Portfolio Check In - New 457 to Think About (UPDATED)

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Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Thu Jun 13, 2013 9:45 pm

Hello Bogleheads,

I posted earlier seeking help maxing out my tax advantaged space and got a lot of great replies. (Please see previous post http://www.bogleheads.org/forum/viewtopic.php?f=1&t=92536). Since then I discovered that I am eligible for my city's 457 plan in addition to my 403b and I thought that given the lower cost fixed income options you could help me retool my contributions to maximize all the various plans.

Emergency fund: Yes
Mortgage Debt: 296k @ 4% fixed. 29 yrs left.
Tax Filing Status: Married filing Jointly
Tax Rate: 25 Federal approx 8% New York (State + City)
Age: Wife and I both 34
Asset Allocation: 75/25
Desired Intl allocation: 20-30% of equities?
Taxable: None
Annual Contributions: 35k at this point

Her 401k: 75K (Contributing the max):
We need to contribute at least 5% to receive a 4% match on her salary.
75% BNY S&P 500 Index (No ticker) (.05)
25% Pimco Total Return (PTRAX) (.71)

Other options:
Mainstay Large Cap R2 (MLRTX) (1.29)
American Funds Euro Pacific (REREX) (1.13)
Dodge and Cox Stock (DODGX) (.52)
Allianz Nfj Small-Cap Value Fd (PCVAX) (1.18)
Buffalo Small Cap (BUFSX) (1.01)
Virtus Real Estate Securities (PHRAX) (1.48)
American Cent Inflation Adj - ACITX (.48)
American Funds Amer H/I - RITCX (1.02)
Blackrock Equity Dividend - MSDVX (1.02)
Columbia Strategic Income - COSIX (1.01)
Eaton Vance Floating Rate - EVBLX (1.01)
Federate Prime Obligations Mm Cash Stable Value - PRSXX (.45)
Goldman Sachs Mid Cap Value - GSMCX (.76)
Munder Mid-Cap Core Growth - MGOAX (1.33)

His 403b: 25K (contributing the max)
100% Fixed Return Fund

Please note that this fund pays a guaranteed 7% return to New York City educators. I am treating this as a separate portfolio as I will be maxing this out regardless. My 75/25 asset allocation outside of this plan reflects that reality. See here for details on the fund https://www.trsnyc.org/trsweb/passportFunds/fixedReturnFund.html

City 457 Plan (no contributions yet)
The funds do not have tickers - see here for more info http://www.nyc.gov/html/olr/html/shared/shared_core_options.shtml#sif

Stable Income Fund (.34)
Bond Fund (.30)
Equity Index Fund (.05)
Socially Responsible Fund (.46)
Mid-Cap Equity Fund (.51)
International Equity Fund (.34)
Small-Cap Equity Fund (.45)

Questions:

1. We currently have no international. What would be the best way to add this exposure given our options?
2. We have a stable value fund and bond fund in the 457? What would be the best way to use these in addition to or instead of PIMCO Total Return?
3.We are interested in making the best use out of all of this tax deferred space. My understanding is that in our tax bracket this would be the way to go? Right now we are making out 2 plans for a total of 35k but will increase our contributions as raises allow.

Thanks in advance for your help!
Last edited by schneidy on Fri Jun 14, 2013 8:11 am, edited 1 time in total.
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Re: Portfolio Review - UPDATE

Postby Peter Foley » Thu Jun 13, 2013 11:46 pm

Do you know what your Stable value options are currently paying? They are an alternative to the PIMCO Total Return. Be sure to look at both your retirement accounts as a single portfolio so you can pick the best options available to the two of you.

I would definitely include some international - it looks like you have an ok option in your 457 account. You could direct new contributions there for the time being.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Fri Jun 14, 2013 8:59 am

Peter Foley wrote:Do you know what your Stable value options are currently paying? They are an alternative to the PIMCO Total Return. Be sure to look at both your retirement accounts as a single portfolio so you can pick the best options available to the two of you.


Thanks for your response.

