With a conservative 40% equity ratio, our weighted return for 2019 was 12.48%. This was below the benchmark I use by about 300bps.
Using a self-designed benchmark provides one measure of how we did based on our choice of assets. Each year I reset the benchmark to reflect my current asset allocation.
A critical goal since I retired is for our Taxable accounts’ dividend/interest income to continue to cover any Pension & Social Security income shortfall.
I can hear the snickering already from the 100% US equity investors who made 30% in 2019. The main reason for our 12.48% return is the low equity ratio (near 40%) and large CD ownership that starts to wind down during the first quarter of 2020. Being retired with a pension and my wife's SS check, one goal is to have enough to live on once our investment income is added. I dealt with the idea of risk, age, and wealth in this article: Setting Your Equity Ratio. Based of the Retirement Calculator provided by Fidelity, we don't need to take too much risk to meet our financial goals, so like some retirees, we have chosen not to at this time.
I discussed the idea of how to build and use a benchmark in another article (Benchmarks 101). It is one of two measures I use to gauge how I am doing. The other is how Morgan Stanley did with the fraction I have them managing for us. Having become acquainted with PortfolioVisualizer last year, I made my benchmark more representative of what I think we own versus my old Excel version that had 3 parts (S&P 500, Lehman's Bond, and an EFA component). I will adjust the weights after reviewing my current holdings, but this is what it looks like as of now.
Having accepted the fact that during very good equity years like 2019 my performance will be lacking, were we at least rewarded by being compensated for taking less risk, assuming our actual holding closely matched the benchmark. To determine that, I ran my benchmark against a full equity allocation using VTI and a balanced mutual fund I have used, FBALX.
Source: PortfolioVisualizer #1: my benchmark, #2: VTI, #3 FBALX
Both the Sharpe and Sortino Ratios indicate I had a superior risk/reward performance. You can see, if the benchmark accurately represents my accounts, the late spring dip was avoided. Again, because I spent wisely while working, I can afford to sacrifice some return in order to sleep better at night. I thought about trying to run my portfolio thru PV to measure its risk but I started doing major rebalancing last summer when I retired so not sure what it would really mean. I will do that for my mid-year review.
2019 Portfolio Results
For the benchmark numbers in the above chart, I use PV to get results assuming my current benchmark was in place back to 2015. Prior to that, I left it based on what I used for the individual years prior to that. I will include links at the end to articles that describe each account in detail, but for here, a short summary of each group.
Five of our eleven accounts did better than our benchmark. While the chart above tells you what each type of account returned and our long-term results, the asset allocations tell very little because they reflect the year-end values, which are not necessarily where the funds were invested during the year. But it does show the accounts definitely held different assets as the returns range from 4.23% up to 19.57%!
In 2019, for our Fidelity accounts, dividends and interest provided about 30% of our returns. More importantly, we had a positive cashflow, not counting earnings, of about $40,000. Going from salary to pension will require earnings to keep that positive until I apply for Social Security sometime later this year or at my FRA in 2021.
Taxable Accounts (26% of assets): These accounts ended the year with all of our CDs. 1-YR rates are down over 100bps so doubt any will be renewed. Started buying REIT oriented ETFs and one that shorts stocks for these accounts now that passing the Medicare income breakpoint can be controlled elsewhere.
401k (45%): I still have this at Merrill Lynch as I will be doing some Roth conversions over the next several years to minimize my expected RMD, now scheduled to begin in 2027. Fees are reasonable and results match what I could get if not under Merrill Lynch. Long range plan under consideration is to move all but the Stable Value part to Fidelity. The Roth component has to be converted to a Roth IRA before the year I turn 72 to avoid RMDs.
IRAs (13%): My wife now has one IRA she inherited that requires RMDs to be taken. We merged her two inherited IRAs into the one we had at Fidelity to simplify life. This was possible since she inherited both from her father. That cashflow helps cover some living expenses. The other IRAs are slowly moving into equities, mostly by increasing existing positions, with the first RMD for her in 2024, mine in 2027. These are destined for charities so the new SECURE ACT is not a concern.
