Asset allocation before/during Retirement

[TokyoWart]

I turn 62 in a few months and am thinking along the same lines of how to position my portfolio for retirement. Honestly, for most of the past 15 years bonds have been a terrible asset class across countries. There are some structural reasons for that (highly indebted governments have suppressed interest rates both for their own financial stability and to support economies) and the relatively brief recovery in interest rates recently does not make up for the negative bond returns after inflation and taxes which I believe most bond investors have experienced over the last 5 years. I am maintaining the core of my portfolio in broad index funds and some individual stocks and then adding some preferred equity funds and senior lien US real estate lending funds.

I do not like broad bond index funds. They inherently weight the companies with greater debt so that they make up a larger portion of the total fund. That concentrates risk in companies which have greater leverage right at a moment in history when companies with the strongest finances have been the best disruptors of their industries and have given the best returns to investors. I like Captainspoke's approach of using a generous cash bucket in lieu of a large bond position.

I also do not like the annuities available here in Japan. By necessity annuities are closely tied to the risk free interest rate (because the annuity provider cannot afford to take on risk) and for yen that rate is too low. They also are terrible in the face of inflation (inflation adjusted annuities were not even available in the US the last time I checked).

[captainspoke]

Not going to dig up links to substantiate this claim, but from what I've read, you might say that annuities have fees on steroids.

I'm not sure how people who, for most of their investing lives have pursued funds with low expense ratios, would then sort of throw up their hands (in surrender) and buy an annuity.

I'd like to think that I've learned something along the way...?

[ToushiTime]

I turn 62 in a few months and am thinking along the same lines of how to position my portfolio for retirement. Honestly, for most of the past 15 years bonds have been a terrible asset class across countries. There are some structural reasons for that (highly indebted governments have suppressed interest rates both for their own financial stability and to support economies) and the relatively brief recovery in interest rates recently does not make up for the negative bond returns after inflation and taxes which I believe most bond investors have experienced over the last 5 years. I am maintaining the core of my portfolio in broad index funds and some individual stocks and then adding some preferred equity funds and senior lien US real estate lending funds.

I do not like broad bond index funds. They inherently weight the companies with greater debt so that they make up a larger portion of the total fund. That concentrates risk in companies which have greater leverage right at a moment in history when companies with the strongest finances have been the best disruptors of their industries and have given the best returns to investors. I like Captainspoke's approach of using a generous cash bucket in lieu of a large bond position.

I also do not like the annuities available here in Japan. By necessity annuities are closely tied to the risk free interest rate (because the annuity provider cannot afford to take on risk) and for yen that rate is too low. They also are terrible in the face of inflation (inflation adjusted annuities were not even available in the US the last time I checked).

Yeah BNDX and BNDW include corporate bonds, and mortgage-backed securities, I think, which I probably want to avoid in retirement.

I am not sure about negative returns on government bond funds though. Over the last five years eMaxis SLIM Developed Bonds returned 5.22% including distributions https://site0.sbisec.co.jp/marble/fund/ ... =20331A172 I doubt inflation and taxes turned that negative. And it has returned 37% since it started in 2017, which is pitiful compared to stocks, but good compared to cash in a Japanese bank account.

Just curious: why do you like "preferred equity funds and senior lien US real estate lending funds" and how do you get hold of them?

[captainspoke]

You don't mention currency hedging, so I guess you can live with the risk of the yen strengthening during your retirement? ...

No, I'm not worried about currency fluctuations. I've been here a while, and since I'm US, I've been converting to USD and then investing that for quite a while. And just as an example, I have one stock that I bought in late fall of 2011.

This is one that I really cannot sell (or don't want to)--it has gone up in price, sure. Maybe not quite as much as the S&P500, but excellent dividends along the way (and yes, I've declared those and paid taxes). The 'problem' is that the yen was about ¥80 to the dollar at the time, and a sale now would need to use that basis when calculating capital gains.

Let's say I bought 1000 shares at $18/share, so $18,000, or ¥1,440,000 when the yen was at 80. That stock is now worth $50/share, so 1000 shares is worth ¥50k. But $50k at ¥148:$1 is ¥7,400,000. If I were to sell, there be close to a ¥6m gain (a good portion of that a 'phantom' gain due to the yen weakening), which I'd owe 20% of for taxes--and the tax bill (¥6m*.2=Y1.2m) would be fairly close to my initial investment.

Bottom line--there's more than one angle on currency fluctuations.

This is why you may sometimes read that when someone is going to move to japan, they should consider selling and then re-buying certain investments, in order to reset (upping) their cost basis--not only is the basis in dollars higher, the 'purchase' date would then reflect a weaker yen, so less of any phantom gain.

[Wales4rugbyWC23]

Yes, I am overdue on this one!

Just a quick Google and went with Legal & General calculator not bad annuity rates. (Biggest provider of annuities in the UK) I would take at a guess that you could get better annuity rates than in Japan. One thing I would like to know is can non-resident Brits apply for these. Already non-residents are not permitted to access high interest savings accounts- Although I am sure there is a way....

