Asset allocation is the delicate balance of stocks, bonds, and other assets in an investment portfolio. What allocation is best for your retirement needs? What’s a good mix of domestic and international stocks? Is it crazy to have a 90/10 allocation of equities to fixed income in a $10 million portfolio? Should Dad’s portfolio be rebalanced from 90% stocks to 60% stocks and 40% bonds? Can pension and Social Security be counted as your bond allocation? Plus, legacy tax planning: how can you avoid confiscatory estate taxes?
- (01:03) What’s a Good Domestic and International Stock Mix? (Brian, Albany, NY)
- (07:57) Is a 90/10 Stock/Bond Mix Crazy for a $10M Portfolio? (Sunny D, AZ)
- (18:48) Should Pension and Social Security Be Considered Part of My Fixed Income Allocation? (James, AZ)
- (25:01) Should I Rebalance Dad’s Portfolio From 90% Stocks to 60/40 Stocks and Bonds? (Craig, Chicago)
- (29:47) Legacy Tax Planning: How Can We Avoid Confiscatory Estate Taxes? (George, Ledbetter, TX)
READ THE BLOG | What is Asset Allocation?
LISTEN | YMYW Podcast #262: What’s the Right Retirement Asset Allocation for You?
Asset allocation is the delicate balance of stocks, bonds, and other assets that make up your investment portfolio. Today on Your Money, Your Wealth® podcast 347, Joe and Big Al help YMYW listeners figure out the best asset allocations for their needs. What’s a good mix of domestic and international stocks? Is a 90/10 stock/bond mix crazy in a $10 million portfolio? Can pension and Social Security count as your bond allocation? Should Dad’s portfolio be rebalanced from 90% stocks to 60% stocks and 40% bonds? Then for something completely different we’ll wrap up with a legacy tax planning question: how to avoid “confiscatory” estate taxes? Go to YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your money questions and comments. Don’t forget to tell us where you’re from, when and where you listen, and what you’re drinking! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
What’s a Good Domestic and International Stock Mix? (Brian, Albany, NY)
“Hi Joe, Big Al and Andi YMYW is the best! I never miss an episode. I have a simple non-roth question: I’ve determined that a 70/30 allocation is right for my risk tolerance. I’m not sure how to split the 70% between domestic and international. When I research this on the web the answers are all over the map, from 50/50 to 100/0. What is a reasonable mix? I’m thinking 30% bonds/cash equivalents/50% domestic stocks and 20% international stocks. Does this make sense? – Brian Albany NY”
Is a 90/10 Stock/Bond Mix Crazy for a $10M Portfolio? (Sunny D, AZ)
“Hi Andi (First not Last), Big Al and Dynamite Joe, I am from Sunny AZ and this is my first email to you. I am 65 years old, quit working in 2017 while wife (60 years) has been a homemaker since day 1. Found you by searching Best Retirement Podcasts. Typically listen while on walks and started with episode 250 about 2 months back. Have enjoyed each segment and must admit that I admire your knowledge, tenacity, and patience. I listen at 1.5x speed and increase it to 2.0x when the same question is being answered (think Backdoor Roth).
My question: My expenses over 10 years are estimated to be $1M. If I have $2.5M in assets, then for a 60/40 portfolio $1.5M is equities and $1M is cash/bonds. However, if my assets are $10M then a 60/40 portfolio will result in $6M in equities and $4M in cash. Would I be crazy to keep $9M in equities and $1M in cash? A 90/10 mix for a $10M portfolio. The strategy would be to maintain 10 years of expenses in cash all the time. Goal – is to leave some bucks to charity and kids…three kids who are Doctors, so well settled. Would love to hear your thoughts. Keep up the good work. Best Regards, Sunny D”
Learn more about asset allocation by taking advantage of all the free resources I’ve posted in the podcast show notes at YourMoneyYourWealth.com. The Retirement Readiness Guide contains eight strategies, one of which focuses on asset allocation, to help you prepare for retirement. YMYW podcast episode 262 was about asset allocation, that’s in the podcast show notes too, and there’s also an in-depth blog post that fleshes out asset allocation in much more more detail and shows how it has the potential to lower your risk while giving you the same expected return. There are a lot of moving parts to constructing a properly allocated retirement portfolio. A financial assessment with a CERTIFIED FINANCIAL PLANNER™ professional on Joe and Big Al’s team at Pure Financial Advisors can help. It’s free, just like the podcast and those financial resources, and you can schedule yours right in the podcast show notes. Just lick the link in the description of today’s episode in your podcast app to get to those free resources, and to schedule your free financial assessment.
Should Pension and Social Security Be Considered Part of My Fixed Income Allocation? (James, AZ)
Joe: We got James. He writes from Arizona. “Hello, Joe, Al, and Andi. Thanks for the podcast and the valuable information you share with us listeners. I would like to get your thoughts on how to incorporate a pension and Social Security within the fixed income portion of my portfolio. Do you recommend this approach? Or do you keep those separate from the allocation percentages?” So James is asking Al, is that I got a pension and Social Security, can I just count that as, like, my bond allocation of my portfolio?
