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2025 was a stellar year for investors. “The S&P 500 finished the year with an 18% gain, achieving a ‘three-peat’ of double digit annual returns.” Investors who didn’t bail were rewarded.
We have a larger cash/bond allocation, about 55% stocks. The stocks do the heavy lifting while the cash/bonds provides some drag, but we are thoughtful about where we park it. The conventional thinking is that idle money is inefficient. It does not compound. But we like the flexibility cash provides. It can be a buffer. For example, we made a lifestyle change in 2022. We permanently relocated, selling a condo and a RV, lived in a hotel for a month, and purchased a house. This was so I could get proper medical treatment. Over the next two years there were many hospital stays and unusual medical bills, too, totaling about $2 million, although insurance covered most of that.
At the time I wasn’t certain how to make this work. I looked at the funds available and came to the realization that this is why we had saved for many years. I decided to pull funds from a Roth IRA so as to avoid a tax bite.
The original “plan” was to draw from Roths after the traditional IRAs. But health factors intervened. As it turned out, the financial gyrations were easier to manage than I had anticipated.
Thanks to recent market returns, all of the funds I pulled for this and for RMDs have been replenished. That was unexpected. We continue to live debt free, too.
Today, there are short- and ultra-short bond funds available that pay 4.0%. This won’t grow a nest egg, but it will maintain it. It may not beat inflation either. But it does provide a buffer. What could have been a financial panic situation in 2022 was not. We focused on what really mattered, a long and arduous treatment, and our well-being.
Last year we completed increasing our stable value investments from 9.5% in 2022 to 21.5% now.
And, while most of our Roth account investments are growth funds, a portion is held in an ultra-short term (i.e. stable value) bond fund to have the flexibility to be able to access as needed on a tax-free and low market risk basis. We can tap the stable value in Roth for unplanned expenses without being pushed into a higher tax bracket or forced to sell equities in a market downturn.
More stable value (a money market fund) in my traditional IRA account is now being used for my RMD, transferring fund shares into our brokerage account with a portion eventually being cashed.
I would try to keep all stable value in the traditional IRA, and if money is needed from Roth, sell equities there and buy them back in the traditional, selling the stable value.
Thank you Randy for your suggestion for how to handle unplanned expenses.
So to fund an unplanned expense of X amount:
1) Sell X amount of a growth fund in the Roth account and transfer cash out of the Roth for the expense.
2) And simultaneously sell X amount of a stable value fund in the traditional IRA account and buy X amount of the growth fund.
This does make sense. A bit more complicated and perhaps some additional trading costs, but it would eliminate the “drag” of holding stable value in the Roth account.
Eventually the stable value would need to be replenished during rebalancing but presumably that would be done when the market has recovered. But that is another topic: “market timing when rebalancing”.
Yes, following the principles of asset location I learned from Jonathan here on HumbleDollar. I try to keep Roth, HSA, and taxable accounts full of equities, and everything else goes in traditional IRA and 401(k).
Norm, good post. We are starting to tap our HSA and are finding that it is staying steady also so far. I know this may not always be the case. I am glad finances were the least of your worries during your treatments. We had the same experience during my cancer treatments 10 years ago. Was so thankful for the HSA then. Chris
Nice plan… I like the 80/20, with the 20% divided 1/2 money market & 1/2 Vanguards Bond ETF (BND.) But that is today… tomorrow… who knows what might change.
Yes, as I approached retirement in 2018 and I began RMDs I shifted from an 80/20 to 70/30 and finally settled at about 60/40.
Recently my portfolio has been somewhere between 50 and 60% stocks; it is currently 53% stock. I’d be more aggressive, but my health and circumstances will require my spouse to deal with the investments and I prefer she not have to do that for another 10+ years.
We use a professional accountant who oversees the RMDs to verify what I am doing adhere to IRS requirements. However, at some point in the future some stock will have to be sold to maintain an acceptable percentage in the portfolio. My younger spouse has her own retirement accounts which are invested about 58% stocks, a portion of which is via Target Date Funds. She is a few years away from RMDs.