(Q & A) Portfolio Issue

Jun 2018


Dear Rick:
I need your help with an overall allocation for my portfolio. My situation is that I am 58 years old, divorced with two adult children. I have no dependents and I plan to work until 62. When I retire at 62 I will receive a pension of approximately $5,000 a month. Other than my home, which is debt free, I have a 401(k) Plan with approximately $275,000. My divorce was very costly. I consider myself a moderate risk investor and I think I have a decent understanding of the market. My pension should cover most of my expenses and at most I would need another $300 to $400 a month extra. You should also know that I am an only child and my mom is I her mid-80s with an estate in the mid six figures. My first question is do you think I should take Social Security when I retire or wait until I can collect my full benefit? My second question is do you think at my age a portfolio of 50 percent stocks and 50 percent bonds is too aggressive for my goals?



Dear Rodney:
In reviewing your situation the first issue I’d like to address is the inheritance. I generally tell everyone that they should not depend upon an inheritance. After all, you never know how long someone will live and how much their estate will be worth. In the situation at hand, it is possible that your mother could live another 10 plus years and who knows during that time how much she will draw down on her estate. Therefore, I believe the best course of action is to make decisions based upon what you currently have, not what you may have in the future.

In reviewing your situation I think it would make sense to delay Social Security until you receive your full benefit. By deferring Social Security you’ll end up receiving about an eight percent return on your money which in today’s world is a very good rate of return. In addition, since your pension will cover the great bulk of your expenses and at most you may need another few hundred dollars a month, you can easily remove that from your portfolio. Fast forward when you collect your full Social Security benefit- you’ll be in a position where Social Security and your pension will more than cover all your living expenses and in fact, at that point in time you will actually be accumulating money, which is a great position to be in. Therefore, in your situation, delaying your Social Security would be a very good financial move.

With regard to the allocation of the portfolio, first I believe that age is not the determining factor. After all, age says nothing about your goals and objectives. In addition, someone’s risk tolerance level has nothing to do with age. Therefore, the real question is whether or not a portfolio that contains half stocks and half bonds is appropriate for what you are trying to accomplish.

I have no problem with a 50/50 portfolio and I think it could work for you. However, in your situation I would also have no problem having a portfolio that even had a greater allocation toward stocks. My reasoning is that most of your goals are long term. After all, when you first retire a few years down the road, you’ll only need a very small withdrawal from your portfolio to cover your needs. In addition, once you collect Social Security your income needs will be covered allowing your portfolio to reinvest and grow. Therefore, considering that you said that you understand the market, how it works and the risk involved, I would have no problem allocating a greater portion of your portfolio to equities if you choose.

One thing I definitely compliment Rodney on is that he’s paying attention to the allocations. As far as I’m concerned, before you invest money you should establish the proper allocation. As many studies have shown having the right allocation is one of the keys to being successful as an investor. In fact, in many situations I actually think having the right allocation is more important than having the right mutual fund.

Good luck!



If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com