Al: So in other words, I don’t need any bonds. Because I got plenty of fixed income.
Joe: Correct. I guess another way to look at that is like- what was the name of the book that- he was all into human capital and he kind of looked at it that way. If you have fixed income sources coming in from Social Security and pensions and so on, you have to look at that present value allocation into your overall asset allocation, right?
Al: Yes, I do remember that. I forget the name of the book, too. We interviewed him, the author. I remember.
Joe: Yeah, yeah, yeah. He’s a good guy. “As an example, we have $1,500,000 in retirement in taxable accounts. So we want to take 4% each year or $60,000. My pension is $20,000 per year. Our Social Security will be $40,000 per year. That provides $120,000 in total income with half coming from pension and Social Security. If we want to have a 50/50 equity and fixed income allocation and the 50% fixed income is covered with pension and Social Security, can we invest 100% of what is in the retirement taxable accounts into equities to cover the 50% of the portfolio? If you do not agree with this approach, I would appreciate hearing your thoughts and how you incorporate pensions and Social Security into the equity and fixed income portfolio mix. Much appreciate it.” And James, that’s a very good question. And Al, I guess I’ll let you kind of take a crack at that.
Al: It’s my turn, OK good. See what you think. I like to separate it, Joe. So in other words, I like to say, what is your need? What is your shortfall? You take your spending need of $120,000 and your fixed income is $60,000, so you still need $60,000. So I like to look at that compared to your overall portfolio. And of course, that’s 4%. But then a couple of things that I would say. One is we kind of want to make sure you have enough safety in your portfolio to ride out a long-term market downturn. So if you need $60,000 a year, you can multiply that by 5 years. You could multiply by 10 years, let’s say 10 years to be ultra-safe. So that’s $600,000. So if you agree with that, then you would want $600,000 in fixed income divided by $1,500,000, which comes out to be 40%. 40% bonds, 60% stocks. Now, that’s just- that’s one way to look at it. A second way to look at it is, what rate of return do you need to be able to generate a 4% cash flow distribution? And interestingly enough, the 4% rule came from somebody investing in a 60/40 portfolio, 60% stocks, 40% bonds for a 25-year period. That doesn’t guarantee that’s going to work. But over the likelihood, that’s probably a 90% plus chance that you’ll have enough money over your retirement, which is- when the study was done years ago- was over 25 years. So anyway, in both analyses, 60/40 to get a 4% distribution, 60/40 to have $600,000 in fixed income, I think that’s the number.
Joe: I agree with both those statements because how I would look, you have to look at it, what is the demand for the portfolio? What is the portfolio meant to do? In the portfolio, in this particular scenario for James, is that it needs to create $40,000 dollars of income. No, $60,000 of income from the portfolio, he’ll be pulling 4% of the portfolio. So he’s like can I keep that 100% equity? Because my true income need is $120,000. So $60,000 is going to come from the portfolio. $60,000 is going to come from pensions and Social Security. So half of my income is already met by other fixed income sources other than my portfolio. So can’t I just keep that 100% stocks because half of my income is already covered and that’s my fixed income? I like his thinking, but I think it’s flawed just a little bit because he has to look at what the demand is for the portfolio because if he’s got 100% stocks and he’s pulling 4% out- do we know how old James is? No, no idea.
Al: We don’t.
Joe: I don’t know. Maybe if he was 75, I’d be fine with it.
Al: I think that to me, Joe, that the lower the demand on the portfolio now it’s- now you’ve got a little more flexibility. You can take more risk if that’s what you want to do to save for charity or your kids. Or you can take less risk because you don’t need to take as much risk. But I think the 4% rule was originally designed as 60% stocks, 40% bonds. And that’s kind of what he’s wanting to do.
Joe: No, I agree. He needs a little bit more safety because if he had 100% equities within that portfolio and he’s pulling 4% out, and the market drops, let’s say 20%. And so now he doesn’t have- that 4%, just went up to 7% or 8% and he could go into asset depletion mode. If he’s fine at the end of the day, just living off of $60,000 from his fixed income sources, by all means, just keep it in equities. Because he could eventually live off of $200,000 a year if he has a really good bull run. But if he hits a bear market at the wrong time, it could blow up his entire plan. So we’re fairly conservative. So we look at constructing the portfolio, what it needs. If you’re taking that big of a distribution, I like Al’s idea.
Should I Rebalance Dad’s Portfolio From 90% Stocks to 60/40 Stocks and Bonds? (Craig, Chicago)
Joe: Craig from Chicago writes in “You’ll be glad to know that the word, Roth-” oh, he put it-
Al: – like a swear word.
Andi: – like it’s a bad word.
Joe: “- is nowhere in this question.” Thanks, Craig.
Al: Craig, we like you already.
