Retirement Investors – Do you want to leave your kids 5 times more money?

As parents, we all want to provide for our kids and subsequent generations as well as we possibly can.  The following plan may provide up to 522% more money to leave to your children / grandchildren and at the same time increase current income for you to spend in retirement.

  • The Plan
    • In the taxable portion of your retirement investment portfolio, move 10% of your investable net worth from bonds to a portfolio of high-quality stocks managed in a low cost, tax efficient manner.
    • Based upon long term U.S. asset class returns since 1926, over a 30-year period (a typical retirement) this may provide you 138% more after tax spending during retirement and a 522% higher ending balance.
    • So, if you move $100,000, you may have $81,000 more to spend over 30 years and a $522,000 higher ending balance to bequeath to your children/grandchildren. 
  • How it works
    • Over the long term, stocks earn substantially more than bonds.  Since 1926, U.S. large company stocks have earned 10.2% per year, vs long term government bonds of 5.5%.
    • Long term holdings can reduce the risk of loss in stocks – since 1926, there has never been a 15-year holding period where stocks lost money.  Since 1926, there has only been one 30 year holding period where long term government bonds earned more than stocks (and stocks earned an average of 10.98% per year during that 30-year period).
    • Stocks are much more tax efficient than bonds – long term holding periods delay taxes on gains until the stock is sold and qualified dividends and long-term capital gains are taxed at a lower rate.
    • Lower cost investing really adds up!  In the U.S. the average annual financial advisory fee for an account with $1 million is 1.02% (per  Reducing that fee to .5% in a stock portfolio compounds over 30 years to a 21% increase in ending value.
    • The power of compounding – “Compound interest is the 8th wonder of the world.  He who understands it, earns it; he who doesn’t pays it.”  Albert Einstein
  • The details and assumptions
    • This assumes a pre-existing diversified retirement investment portfolio and the move to stocks will likely increase a 60-40 stock/bond asset allocation to approximately 70-30).  In many circumstances, a higher stock/bond asset allocation is superior, but care must be taken to ensure it will not increase short term volatility to an unmanageable amount.
    • These funds are in a taxable account for a NY state investor with an annual income level of $500,000.  Federal and New York state tax rates apply.
    • This assumes stocks earn the long-term average of 10.2% per year and bonds earn 5.5% (note the 10-year treasury bond is yielding 1.18% per year presently, so the stock out performance is likely to be even higher).
    • Expenses decline on this portion of the portfolio from 1.02% to .5% per year.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Source for all return data is “2020 Stocks, Bonds, Bills and Inflation Yearbook”, Roger G Ibbotson and Duff & Phelps. For our full disclosures, click here.