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If you were me, age 82 living on a pension and Social Security with both qualified and brokerage account investments evenly split and with the goal of leaving as much as possible to our children…
how would you allocate your investments?
I have 55% in domestic stock mutual funds, but including 20% in one stock. 4% foreign stocks, 27% bonds and 14% in short term cash.
None of this is the result of a grand strategy. It is the result of 401k investment options and trying to match them in a rollover IRA and just picking a few mutual funds, mostly index funds.
Most of the bonds are municipal funds of different duration. In recent months I have cut back some reinvesting to build more cash. I just had a shaky feeling about the markets, but probably not logical.
The bond fund interest and the individual stock dividends are intended to provide an additional income stream, if needed, to cope with inflation in the future or to provide income for Connie (age 86) as a survivor when pension income and SS will be less.
I make no claim to being a astute investor, especially one who puts research and effort into investing.
What would you do differently?
How are a portfolio and a bar of soap similar? The more you touch it the smaller it gets.
If you’re happy with how your portfolio has performed don’t mess with it. I believe that sticking with a plan will always yield better results than continuously tweaking it.
That being said since you are looking for feedback. I would start with evaluating the intended purpose of each dollar. It seems that your pension & SS are covering your basic needs. I will have a similar situation and plan to treat that “guaranteed income” as the stable/conservative/bond portion allowing me to limit my use of cash-like investments on the rest of my portfolio. So, I think your 41% allocation to stable investments could serve you and future generations better if it/more of it, were invested in equities.
For equity investments, I have loosely followed the 10-equity class diversification strategy espoused by Paul Merriman. It’s not very exciting (in good markets or bad), because it successfully diversifies your portfolio: growth and value, big and small & domestically and internationally, but it does move steadily up and to the right over time.
If you earmark specific dollars that you intend to leave to future generations, invest those like they should for a longer time line in low cost, well diversified equity funds.
As the investment timeline increases the risk associated with equities decreases and risk associated with bonds increases.
Whatever changes you decide to make (if any) just make sure they allow you to sleep well at night.
“If you earmark specific dollars that you intend to leave to future generations, invest those like they should for a longer time line in low cost, well diversified equity funds.”
This is not directed towards Richard, but in general.
As I have written before for the past several years I have been in the process of converting all of my wife’s traditional IRA (about 1/3 of our retirement assets) to a Roth. This way I will only have to take RMDs from my traditional. As a result my traditional is more conservative in order to meet our overall allocation. My traditional is, and hopefully will be the only fund tapped to supplement our Social Security income, and my small pension.
My wife’s Roth is invested 100% in Vanguard Total World ETF (VT) as hopefully this portion of our portfolio will never be touched and thus both grow and be inherited tax free. Under current tax law, always subject to change, our children can also wait to tap these funds for an additional 10 years after we are gone for further tax free growth. If my wife lives to approximately the same age as her mother did (103), and my children wait 10 years after our passing that could result in a total of more than 45 years of tax free growth.
Well said 👍
You don’t need to do anything but here are my suggestions anyway. 1) Sell the 20% stock position a little at a time to avoid a big tax hit. 2) The S&P 500 companies do about 30% of their business outside the US so you could use a little more non-US equities but do not need them. 3) That is a lot of cash for someone with a pension and Social Security. 5-8% is closer to my preference. Take free advice for what it’s worth, not much.
Like some other posters, RDQ, I would increase the international exposure. Worrisome to me, though, is the single stock risk, whether the position is 20% of the total account, or 20% of the equities (not clear).
From previous posts, I believe your single holding is a utility. No matter how well managed, utilities carry risks from gas pipeline explosions, wildfires, ice storms, nuclear mishaps, etc. One major event could result in years of litigation, dragging down the stock price and potentially suspending the dividend.
While selling some stock would be desirable, I say this gently as I too have concentrated (tech) positions in a taxable account. To me, the tax consequences of selling and/or the intricacies of equity exchange funds (partnerships, holding periods, fees) have kept me from doing anything. As you note, heirs will have the stepped up basis.
Also like you, I have a large muni position. Investing in munis, besides the tax benefit, in my opinion equates to support of one’s community.
I’m confused as to why investors have individual stocks in their taxable brokerage account. All I read is that these holders aren’t willing to sell because of capital gains taxes. So are these investments initially made with the idea they will never be sold and are only there be inherited to take advantage in the step up? I just don’t get it!
🤔
In my case I didn’t invest a penny. My shares are all from stock awards and converting stock options upon exercise as part of my compensation plus subsequent dividend reinvestment over twenty plus years.
I recently stopped reinvestment and put the cash in MM fund. The building up of cash has two specific purposes. Connie is planning a new kitchen and several grandchildren will need extra help with college.