Joe: Craig. Love you buddy. “I took over my father’s finances from a friend broker of his who- my dad was in questionable investments, MLPs, non-traded, etc.-” So. OK. He’s taking over the family finances. I guess he looked at his dad’s brokerage account. He’s got some questionable investment choices in there. “It’s going to be difficult to get out of these so I’m dealing with the IRA and brokerage accounts first. The IRA is manageable as I can get out of those bad risky investments without the tax consequences, right?” Yes. Anything inside a retirement account you’re good to go. You can buy, sell, trade, day-trade, do whatever in the retirement accounts, IRAs, Roth IRAs, whatever because they grow tax-deferred. Just make sure that you’re doing it correctly as you transfer that money into another IRA that you’re not taking distributions. We’ve seen that in the past. “So my plan there is just to rebalance to the 3-fund portfolio 60/40.” Three fund portfolio- I think it’s like Vanguard Total Stock Market Index, total international index, and a bond fund?
Al: That’s exactly what he’s referring to.
Al: Or Fidelity or whoever. It doesn’t matter. Which is not a bad, very simple way to go.
Joe: I agree. “But the brokerage account is large and 90% invested in individual stocks. I’d like to sell the bulk of the stocks and rebalance into Fidelity, no-fee mutual funds ending up at a 60/40 split. But I understand that he will have to pay taxes, at least 15%, on any gains. Do I understand this right? And is there some strategy to lessen the tax impact of a radical rebalance like this? I drive a Tesla. Thanks.”
Al: That’s good.
Joe: Yes. Tax-loss harvesting comes to mind. But make sure that you’re rebalancing just- I guess- if you’re going to take over the family finances you don’t want to blow them up in taxes, just to make your life easier. He’s got good investments. Keep the ones that are good and then get rid of the ones that are bad.
Al: I think that the way I would think about it is that some of the individual stocks probably have a bunch of gains, maybe you use those as proxies for an S&P 500 Fund, which is not ideal. I understand it’s not as diversified as you would like. But if it avoids causing a whole bunch of taxation. We don’t know how old your dad is. And right now under current law when someone passes away the next generation gets a full step-up in basis so there is no tax problem. So if your dad is 70 and his dad lived to 95 then that’s probably not going to be a great strategy. On the other hand, if your dad’s like my dad who’s 87, you hate to think about it but-
Joe: Wow. Morbid.
Al: – we don’t live forever. And even he said it, I don’t know if I want to get to 90.
Joe: So yeah Craig, if your dad’s a-tippin’ the toe…
Andi: What does that mean!?
Al: Well, I gotta be realistic here, right?
Joe: Yeah. If he can barely fog a mirror, then don’t do anything. Just hold on.
Al: Otherwise, do your best. Just create some proxies on some of these stocks and try to backfill the best you can.
Joe: Yes. Hopefully, that helps. But you know we’ve seen that in the past. Like- I’m taking over the family finances, dad’s 90 and all of a sudden they’re selling all this stuff and capital gains happens and they re-balance it. But then the old man dies like a couple of weeks later, they could have got a full step-up in basis, no taxes due.
Al: Or mom’s about to pass away, she sells all her real estate so it’s simpler for the kids and pays a bunch of tax that they wouldn’t have paid.
Yikes. Yes, planning for what happens when you or your parents are gone can be morbid but these are important conversations to have and decisions to make. We have a free resource that makes it a little easier for everyone involved. Our Estate Plan Organizer is packed with information to get your estate in order, like a list of documents to provide to your loved ones, and a convenient place to record all of the important information your family will need in the event of your passing. Download the organizer, fill out everything from your financial account details and insurance policies to your contacts and your final wishes, then put it in a safe place and give a copy to your family. Don’t forget to update it regularly. You can download the Estate Plan Organizer for free from the podcast show notes at YourMoneyYourWealth.com, just click the link in the description of today’s episode in your podcast app and you’ll see it there under “Free Resources”.
Legacy Tax Planning: How Can We Avoid Confiscatory Estate Taxes? (George, Ledbetter, TX)
“A big Texas “howdy!” to the YMYW team: Big Al, Andi, Andi’s mom, and Joe the Excitable Intern. This is George emailing again from Ledbetter, Texas. Still living my best retired life with Cletus the Wonderdog, and I wanted to reach out to y’all to pose another question.
I am looking at legacy tax planning and find myself stumped. My wife and I (each retired and 61 years old) have a combined $13M net worth. We know that the Unified Gift and Estate Tax exemption is currently ~$22M for a married couple and that it’s scheduled to be cut in half by the end of 2025, if not sooner. That puts us in the 40% estate tax crosshairs.
Obviously, we’re trying to avoid confiscatory estate taxes so we can pass along our estate to our children and important charities. We’ve already established an irrevocable life insurance trust that holds a $3M second-to-die policy that pays our 3 children upon both our deaths. By law, that’s not included in our estate. Grantor trusts appear to be on the chopping block in proposed legislation. Anything else we can do? Can the ILIT hold assets other than the life insurance? Should we consider an additional second-to-die policy? Thanks for your barstool conversation.
Oh, and I was looking through my old baseball cards and stumbled onto one for Iron Mike Schmidt of the Phillies. I’ll be honest–he does look a lot like Big Al. Do you agree, Andi? I’ve dug even deeper! Check out these “switched at birth” photos… Big Al Clopine vs Mike Schmidt, Joe Anderson vs Tom Arnold. Thanks, George”
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