The Art of Crafting a Tailored Retirement Strategy

Navigating the nuances of retirement planning requires more than just a cookie-cutter approach. Using outdated rules around spending or ignoring the potential in private markets are just a few of the common mistakes. By revisiting your allocation—and where you locate certain assets within your portfolio—you can craft a personalized strategy that maximizes opportunity and tax efficiency.

Consider Dave and Devin, two 60-year-olds who have enjoyed successful careers. Devin has recently retired while Dave is planning to follow him in four years. They’ve amassed a liquid net worth of $8 million, distributed across taxable assets ($5 million), a traditional IRA ($1.5 million), a Roth IRA ($500,000), and a 401(k) split between traditional and Roth assets ($1 million). As Dave approaches retirement, he wants to put the couple in the best position to maintain their $180,000 lifestyle while minimizing investment risk and preserving their portfolio’s real value over time.

Low-Hanging Fruit

An avid saver, Dave always prioritized maximizing his retirement contributions before adding to his taxable accounts. Now, under the Secure Act 2.0, two new provisions have come to the fore: 

• High-Earner Catch-Up: Starting in 2026, Dave, who earns over $145,000, must make any $7,500 “catch-up” contribution as a Roth contribution. Since he already splits his contributions between traditional and Roth, this change won’t really impact him.
• Super Catch-Up: This new provision allows individuals aged 60 to 63 to contribute an additional $11,250 annually to their 401(k). This is a win-win for Dave, as it enables him to channel more funds into his Roth 401(k), instead of tucking additional savings outside of his retirement plan.

Harmonizing Growth and Safety

Despite those early wins, the duo questioned whether their savings would be enough to meet their goals. To address this, we used our advanced modeling to evaluate the trade-off between assuming too much investment risk and maintaining their desired spending level over the next 30 years. Essentially, we assessed the probability of experiencing a 20% peak-to-trough loss against the risk of depleting their funds, considering various asset allocations ranging from 70% to 30% in stocks (Display 1). 

 

 

Upon seeing the results, Dave and Devin were pleased to find that any allocation they selected would carry a minimal risk of depleting their assets, which was their main concern. But their secondary goals—minimizing investment risk and maintaining real value over time—remained at odds. This realization led them to reconsider whether their current aggressive investment strategy was necessary. To further explore this trade-off, we showed them projections of their portfolio’s expected value 30 years down the line across various asset allocations (Display 2). 

 

Fortunately, our modeling revealed that Dave and Devin’s real wealth would increase regardless of the chosen allocation. However, they found that a 50/50 portfolio struck the ideal balance between minimizing investment risk and achieving substantial growth in their portfolio’s value after inflation. After thoughtful discussion, the pair opted for the 50/50 allocation. 

Private Assets: From Traditional to Transformative

Could Dave and Devin improve their results? While they’d traditionally stuck with publicly traded stocks and bonds, their Bernstein Advisor suggested incorporating private assets into their mix. Would exposure to alternative investments boost their portfolio’s potential?

Private assets, including private credit, real estate, hedge funds, and private equity, offer unique return streams that are uncorrelated with traditional assets. When sized appropriately, the resulting portfolio tends to deliver enhanced risk-adjusted returns through higher returns, lower risk, or both. To help Dave and Devin, we ran an analysis comparing a 50/50 “Traditional Portfolio” without private investments to one with 15% (“Mix A”) and another with 30% in these asset classes (“Mix B”) (Display 3).

 

 

Dave and Devin were surprised by the results. It was clear that incorporating private assets not only boosted their returns from 5.6% to either 6.2% or 6.6%, but also reduced long-term volatility from 9.3% to 8.7% or even 7.5%. The big trade-off? The illiquid nature of these asset classes. That said, they felt reassured knowing that 70% of their portfolio remained highly liquid, with only 30% being somewhat illiquid.

Location Matters

While the results were compelling, Dave and Devin faced the challenge of implementing their plan, knowing that 30% would be allocated to private assets—some of which are more tax inefficient than others. They had three investment buckets to consider: taxable assets, their IRA, and their Roth IRA.

Additionally, since Dave is over 59½ and his plan permits it, he could perform an in-service rollover,[i] transferring his 401(k) into his IRA and Roth IRA to increase the assets available in retirement accounts for private investments. Our general guidance is to strategically place the more tax-efficient alternatives, like real estate and private equity, in taxable accounts. Then, the more liquid but tax-inefficient investments like hedge funds can be earmarked for an IRA to ensure cash availability for required minimum distributions (RMDs). Finally, the most tax- inefficient illiquid alternatives like private credit are ideal for a Roth IRA. This approach aims to optimize their portfolio’s tax efficiency while accommodating their liquidity needs.

Dave and Devin liked the plan, especially since they had IRA and Roth IRA assets available to accommodate the more tax-inefficient alternatives. But what if they lacked retirement accounts or their accounts weren’t substantial enough for such investments? Fortunately, there are insurance vehicles, like Private Placement Life Insurance and Private Placement Variable Annuities, that can be used to shelter tax-inefficient investments, offering a strategic solution to those in need of additional options.

For Dave and Devin, choosing the right allocation is crucial, especially in today’s dynamic environment where one-size-fits-all solutions simply don’t exist. Ideally, investors should aim for an allocation that not only provides enough growth to meet their spending goals, but also aligns with their comfort level when it comes to risk. But selecting the right mix is only half the battle. Implementing it effectively is equally important, factoring in taxes and liquidity needs.