The stable income fund returned 3% in 2012. According to the fund profile

"The Stable Income Fund consists of a managed portfolio of traditional guaranteed investment contracts (GICs), bonds and investment contracts
which help stabilize those bonds. Investment return will be from interest income. The level of return is expected to be lower than that of the
Plan’s other investment fund options. This Fund should keep pace with or modestly outpace inflation."

Do you think this would be an appropriate alternative to the PIMCO fund or r would it better to use the bond fund in the 457?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Fri Jun 14, 2013 9:43 am

I don't understand why you are not including His 403b as part of your 75/25 allocation?

For international, I'd use the International Equity Fund (.34) offered in the 457. However, since it is an EAFE fund, you still would not have the emerging markets. Can you put some money into a Roth IRA to hold just the emerging markets?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby Grt2bOutdoors » Fri Jun 14, 2013 9:55 am

Frankly, between your pension and 403(b) - I don't see the need for international - you will be walking out with close to your salary when you retire. 60% of pay at retirement, free/reduced healthcare, an annuity that will double in value every 10 years, a Cola at current legislation for first $18K of pension plus Social Security. I'd use a Traditional IRA if allowed and reduce your taxes even more today, place international in there if you want to dabble. I think you are plenty exposed to all facets of equities, your pension is invested at a rate of 80% equities/private investments and 20% fixed income. The worse that could happen is they hold back the rate of your salary increases which given the last 3 years, seems to be a sure thing for the foreseeable future, city can not afford to be handing out any substantial raises like the outgoing mayor did a few years back.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Fri Jun 14, 2013 10:18 am

retiredjg wrote:I don't understand why you are not including His 403b as part of your 75/25 allocation?


My thinking is that it would be crazy to do anything other than to max out the 403b at 7%, so there would be no flexibility with changing the allocations to other funds offered in the plans in order to rebalance my other accounts. I view this plan as fixed income that would decrease my need to take more risk down the road, and given that it is only 25% of my current portfolio I'm fine with a 75/25 asset allocation outside that plan at this time. I guess the question is how best to make use of her 401k and his 457 in order to maximize those plan's options. Am I missing something here?

Grt2bOutdoors wrote:Frankly, between your pension and 403(b) - I don't see the need for international - you will be walking out with close to your salary when you retire. 60% of pay at retirement, free/reduced healthcare, an annuity that will double in value every 10 years, a Cola at current legislation for first $18K of pension plus Social Security. I'd use a Traditional IRA if allowed and reduce your taxes even more today, place international in there if you want to dabble. I think you are plenty exposed to all facets of equities, your pension is invested at a rate of 80% equities/private investments and 20% fixed income. The worse that could happen is they hold back the rate of your salary increases which given the last 3 years, seems to be a sure thing for the foreseeable future, city can not afford to be handing out any substantial raises like the outgoing mayor did a few years back.


Yes, but I guess I'm hedging against not staying in the system long term (I'm 6 years in and may move to Canada with the family at some point). This is why I'm looking to make use of the 457 plan in addition to the 401k. Do you think that ideally we should max out these three plans before getting serious with Roth? I'm thinking we're a little behind in retirement savings at this point given our age and having more to contribute now pre-tax would be the way to go.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Fri Jun 14, 2013 11:25 am

schneidy wrote:
retiredjg wrote:I don't understand why you are not including His 403b as part of your 75/25 allocation?


My thinking is that it would be crazy to do anything other than to max out the 403b at 7%, so there would be no flexibility with changing the allocations to other funds offered in the plans in order to rebalance my other accounts. I view this plan as fixed income that would decrease my need to take more risk down the road, and given that it is only 25% of my current portfolio I'm fine with a 75/25 asset allocation outside that plan at this time. I guess the question is how best to make use of her 401k and his 457 in order to maximize those plan's options. Am I missing something here?

I think you are missing something. If you look at your portfolio as a whole, there is no need to hold 75% and 25% in each account. The stable value fund would just be part of the 25% in bonds. This would mean you would need to use less of the expensive PIMCO fund in Her 401k.

