If I went to a social gathering, how many people would willing talk about their investment portfolio? My experience says zero, zip, nada.
If you believe the horrendous retirement statistics, people don’t have much to talk about anyway. Most can’t cover a basic $500 emergency so it makes sense that people aren’t talking about their portfolios. Even if they did, you’d only hear the good stories. The bad or stupid things we’ve done to lose money never seem to come up in conversation.
Well, I’m going to talk about my portfolio. It’s not anything to brag about but it’s mine. If I can get serious about my contributions then it can get me to the retirement promised land in 6 years. At least that’s what I think.
Another reminder – Do not compare my situation to yours. I hope and want you do to better. Do not copy my approach because my situation is different than yours. Do get some ideas from the read and see how it applies to you.
Now let’s look under the hood …
My Portfolio
My goal is to retire at 62 years old and I plan to have approximately $1.3M in portfolio assets. Let’s take each one of these asset classes and understand why and how I’m using them in my portfolio.
401(k)
It’s kind of funny but when you aren’t making much money they (IRS) allow you to contribute up to $19,000 into your 401(k) (and more if you are over 50 years old). That’s nearly 32% of your income if you are making $60,000 per year. Unfortunately, I’m can only contribute up to 6% of my total annual base pay and yearly bonus.
I know, I know … this is a 1st world problem. But now is when I’d really like to crank up the contributions. I started contributing when I was 36 years old and I never came close to the maximum contribution. It sure would be nice to have contributions in my portfolio from an earlier age though.
Today, I contribute my 6% and receive another 3% match from the company. And because I’m over 50 years old, I put in another $6,000 in yearly catch-up contributions.
In my forecast, I assume a very conservative 3.5% return. I’m not sure that near-term future returns will match what we’ve seen in the last 10 years.
Upon my retirement, we plan to convert this 401(k) into a Roth IRA. This takes away the worry of tax consequences with required minimum distributions (RMDs).
NQ 401(k) – Restoration Plan
Designated as “highly compensated,” I’m allowed to provide non-qualified tax-deferred contributions to a NQ 401(k) plan (aka Restoration Plan).
The plan pays well, currently 6.25%, and I can contribute up to 9% of my pay. The return on the plan is preset each year during sign-up time. Truly, the plan is considered like a loan to my company. In other words, a bond.
I’m not putting all my eggs in one basket (think Enron). In fact, I’ll have nearly $150,000 in the fund by the time I retire in 6 years. That’s enough risk (probably too much) even though I feel the company runs a conservative balance sheet.
Upon my exit from the company, the plan will payout over 5 years as ordinary income. So, assuming I have $150,000 in the fund, I’ll receive about $35,000 per year for 5 years. I’m using this plan to produce a floor of income for the first 5 years of my retirement.
I no longer contribute to the fund though that may change in the future. Those contributions are redirected to building my cash and taxable investments plus reducing debt.
Taxable
I really started focusing on building a dividend portfolio in Q4 2018. I’ll continue building that portfolio of high-quality stocks and ETFs for the next 6 years. Real estate crowd funding is also being explored to create predictable, diversified, passive income.
The plan is to contribute $30,000-$60,000 of new money each year to get me to the $400,000+ range. Remember, I’ve only got 6 years and I’m trying to fill up my buckets while I still have a kid in college.
Cash
Until this time, I’ve purposefully kept my cash position low. I knew if something happened to my job that I’d be receiving a payout from my Restoration Fund (NQ 401(k)). Well, that stance has now changed because my goals have changed.
I’m close enough to retirement that I’m pushing my cash position way up over the next 6 years. Keeping taxable events to a minimum for the first few years of retirement is critical. This enables a Roth IRA conversion over a 2 or 3-year period before my pension starts at age 65.
Conclusion
I’m a firm believer that the 5 years before and after retirement are critical in determining if you’ll outlive your money. This means my most important task in the next 10 years is to focus on my contributions and not chase investment returns. Now is not the time to be a hero.
The challenges are enormous but doable. It helps to have Mrs. TLR 100% on the same page and doing everything possible to keep expenses manageable. Neither of us can do this alone.
With a pension starting at age 65, my first 3 years of retirement will be to create low taxable events. This allows me to convert my 401(k) into a Roth IRA. And that’s when the larger cash balance really helps out.
- $35,000 per year (for 5 years) of my NQ 401(k) Restoration Plan
- $12,000-$15,000 in dividends per year
- $150,000 in cash to fill in any expense gaps
Thanks for reading!
Mr. TLR
NOTE: In a few years, I’ll visit a fee-only financial planner to verify that my plan will support our retirement.