Roth IRAs (12%): The Roths will also be moving to higher equity ratios. Right now, I am writing Puts against the cash in my Roth. I added about 2% to the return in just the second half of 2019 doing that. For details on that strategy, read Option Writing For Income. Most of these funds are destined for the next generation so we might need to look into a Trust to "inherit" them first.
Gift Trust (4%): We use Fidelity's Charitable Gift Trust to cover most of our charitable giving. We banked enough to cover between 10-12 years worth of giving, which removes that from our current cash flow needs and will now allow us to take advantage of the high Standard Deduction when filing our Federal taxes, though I suspect our Delaware taxes will be up. You are right; I have an article on that too: Charitable Gift Trust
We also gave Morgan Stanley a small slice of our taxable money to manage. Besides giving me another measure to gauge my performance against, the main purpose was having real people to talk with in case my wife dies second. That strategy was covered here: Hiring Morgan Stanley
Income versus "Expenses"
My wife's SS check and RMD, my pension check plus the roughly $10,000 from our taxable accounts cover our cash flow needs. I put expenses in "" as our largest outflow is our charity giving, about 25% of our monthly budget. This doesn't require current income as we use our Fidelity Charitable Gift Trust to cover this. I retired with no debt which is a great relief and one reason we have plenty to give away. Besides church & charities, we partially fund our nieces/nephew Roth accounts annually.
Plans for 2020
Everyone's returns for 2019 were highly dependent on where they invested (goes without saying, right?). The Fed keeping interest rates low has eliminated one safe investment, the 5% 4-year CD. So while I have a low equity ratio, I take a high level of risk in my fixed income allocation.
My immediate plan for 2020 is to move most of the maturing CDs into higher yielding assets like BDCs, Preferreds, and some dividend-oriented ETFs and CEFs. My follow SA Contributors provide great insight into those investment sectors. Currently little of our equity exposure is in REITs or individual stocks so I am looking to add to those asset types to our portfolio. My 401k offers a decent REITs option that I plan on raising from 5% to 10% in 2020. Our Fidelity accounts are projected to earn just 3% in 2020 so increasing that percent will come into play in selecting new investments. For the cash I keep, I want to earn 4-5% minimum by writing Put options. With interest rates low and stock prices high, there is are few easy, low risk means of increasing my portfolios' income return without taking on risk. The key will be finding the best risk/reward investments.
I track my income for tax purposes using Excel. This will also allow me to get a feel for how much of my other goal, Roth conversion, I can do without going past the Medicare income limit, estimated at around $176,000 for this year's MAGI. Converting my 401k After-tax assets to a Roth will reduce my pending RMD and the projected higher tax bracket they will most likely push us into. Since these funds were AT, only the growth is taxable upon conversion, or about 40%.
About 25% of our assets currently are in taxable accounts. Since I no longer can contribute to my 401k or Roths, that percentage should increase as all new cash flows will be into those accounts. Since our income appears adequate, this is not an issue though we could tap any of the Roths tax-free if needed.
My next two articles will go into great detail on our Equity and Fixed Income holdings covering percentages, types, and the why they are owned. In the meantime, new followers might want to review at least three articles:
They will give readers an in-depth look at what the accounts looked like last summer and our goals for each. Getting adjusted to retirement has slowed the rebalancing process as did the need to keep under the Medicare income level that would have bumped up our premiums. With our lower retired income and the inflation increase to the lowest Medicare income level to avoid, that should not be an issue going forward.
One account not mentioned is my Health Savings Account. I go on Medicare in May so I can only contribute until then. I started the process of moving this account away from BOA to Fidelity where most of our accounts reside. Once there, I will consider investing some of the funds since we won't have to tap it for medical expenses in the near future. This account adds less than 1% to my net worth so any asset allocation changes basically mean nothing.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.