You could set things up roughly like this:

Her 401k
500 Index
PIMCO bonds (but less than now)

His 403b
Stable Value

His 457
International
Small Cap Equity (to balance out the 500 Index)

Roth IRA
Emerging Markets (to finish off the EAFE International fund


Do you think that ideally we should max out these three plans before getting serious with Roth? I'm thinking we're a little behind in retirement savings at this point given our age and having more to contribute now pre-tax would be the way to go.

Maybe, maybe not. The amount you save is the most important factor. The stock to bond ratio is probably next. Just what types of accounts hold the money is less important.

For IRA, you might be eligible to make deductible contributions. Have you checked? This would give you the same benefit as putting more into 401/403/457 but you would have a broader range of choices. Or you could put a certain amount of money into Roth IRA to give yourselves some tax-diversification. In the 25% bracket, I tend to prefer tax-deferral instead of Roth, but think that having some of both is a good choice.

If you have a pension coming (apparently not a given at this point), that is an argument for more Roth rather than less Roth.

If you end up having a pension, you are not "behind" in my opinion. You already have $100k saved and another 20 or more years to work on it. Even if you don't end up with a pension, I'm not sure you are "behind".
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby Grt2bOutdoors » Fri Jun 14, 2013 1:03 pm

schneidy wrote:
retiredjg wrote:I don't understand why you are not including His 403b as part of your 75/25 allocation?


My thinking is that it would be crazy to do anything other than to max out the 403b at 7%, so there would be no flexibility with changing the allocations to other funds offered in the plans in order to rebalance my other accounts. I view this plan as fixed income that would decrease my need to take more risk down the road, and given that it is only 25% of my current portfolio I'm fine with a 75/25 asset allocation outside that plan at this time. I guess the question is how best to make use of her 401k and his 457 in order to maximize those plan's options. Am I missing something here?

Grt2bOutdoors wrote:Frankly, between your pension and 403(b) - I don't see the need for international - you will be walking out with close to your salary when you retire. 60% of pay at retirement, free/reduced healthcare, an annuity that will double in value every 10 years, a Cola at current legislation for first $18K of pension plus Social Security. I'd use a Traditional IRA if allowed and reduce your taxes even more today, place international in there if you want to dabble. I think you are plenty exposed to all facets of equities, your pension is invested at a rate of 80% equities/private investments and 20% fixed income. The worse that could happen is they hold back the rate of your salary increases which given the last 3 years, seems to be a sure thing for the foreseeable future, city can not afford to be handing out any substantial raises like the outgoing mayor did a few years back.


Yes, but I guess I'm hedging against not staying in the system long term (I'm 6 years in and may move to Canada with the family at some point). This is why I'm looking to make use of the 457 plan in addition to the 401k. Do you think that ideally we should max out these three plans before getting serious with Roth? I'm thinking we're a little behind in retirement savings at this point given our age and having more to contribute now pre-tax would be the way to go.


The current plan of which you are a member and vested is a 57/25 plan - 57 years of age, 25 years of service. You've completed roughly 24% of the time necessary to retire. You will receive something when you file to collect. The money you put into the 403b, if you move to Canada, leave it there - it will continue to accrue at 7%. The healthcare aspect you likely will not be eligible for if you leave prior to full retirement.
So, just ballparking it, your pension benefit now, is likely worth an annuity of probably $7.5-$10K per year at retirement, but you'd get a better approximation if you call the TRS yourself.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby Peter Foley » Fri Jun 14, 2013 1:19 pm

Sorry I didn't get back to you earlier. With a 3% yield your stable value is a better bet than the PIMCO bonds. I wouldn't use it exclusively for non equities, but certainly for half. I think retiredjg's set up is fine.

If you are considering leaving the system early (before age 55) the 457 account should be a high priority.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby Randomize » Fri Jun 14, 2013 1:28 pm

Peter Foley wrote:If you are considering leaving the system early (before age 55) the 457 account should be a high priority.


Agreed. The flexibility of a 457 can be really, really useful for doing conversions/etc. when you change jobs as long as you don't just use the change as an opportunity to spend it all.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Fri Jun 14, 2013 4:05 pm

Thanks to everyone for the replies.

First, we are not eligible for a TIRA. We actually do have Roth accounts, but are currently using them to hold a portion of our emergency funds.

