personal finance

Throwback Thursday Classic Post – My Investment Portfolio

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I write a lot about personal finance. If you are wondering what I’m doing for my own finances, here’s a detailed look at my own portfolio. I’m not going to give you dollar amounts, but percentages. If you want to know the dollar amounts, they can be expressed in one word. I have…enough:

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds,“Yes, but I have something he will never have . . . enough.”

Retirement Assets

My retirement financial assets from largest to smallest include: (all percentages are rounded to the nearest whole percentage)

  • 34% – My taxable mutual funds, which is where I put our retirement savings when I fill our retirement accounts. It is currently invested in:
    • 55% – Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
    • 44% – Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
    • 1% – Individual stocks that were gifted to me.
  • 27% – My Thrift Savings Plan (TSP) – Currently invested in the Lifecycle 2030 fund.
  • 15% – My wife’s TSP – Currently invested in the Lifecycle 2030 fund.
  • 14% – My wife’s Roth IRA – Currently invested in the Vanguard Target Retirement 2030 fund.
  • 7% – My Roth IRA – Currently invested in the Vanguard Target Retirement 2030 fund.
  • 1% – My wife’s individual 401k – Currently invested in the Vanguard Target Retirement 2030 fund.
  • 1% – My wife has a 401k that is invested in the Fidelity® 500 Index Fund (FXAIX).

529 Plans

We have two Nevada 529 plans, both of which are at Vanguard and are invested in the age-based investment options.

Liabilities

None. Aside from credit cards we pay off every month, we’re debt free.

Overall Retirement Asset Allocation

  • Stocks – 76% (target 75%)
  • Bonds – 24% (target 25%)

The Military Pension and Retirement Asset Allocation

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Jonathan Clements is one of my favorite authors. As a prior financial columnist for the Wall Street Journal and current author of the Humble Dollar blog and money guide, he doles out common sense advice on a regular basis. One of his tenets of personal finance is to take a holistic approach to your financial life and include everything you’ve got and will receive when deciding on your asset allocation and risk tolerance.

In 2017, he published a blog post discussing how he values future income, Social Security, and pensions. If you stick around the military long enough to get an inflation-adjusted pension, his approach and the security of the pension would allow you to take on a lot of additional risk, more than many traditionalists would recommend. He and I discussed this very issue in the comments section, so do me a favor and read the post.

My comments to him were:

I am a huge fan of your writing AND the beneficiary of an inflation adjusted pensions if I stay in for 20 years, which is quite valuable. You advocate for including the value of social security (SS) and pensions in your overall asset allocation, but the other side of the camp would argue you should not because you can’t rebalance with SS or pensions. The present value of SS and an inflation adjusted military pension can be quite large, and with your approach would likely represent all of a person’s “bond holdings” unless they were very wealthy or extremely conservative.

For example, if a retired military member wanted to generate $75K in annual income, and was going to get $15K/year from SS and $35K/year from his/her military pension, that would leave $25K/year they need to generate income from. Using the 4% rule, they would need about $625K in investments.

If they wanted a 50/50 stock/bond portfolio, using your approach they might own all $625K in stocks. They’d have nothing to rebalance with when the stock market soared.

Using the argument of those who don’t agree with your way of allocating assets and don’t include SS/pensions as bond-like, they’d own $312.5K of bonds and $312.5K of stocks. They could easily rebalance.

Does the case of someone with a very large, inflation adjusted military pension change they way you’d approach retirement asset allocation?

His reply:

What you describe falls firmly into the category of “nice problems to have.” If I had $50k guaranteed every year and needed another $25k from investments, I’d set aside $125k of my $625k portfolio in cash and short-term bonds, to cover the next five years of required portfolio withdrawals. And then I’d probably put much or all of the remaining $500k in stocks.

How to Easily Figure Out the Dollar Value of Staying In vs Getting Out of the Military

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Here is a table from the 2019 Statistical Report on the Military Retirement System:

Just by looking at this table, you can very easily learn a few things including:

  • The dollar value of staying in for 20+ years and receiving a retirement pension.
  • The incremental value of staying on active duty for additional years once you are retirement eligible.

The Dollar Value of a Military Pension

Let’s say you are an O-4 who has the option of resigning/separating at the 12 year mark. You think if you stayed in until 20 years you could make O-5, but you’re not sure just how valuable that military pension really is. You can figure that out by looking at the table above, and you can see that a 20 year O-5 pension has a dollar value of $1,458,837. You can reduce this value by about 20% ($1,167,070) if your are in the Blended Retirement System and would only get 80% of the full pension. That is what you’d be giving up by getting out at the 12 year mark as an O-4 and not staying in long enough to get the pension.

The Value of Staying Additional Years Once You are Retirement Eligible

Let’s say you are a 20 year O-5 who is weighing an extra 4 year commitment, and you think you could make it to O-6 if you stayed until 24. What is the dollar value of sticking around when it comes to your retirement pension?

We already mentioned that a 20 year O-5 pension was worth $1,458,837. If you stayed in another 4 years and made O-6 the value of your pension would have increased by $526,879 to $1,985,716, an average of $131,720 per extra year you stuck it out.

The Bottom Line

There are a lot of factors to consider when you are making the decision to stay in or get out, but by looking at the table above you can pretty easily quantify dollars values associated with:

  • Staying in for 20+ years and receiving a retirement pension.
  • The incremental value of staying on active duty for additional years once you are retirement eligible.