I need help with Investment Scenario for job

going to answer the questions within the quote, not a html code expert. @"AndyLouis" feel free to come behind me & clean it up.

dr0833:

Hi I have an investment scenario I am working on. If anyone with knowledge on the subject is willing to help me answering these questions, I would appreciate it.

Married couple:

Name person 1 person 2

Age 56 56

Employment Doctor Professor

Annual Income $195k $75k

Taxable Portfolio : $1 mil

401k – Person1 : $500k

401k – Person 2 : $250k

They two people would like to retire at age 67 and believe they need $150k per year in retirement to achieve their goal (this is in addition to their anticipated social security of $40k).

1) What spend rate (as a percentage of total assets) would you recommend in retirement and why?

the simple answer to this is I would recommend they spend no more than 80-90k out of their retirement assets per year (the first year, with this growing in line with inflation every year). I recommend that range because 90k is roughly 4% based on your estimate of future value, and 80k is conservative, if they have emergencies, it's better to have a cushion.

2) How would you invest the portfolios differently to maximize tax efficiency?

the utility of asset location is overstated in my opinion. at this asset level, it's not going to make a huge difference in my opinion, only if they were in the AMT bracket would it matter. to answer this another way, the simple thing would be to put the taxable portfolio's fixed income in munis instead of corps/govvies and put all of the stocks in the IRA, but I personally believe this leaves the couple underexposed to equities given their high cash flow needs

3) How much will the couple need at age 67 to meet their cash flow objectives?

simple math would tell you 150k needed - 40k guaranteed = 110k shortfall / 4% = 2.75mm; this is using the 4% rule (by the way, I'm not going to write a dissertation on this, look this up on google), which is often cited because it's the highest percentage statistically you can withdraw from a balanced portfolio while protecting the purchasing power.

4) At age 67, from which buckets would they initially draw money first and why? Would this change at all after age 70.5?

ah, bucketing. a great concept that some claim can allow you to take an extra 1% a year, but really it's a behavioral thing. if you do anything other than rebalancing and taking cash from stuff that's done well/overvalued, you're trying to time the market, which we don't do. if the market hasn't moved, we do it pro rata, while trying to minimize short term cap gains, but otherwise we just rebalance and take cash from that (buy low, sell high)

9) At what rate would the portfolios have to grow to meet their cash flow objectives in 11 years if they each are adding $23k per year to their 401ks?

depends how you compound the money (annually, monthly, end of period, beginning of period, etc), so whatever convention you're used to/is recommended for the job, work backwards from the 2.75mm figure I gave you, account for the starting value (today's value), your financial calculator will do the rest.

Can anyone tell me how you go about predicting life expectancy and therefore how many years they will need to receive $150k cash flow?

look at mortality tables but realize the wealthy tend to live longer. we model 90 for men and 92 for female, which are high estimates, granted, but better safe than sorry.

Currently their total assets between their portfolios are $1,750,000. They will both add $23,000k a year which means after 11 years person 1’s 401k will be $753,000 and person 2’s will be $503,000. Their total asset 11 years from now when they retire at 67 would be $1,000,000 + $753k + 503k = $2,256,000.

$2,256,000/150k cash flow per yr = 15 years which means without taking into account any sort of capital appreciation, they would have enough money to cover 15 years of life after retirement which puts them at 82 (which I believe is around average life expectancy for a woman in the US).