Even if the rates are good, if it is a annuity involving a huge initial investment to receive fixed payments + fixed interest for the rest of your life, you are screwed if there is high inflation.
I would hesitate to throw all my life savings into one of these things and leave them at the mercy of inflation. Maybe get an inflation-linked version but that would cost more.

Plus, if you were residing in Japan with a sterling-based annuity you would have the currency risk, but maybe a British annuity would work well if you would want to take early retirement in your early sixties/ late fifties and waiting for your state pension to kick in when you are 67/68 years old. They do offer 10- and 20-year annuities.

For an end-of-life annuity to pay for what the British state pension pay would require a pension pot in excess of 250,000 pounds.

[Tsumitate Wrestler]

I think the most sensible approach from a conservative standpoints might be a three bucket approach:

Equity -> Emaxis SLim All Country

Bond -> 50%/50% -> Emaxis Slim Developed Country Bond / たわらノーロード Developed Country Bond (Currency Hedged)

Cash like -> 6 months living expenses, then term deposits/JGBs with the rest if you wish.

[ToushiTime]

You don't mention currency hedging, so I guess you can live with the risk of the yen strengthening during your retirement? ...

No, I'm not worried about currency fluctuations. I've been here a while, and since I'm US, I've been converting to USD and then investing that for quite a while. And just as an example, I have one stock that I bought in late fall of 2011.

This is one that I really cannot sell (or don't want to)--it has gone up in price, sure. Maybe not quite as much as the S&P500, but excellent dividends along the way (and yes, I've declared those and paid taxes). The 'problem' is that the yen was about ¥80 to the dollar at the time, and a sale now would need to use that basis when calculating capital gains.

Let's say I bought 1000 shares at $18/share, so $18,000, or ¥1,440,000 when the yen was at 80. That stock is now worth $50/share, so 1000 shares is worth ¥50k. But $50k at ¥148:$1 is ¥7,400,000. If I were to sell, there be close to a ¥6m gain (a good portion of that a 'phantom' gain due to the yen weakening), which I'd owe 20% of for taxes--and the tax bill (¥6m*.2=Y1.2m) would be fairly close to my initial investment.

Bottom line--there's more than one angle on currency fluctuations.

This is why you may sometimes read that when someone is going to move to japan, they should consider selling and then re-buying certain investments, in order to reset (upping) their cost basis--not only is the basis in dollars higher, the 'purchase' date would then reflect a weaker yen, so less of any phantom gain.

I get that you are not worried now, and you take the highs and lows when it comes to the exchange rate. Me too, but what about when you retire?
Will you stick to this approach and avoid hedging and rely on the cash bucket to cushion any sudden appreciation of the yen?
I might do that.

[ToushiTime]

I think the most sensible approach from a conservative standpoints might be a three bucket approach:

Equity -> Emaxis SLim All Country

Bond -> 50%/50% -> Emaxis Slim Developed Country Bond / たわらノーロード Developed Country Bond (Currency Hedged)

Cash like -> 6 months living expenses, then term deposits/JGBs with the rest if you wish.

- so 6 months instantly available cash, and how many years worth of term deposits/JGBs?

[captainspoke]

I get that you are not worried now, ... but what about when you retire? ...

Well, at 72 I'm halfway into my eighth year of retirement.

(hopefully that's only about a quarter of it!)

[TokyoWart]

Yeah BNDX and BNDW include corporate bonds, and mortgage-backed securities, I think, which I probably want to avoid in retirement.

I am not sure about negative returns on government bond funds though. Over the last five years eMaxis SLIM Developed Bonds returned 5.22% including distributions https://site0.sbisec.co.jp/marble/fund/ ... =20331A172 I doubt inflation and taxes turned that negative. And it has returned 37% since it started in 2017, which is pitiful compared to stocks, but good compared to cash in a Japanese bank account

That 5% total return over 5 years is because it is unhedged. An investor in a currency that had not weakened as much as the yen has in the past 3 years is likely seeing a negative return. The Vanguard total bond ETF BND has returned under 1% total in the past 5 years which will mean a negative return for any US dollar investor who had to pay taxes on the coupon distributions.

Just curious: why do you like "preferred equity funds and senior lien US real estate lending funds" and how do you get hold of them?

These are the private equity funds from the "shadow banking sector." Most of the larger private equity and REIT platforms (e.g. Fundrise, Origin, DLP, Equity Multiple, etc.) have these for accredited investors. They currently get returns around 10% and the first lien position makes them relatively safe even for fixed income funds. As an example, the DLP lending fund has never written down a dollar, delivers a monthly distribution of its pref 8% yearly return and has total annualized returns of over 12% with 90 day liquidity. These funds benefit from the difficulty banks have right now in addressing this part of the real estate market.

https://go.dlpcapital.com/hubfs/Fund%20 ... _campaign=