David, ours was from a former employer who had an employee stock plan for a time to raise cash during the Great Recession. We didn’t invest much b/c we had kids in college. The company was sold. We thought for many years the stock was worth nothing, but found out differently several years ago. It is the best investment we ever made. LOL! Chris
I think the reason you see people saying that isn’t because holding individual stocks is different from a capital gains perspective, but because people holding index funds are generally happy to hold them. No one is saying “I wish I owned a bunch of individual stocks instead of an index fund,” so no one is complaining about their fund’s capital gains.
In my case, I admit to not paying much attention to the consequences. I bought a few tech stocks in a taxable account with a few thousand dollars in the mid-1990s and the valuations subsequently ballooned. At the time it seemed more like gambling than investing. Back then I just liked how the equities were making the account grow. Plus I was busy with a career and not thinking at all about my tax future. Looking back, of course the purchases should have been in an IRA, and maybe I shouldn’t have let the shares languish after the dot com bust of the early 2000s or reach concentrated positions.
Now I give some shares each year as highly appreciated donations to charity; otherwise, I still hold a large amount and think that they have room to grow. Not needing the cash now, and I hope, not in the future, I do like that they might all go eventually to charity with the stepped up basis.
In my case it’s only because the stock was part of my compensation. I didn’t buy any but reinvesting dividends for
over 25 years accumulated shares.
This is why I never reinvested company stock, aside from in 401(k) where it’s a hassle not to.
It’s 20% of total investments. You have valid points, of course, but just yesterday it increased the dividend again. The greatest risk though is regulators who like to blame the utility for higher utility costs just like politicians blame insurance companies for high health care costs – neither of which are true.
I would buy STRC for near cash equivalents. Do your homework and see if this might work for you. I know it does for me. Everything else looks great.
I’m glad to see so many people like my recommendation. Thank you for the constructive comments. I know I really don’t belong here. I just like to stop by occasionally to remind myself of it. I wish you all well.
You and your wife are in your 80s and it seems that what you are doing is working out good for you. If you feel it is sound and you are comfortable with it I would just keep your plan going forward.
👍
Here are a few thoughts.
I think you can afford a higher stock allocation. You didn’t say so in this post, but I believe you’ve said earlier that your expenses are covered by guaranteed income streams. One could argue that means you have no need for bonds or significant cash. I’m not one of those and would want to keep some bonds and cash, but I think you can afford to have much more of your portfolio in stocks than you do. (Like you I’m at ~60% stocks, but I’m in my early 60s with a spouse approaching 60, and do not have guaranteed income streams covering all our needs.)
I would increase the amount of international and smaller capitalization stocks you have. These are more volatile, but according to Morningstar both are undervalued, and given your guaranteed income streams you aren’t relying on the portfolio. I’m not saying go crazy here, just some tilt.
I would agree 20% in stock is too much, but this single stock risk would matter more if you were relying on your portfolio, which you are not. And, it sounds like it has significant embedded capital gains. I wouldn’t have let it get that high, but at this point I would agree with you on leaving it alone and letting your heirs benefit from the step up, obviously not reinvesting.
I also think if you did nothing that would also be fine.
Afterthoughts –
If I ever did need to sell stock, I’d make it from that 20% holding. Despite agreeing with you about leaving it to to heirs, it would make me uncomfortable.
Adam Grossman did a piece on how to conduct a portfolio audit that would be worth reading as you think about this.
Michael, I think what you said makes sense. Dick and Connie live on their guaranteed income, so the rest of what they have could be considered for generational wealth. So putting more in stocks can make sense for their situation. Chris
That’s a good way to think about it Chris.
Appreciate your comment. I’m going to look into the international
I think it’s sound. You definitely don’t have too much in international, but no need to make changes if you’re not comfortable.
With 4 kids and over a dozen grandkids to inherit your wealth, your investment horizon is theoretically infinite, so I don’t think it’s too aggressive.
Thank you. Appreciate the insight.
20% in one stock is far too much risk. If your goal is to leave much to the kids you might consider lowering your stock allocation. What tax bracket would that hit if you sell. Too late for roth conversions LIGHTEN up at age 82 as the mkt is OVERVALUED according to Buffett
Generally that would be good advice, but with my next RMD we will be in the 24% and maybe 32% bracket because of low cost basis on the stock.
Also my thinking was to leave to the children and let them take advantage of the step up provision.
in the meantime there is risk.
Dick we have one stock from an old employer that has a low basis like you do. In our case, we are in a lower tax bracket than you, so we did sell some of it to get it to around 10% of our portfolio. We are thinking to keep the rest of it for the kids to inherit also, but may revisit. We don’t need it now for anything. Chris
The maximum long term capital gains rate is 23.8% including NIIT.