This would help heirs and drop taxes markedly during the period RMD withdrawal, SS and dividend income builds up. I am not sure how this compares in risk with your “peace of mind” strategy of annuities with high stock proportions in retirement investments?

Jonathan Clements
Admin
10 months ago
Reply to  BMORE

If Avantis can guarantee 10% to 19% a year for the next three years, sign me up. Otherwise, I’ll assume it was a lucky roll of the dice and stick with conventional broad market index funds.

R Quinn
10 months ago

Jonathan, you wrote “But maybe I need to step up my game—because that $55,000 will cover the bulk of my spending.”

Did you mean that, $55,000 after taxes will cover the bulk of your spending? That’s pretty frugal is it not?

Art Felgate
10 months ago
Reply to  R Quinn

I live in Minnesota and am forecasting my monthly expenses—all, except travel—at ~$2,000. I am turning 60 this month, and have CDs and Treasury Notes and MM to fund my lifestyle until age 63. I was astonished to discover during healthcare open enrollment that I will qualify for MinnesotaCare next year, due to my forecasted low income (interest on those CDs, T Notes, some dividends from index funds in my taxable account—haven’t touched retirement accounts, yet): Zero premiums, and ZERO deductible. You read that right. This year I am paying $602 monthly premium for a $7600 deductible Bronze plan. Next year, ZERO.
I own a 1942 2 BR / 1 BA house, no debt. I think it is quite easy to live on below $3,000/month here in the middle west (if you have NO debt!) If I wait until 67 to claim SS my monthly benefit will be just over $3,000. That would cover everything, including significant travel. We do eat out as much as we desire (couple times per week).
It might make sense for me to claim SS even earlier.

Last edited 10 months ago by Art Felgate
R Quinn
10 months ago
Reply to  Art Felgate

No doubt variations in cost of living are a big factor, but generally lower wages go with lower living costs. I couldn’t pay my property taxes and HOA fee on $2,000 a month.

Just curious, $3,000 will cover everything including significant travel. How do you define significant in terms of travel.

For example, I was just looking at a 12 day cruise from Barcelona to Venice and the all in cost for two with airfare was about $25,000 – that kind of significant?

Art Felgate
10 months ago
Reply to  R Quinn

No, definitely not that significant. For us, it means getting away from brutal Minnesota winter for 6-8 weeks, driving to Gulf Coast, staying in moderately priced hotels and/or AirBNB. We rented an AirBNB for this coming January for $2,833 for the month, including taxes and fees. The type of trip you described would force me to tap my nest egg more, selling some fund shares.
I also realize our housing costs are very low, due to such a small house. Low utilities, low insurance, low prop taxes.

mytimetotravel
10 months ago
Reply to  R Quinn

That works out to over $1,000/day per person. I travel solo, which is more expensive than as half of a couple, and I never spent anything close to that. I bet I saw a whole lot more than you will on that cruise, too, although I have been reserving cruises for when I get really decrepit.

R Quinn
10 months ago
Reply to  mytimetotravel

Didn’t say i booked it, just browsing on line. River cruises we used to take for $9,000 for two a few years back are nearly double that now.

Stacey Miller
10 months ago
Reply to  R Quinn

I agree! 2024 will be our first full year of retirement so trips to the library, walking, biking, swimming, & watching TV will continue to be our cheap diversions. However, I have earmarked a healthy sum for overseas travel during our go-go years.

Within 10 years we’ll likely sell our big home, since we’ll be 68 and 70. That will be a sad day. Almost our whole married life has been lived in our suburban “country hamlet” subdivision, with the majority of our friend circle here. By then maybe we can crack a 60k/year budget: no expensive property taxes, we’d both be on Medicare and a supplement for health insurance, our beloved, health-compromised dog will have crossed the Rainbow Bridge, and hopefully I will have finally convinced my husband that one car is plenty. But by then I’d have grandkids…. 😀

Jonathan Clements
Admin
10 months ago
Reply to  R Quinn

That $55,000 a year would be almost $4,600 a month. I don’t know about the ritzy Quinns, but that’s an ample sum for the Clements household. We ate out Tuesday and went to a concert afterwards, ate out Thursday and ordered in pizza last night. Seems like a relatively extravagant lifestyle to me.

R Quinn
10 months ago

That’s spending beyond basic living expenses, like utilities, insurance and such or all spending? If it is all spending I am thorougly impressed.

Last edited 10 months ago by R Quinn
Jonathan Clements
Admin
10 months ago
Reply to  R Quinn

You pay for two homes, one with very high property taxes from what I gather. Meanwhile, I have a single home with property taxes of less than $6,000 a year and, living in the city, don’t need a car.

David Powell
10 months ago

+1 #Impressed. Clearly Nick has a rival for the “most thrifty” title. 😉

Jonathan Clements
Admin
10 months ago
Reply to  David Powell

Oh, David, my thriftiness is nothing compared to my brother’s. I think Nick would be offended by the comparison!

mytimetotravel
10 months ago
Reply to  David Powell

One person’s “thrifty” is another person’s “living comfortably”. Before I sold my house my property taxes were half Jonathon’s, and my 2007 Camry Hybrid has done all of 68,000 miles. This discussion helps illustrate why Dick has such a hard time with the concept of living below your means, which is how I was able to retire – comfortably – at 53.

R Quinn
10 months ago
Reply to  mytimetotravel

Not at all, but you need to realize the key is “means.” A person could be living below their means on an income many times someone else doing the same thing.

Besides, as long as all savings are taken care of and no debt or debt spending occurs what is wrong with living at one’s means?

mytimetotravel
10 months ago
Reply to  R Quinn

What’s good about it? Acquiring more “stuff” requires somewhere to keep it, which is more expense, and how much enjoyment do you get after the first few days? This country is drowning in excess consumption.

R Quinn
10 months ago
Reply to  mytimetotravel

Why do you equate living at means with more stuff. That does not automatically follow does it?

David Powell
10 months ago
Reply to  mytimetotravel

So true that each person’s situation, needs, and desires are different. I’m inspired to take another pass thru our 2023 spending data for more savings ideas.

Nick Politakis
10 months ago

Excellent article. Thank you.

Edmund Marsh
10 months ago

I find my thinking mirroring yours—most likely because I read your newsletter each week, and your Guide every so often. Maybe I’m smart enough to recognize real financial wisdom when see it?

PAUL ADLER
10 months ago

Problem is, that means abandoning my portfolio’s overweighed positions in value stocks, smaller companies and emerging markets.

For the past 13 years I have the same problem. I own DFQTX (DFA U.S. Core Equity II).
I was told by a hourly adviser, once you make a decision to go with value it is for a lifetime.
I also what like to rotate out of value but are concerned about doing the wrong thing since I am in retirement.
Again another excellent article.

Last edited 10 months ago by PAUL ADLER
Nate Allen
10 months ago

Yes, I’ll need to start taking required minimum distributions from my IRA. But there’s no law that says I have to spend that money.

Please, no one mention this non-law to lawmakers. (…who might happily decide create such a law.)

Seriously though, you had me from the get-go on this article, Jonathan. Any article mentioning my favorite VT (VTWAX) fund is one that is going to captivate me.

R Quinn
10 months ago
Reply to  Nate Allen

Absolutely, up until two years ago I reinvested the net after taxes. In recent years I have given the bulk to charity and to our four children.

AmeliaRose
10 months ago
Reply to  Nate Allen

I’m another fan of VTWAX. It’s a big part of my traditional IRA.

Last edited 10 months ago by AmeliaRose

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