My goal is to be able to spend $150k in retirement – how should I allocate my portfolio?

Some people have very high hopes. People like the writer in today’s letter drawn from the Reddit mailbag, for example.

Our special guest today (let’s call her “Samantha”) describes herself as a 49-year-old, single divorcee with no children, living in a medium cost-of-living locale, and one that charges no state income tax. Samantha says she earns “under six figures,” but wants advice on how to save up enough wealth so that, when she retires, her post-tax income will be about $150,000.

Which is to say, she wants to spend 50% more in retirement, than she spends now when she has a salary! Do you see now why this post got my attention?

Samantha’s earning less than $100,000 (that’s six figures) while still working, but she wants to spend a lot more than $100,000 after she retires and stops working. That’s going to be a neat trick, but hey, let’s see if we can help her out with this. Maybe there’s a way to swing it.

I will say that Samantha’s starting off from a very good point. Not yet 50, and still at least 17 years from an ordinary retirement age of 67, Samantha has amassed some very impressive assets with which to fund her hoped-for retirement:

• A $600,000 house, owned free and clear.
• $700,000 in retirement funds divided between a tax-sheltered annuity 403(b) plan and a deferred compensation 457(b) plan. (You can tell from this that Samantha is probably a public school teacher).
• $1 million in “various managed money accounts”.
• And $2.5 million in a “highly concentrated position,” presumably a stock that has gone up a lot, but which will be taxed when sold.

So basically, $4.8 million in assets, were we to convert all of the above into cash. And Samantha is adding a further $60,000 a year to her retirement plans, so this number is growing. In fact, if she keeps saving at this (which is again a very neat trick if her salary is under $100,000, but good for her if she can do it!), over the 17 years between now and retirement, she could easily add another $1 million to her savings, in addition to however much the values of her various accounts grow from capital gains.

Shall we just ballpark her savings at $6 million by age 67? It’ll probably actually be much more than that because of capital gains, but even if we just pencil in $6 million as a working figure, and then apply the simple 4% withdrawal rate rule of thumb, it sure looks to me like Samantha is on track to achieve her dream.

Pre-tax, withdrawing 4% annually from $6 million would work out to about $240,000 in annual income. Even if the economy goes entirely to pot, and tax rates get raised as high as, say, 40% on her income (which I really hope doesn’t happen), she’d still be netting about $144,000 after tax.

Which is just a rounding error away from the $150,000 she says she’d like to be making in retirement.

How to divvy up the loot?

Long story short, Samantha’s basically set for life at this point, even if she does nothing much new with the assets she’s got. Her only real concern at this point is an (understandable) reluctance to part with the $2.5 million “highly concentrated” position, apparently all in a single stock (Nvidia (Nasdaq: NVDA), anyone?) and take the tax hit, which she expects to be substantial. Yet this concern is coupled with a worry that what goes up, might come down, reducing the value of this single asset, which makes up more than half her wealth at present!

What to do, what to do?

Well, here’s what to do, in a nutshell: Sell that stock anyway. Rip the bandage off. Take the tax hit now. And why? First and foremost, because Samantha’s over-concentrated in a single stock right now, and absolutely right to worry that the value of that single stock could take a big hit, and do outsize damage to the total value of her assets when it does.

Will paying taxes on the $2.5 million hurt? Absolutely it will. But the taxes must be paid eventually, and the truth of the matter is that she’ll almost certainly be paying tax at a lower tax bracket now, when her income is “under six figures” than she would when she retires and is withdrawing $150,000 a year from her savings.

Turns out, Samantha’s biggest question was actually the easiest to answer after all!

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