How I'd Invest $2 Million Right Now

David McKnight breaks down the approach he would follow if he were to invest a $2 million 401(k) in retirement.

David points out that when you retire, you're no longer just investing for growth; you're investing for income.

Remember: If you get this wrong, you don't get a do-over.

In the case David discusses, many financial advisors would recommend investing the $2 million in the market and withdrawing whatever your lifestyle requires.

The problem with that way of doing things, however, is the exposure to the sequence of returns risk.

If the market crashes early in retirement and you're pulling money out at the same time, your portfolio could go into a death spiral from which it never recovers.

The main trap those planning their retirement and retirees should avoid is running out of money before running out of life.

David touches upon the role that a guaranteed lifetime income annuity plays in retirement planning.

As far as annuities are concerned, he's in favor of annuities that have what he refers to as "piecemeal internal Roth conversion feature."

That means being able to gradually convert that annuity from tax-deferred to tax-free during the annuity's deferral period.

David recommends investing discretionary funds with the following ratio: 70% in a total U.S. stock index, 30% in a total international stock index.

He would automatically rebalance if his allocations ever got more than about 5% out of alignment.

The reason why David's approach lacks bonds is simple: if your portfolio goes down in your retirement years, your guaranteed lifetime income gives you the luxury of watching it recover before you take further distributions.

Long-term care is a piece of the strategy that most advisors completely ignore – David explains why it shouldn't be overlooked.

Moreover, the cash value inside that policy can also act as a volatility buffer.

David brings up a move that can increase the sustainable withdrawal rate on your stock portfolio from 4% to as high as 8% with a 95% confidence rate.

"I believe we're currently experiencing the lowest tax rates we're likely to see in our lifetime," says David.

Many experts believe that by 2035, when the debt-to-GDP ratio will hit about 150%, the Federal Government would have to begin phasing in tax increases over time to avoid an all-out economic crisis.

That's why David would like to convert his IRA to Roth, little by little, over the next 10 years in the most tax-efficient way possible.

David provides a bird's eye view of the entire strategy, which by his own admission, "checks every single box."

An Ernst & Young study looked at this type of strategy combining investments with insurance-based solutions like annuities and life insurance – David discusses its findings.

"I'm proposing a strategy that gives you certainty where you need it most, your income and tax-free flexibility everywhere else," he adds.

Such an approach allows you to neutralize longevity risk and tax rate risks all in one cohesive strategy.

Mentioned in this episode:

David's new book, available now for pre-order: The Secret Order of Millionaires

David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track

Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight

DavidMcKnight.com

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