GREG ROBERTS’ ON THE MONEY: Your retirement assets allocations

  • Posted: Sunday, August 25, 2013 12:49 a.m.

I enjoy surfing the net to read what the various financial sites are writing concerning retirement planning and other financial planning topics. On one such foray I discovered that the founder of the Vanguard Mutual Fund Group, Jack Bogle, holds the view that retirees should include their Social Security benefits as a part of their overall retirement assets. In so doing, one would treat those benefits as a fixed income component.

Let’s take the example of a person who has reached age 66 this year and will begin to receive $2,834 per month from Social Security and that those benefits will increase each year by 1 percent. If that person lives to his/her normal life expectancy of 21 years, those total benefits would amount to more than $790,000. Valuing that future stream of income using an interest rate of 3 percent would give us a net present value of $574,000. Then, if that person had $500,000 of monies in various retirement accounts, using Bogle’s technique would mean that this “portfolio” was allocated 46 percent of equities and 54 percent to fixed income assets.

Bogle goes on to say that such an allocation would be just about right for a 66-year-old, since Bogle would recommend 66 percent into fixed income investments and 34 percent into equities. Using Bogle’s rule of thumb, a 40-year-old would allocate 40 percent to fixed dollar investments and 60 percent to equities.

If you want to estimate your Social Security benefits, you can go to www.ssa.gov, establish your online account and take a look at your projected benefits, or in my case, my actual benefits. If you can use a financial calculator or have excel on your PC, you can determine what the present value of your benefits would be at various assumed interest rates.

My personal view is to focus on income, and if this 66-year-old wanted a total gross income of $60,000, he would have to generate $26,000 of income from his $500,000 nest egg. That means that he would have to withdraw 5.2 percent of his assets in each year, and to prevent his nest egg from disappearing before he does, his investment adviser would have to generate net returns greater than that withdrawal rate in order for this person not to outlive his income.

Another personal rule of thumb that I have is to remember that if your investment time horizon is greater than five years, you should discuss with your investment adviser having at least half of your retirement assets in equities.

On another topic, the fog has lifted and tax experts now agree that high income wage earners are going to take it in the ear, taxwise, this year and in the years ahead. For starters, the increased Medicare Earned Income Tax of 2.35 percent kicks in for single filers at $200,000 of AGI, and $250,000 for married, filing jointly. Remember that this additional tax applies to all of one’s earned income. Additionally, the Medicare Investment tax of 3.8 percent is now levied on net investment income for these same folks.

The value of itemized deductions will be diminished for singles with AGI’s greater than $250,000 and married greater than $300,000. These deductions will be reduced by multiplying 3 percent times the amount of income that exceeds this threshold amount. (There are some exceptions, however). So, if I am married, filing jointly, with an AGI of $425,000, my itemized deductions will be reduced by $125,000 times 3 percent, or $3,750. Moreover, my personal exemptions will be reduced by 2 percent for each $2,500 that my income exceeds the threshold. Using the same income amounts, my personal exemptions would be eliminated entirely.

Every working individual will experience the impact of increased Social Security taxes. A person, who earns the maximum income counted for Social Security this year of $113,700, will see his Social Security taxes go up from $4,620 last year to $7,049 this year, a $2,429 increase.

Got a financial planning question for Greg? You may email his at greg@lifesolutionsonline.net.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.

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