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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