Assessing Investment Strategies for Retirees with $10 Million in Wealth

Dear Wealth Wise: My 72-year-old wife and I are retired with a net worth of around $10 million. About $3 million is in real estate, including a rental house that provides $1,500 a month in net income and has a $180,000 mortgage. We own a home and a vacation home outright. Our investment portfolio is aggressive. We have $3.8 million in IRAs, another $850,000 in Roths and $900,000 in a generation-skipping trust of which I am the trustee. We get about $9,600 a month in Social Security, pension and annuity payments. We have $800,000 in non-tax-deferred accounts, including $150,000 in cash accounts. My philosophy is that we have enough money to never have to worry, so I’m investing for my heirs. Therefore, we’re heavily invested in mutual funds and ETFs, some of which are fairly aggressive. Is this OK?
— Legacy Builder

Dear Legacy Builder: Traditionally, retirees are advised to reduce portfolio risk. This strategy is rooted in the idea that regular income needs must be met without having to liquidate depreciating assets.

Understanding the Risk Profile

The couple's substantial net worth, including $10 million and a steady influx of $9,600 monthly from Social Security and pensions, suggests their basic financial needs are well covered. This is particularly significant for couples in retirement who rely on fixed income sources. Phillip E. Battin, president and CEO of Ambassador Wealth Management, indicates he isn't overly concerned about their heavy investment in equities.

“With their substantial net worth and guaranteed income, they aren't likely to find themselves in a position where they need to liquidate stocks at a loss,” Battin states. He emphasizes that while there exists a risk associated with not having reliable rental income from their property, the couple can consider liquidating assets if necessary, making their approach less risky than it may seem.

The notion of “aggressive investing” invokes feelings of caution among many financial planners, particularly for retirees. However, it’s essential to differentiate between a diversified, aggressive portfolio in terms of asset allocation versus speculative investments that may introduce unwarranted volatility. Robert Jeter, a financial planner at Back Bay Financial Planning, advises against equating aggressiveness strictly with risk; instead, he suggests adopting a simplified investment strategy even as they maintain a more substantial risk exposure.

Tax Efficiency Matters

For individuals in the couple's financial position, optimizing tax implications is of utmost importance, especially if estate planning and legacy concerns are front of mind. Jeter suggests that more aggressive investments should be placed in taxable and Roth accounts, where potential gains can be tapped more efficiently than in tax-deferred settings. This ensures maximum benefit from the step-up in cost basis that occurs at death, which can help heirs avoid significant capital gains taxes.

Brandon M. Cox, CFP and founder at Coastline Complete Wealth, highlights the tax benefits of performing a Roth conversion, particularly in the current tax climate. "You should absolutely consider converting some of your IRA assets to a Roth IRA. This might provide you and your heirs tax efficiencies that won't be available in the future,” he explains. If either spouse lives longer than expected, leaving traditional IRAs to the surviving spouse can lead to unfavorable tax consequences due to the increased tax burden falling on single taxpayers.

Evaluating Spending Plans and Market Exposure

With their enviable financial situation, it is easy to convey the belief that they have "enough money to never have to worry." However, establishing a comprehensive understanding of their spending patterns is crucial in tailoring an investment approach. Chris Berkel, president of AXIS Financial, points out that assessing their annual spending will significantly affect their risk tolerance. Spending $150,000 annually paints a different picture compared to a $400,000 yearly expenditure.

Should their guaranteed income be insufficient to cover their expected annual withdrawals, they must reassess their reliance on more volatile assets during market downturns. Berkel’s insights underscore the dual aspects of risk tolerance, recognizing that while financial capability is vital, emotional readiness plays an equally critical role.

“Not everyone can take the emotional volatility that comes with market fluctuations. If they find significant drawdowns stressful, they may benefit from reallocating some of their investment portfolio toward more stable assets,” Berkel adds.

Conclusion: Moving Forward with Caution

For high-net-worth retirees like our couple, cautious optimism is warranted. As they focus on leaving a legacy for their heirs, maintaining a tax-conscious investment strategy while balancing risk tolerance will be essential. While their current investments align well with their goals, a well-rounded financial strategy that concurrently addresses spending needs and emotional comfort during market oscillations will strengthen their long-term financial viability.

Clear communication with financial advisors can help establish a structured financial plan that addresses both financial returns and personal comfort levels throughout their retirement years. Staying mindful of market dynamics while ensuring financial security and legacy is the prudent path forward.