I guess just to be clear, what I'm trying to figure out is how to best use all of my tak advantaged space most efficiently. I definitely do consider it one overall portfolio, but because the fixed return (7%) plan in the 403b is such a good deal it's the only account in which no moves will be made other than to max it out. This leaves me wondering what my priorities should be given the remaining options in the 401k and 457.

From what I've gathered, one response has been to hold off on international, mid and small cap for now and swap out PIMCO for the stable value fund in my 457 for now. Another response has been to place international and small cap in the 457. My concern about this is losing the ability to use fixed income to rebalance if and when the market corrects.

What I'm thinking is along the lines of

Her 401k
500 Index
PIMCO bonds (decreasing over time)

His 403b - will max out for 2013
Fixed 7%

His 457
Stable Value (increasing to take place of PIMCO)

Any thoughts of how I can add the broader US equities and international to this, or am I making this all too complicated?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Fri Jun 14, 2013 4:38 pm

I don't see why you can't have it all. Right now your portfolio looks like this if I understand what you have correctly:

Her 401k 75% ($75k)
56.3% 500 Index
18.8% PIMCO bonds (decreasing over time)

His 403b 25% ($25k)
25% Fixed 7%

His 457 0%

So right now, your portfolio really sits at 56% stocks and 44% bonds. You could exchange the bonds in her 401k to 500 index to achieve the desired 75/25. *** Then start contributing to international in the 457. You have no reason to use the stable value fund in His 457 because you will have plenty of fixed assets in His 403b. I think. Can you estimate how much money you have left to contribute this year to the Her 401k, His 403b, and His 457? I realize some of the money could go to either Her 401k or His 457, but I think there is also something that must go to Her 401k to get the full match.

You have received one opinion that international is not necessary. Some people do think that way (including Jack Bogle), but I'd guess the majority opinion (if that is worth anything) would be to definitely have some international. The problem is the international fund available to you at low cost is incomplete. However, that is better than nothing.


My concern about this is losing the ability to use fixed income to rebalance if and when the market corrects.

I see what you are saying. At that point, you might be able to keep up just by the money that is going to Her 401k and His 457. Or you might have to decide if you want to send some of the "7% money" to stocks for a short while. I think this problem will exist anyway, just less visibly.



First, we are not eligible for a TIRA.

Just a clarification, you are eligible for TIRA if you have income, but you might not be eligible to deduct the contributions. But you could still make contributions. However, sending more money to 401k/403b/457 or to Roth IRA would be a much smarter choice.


***This brings up the question of whether 75/25 is what you really want or do you want something more conservative that you are achieving by keeping that account at 75/25 while the other account is at 100% fixed?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Fri Jun 14, 2013 6:08 pm

retiredjg, thanks for the extremely thoughtful reply. Let me see here...

retiredjg wrote:So right now, your portfolio really sits at 56% stocks and 44% bonds. You could exchange the bonds in her 401k to 500 index to achieve the desired 75/25. *** Then start contributing to international in the 457. You have no reason to use the stable value fund in His 457 because you will have plenty of fixed assets in His 403b. I think. Can you estimate how much money you have left to contribute this year to the Her 401k, His 403b, and His 457? I realize some of the money could go to either Her 401k or His 457, but I think there is also something that must go to Her 401k to get the full match.

You have received one opinion that international is not necessary. Some people do think that way (including Jack Bogle), but I'd guess the majority opinion (if that is worth anything) would be to definitely have some international. The problem is the international fund available to you at low cost is incomplete. However, that is better than nothing.


We just got to the point where we could max her 401k in addition to his 403b. In order to get the 4% match in the 401k we need to continue to contribute at least 5% of her salary (we're at about 13% to max it out). I could try to make up the difference in international in the 457. I'm not sure if I would be able to get small cap in in any meaningful way. As far as reducing contributions to the 403b to add to the 401k, it's kind of a nightmare and takes forever for changes to the account to be reflected in City's payroll. It's seen as a major joke in terms of how the plan is administered.

retiredjg wrote:***This brings up the question of whether 75/25 is what you really want or do you want something more conservative that you are achieving by keeping that account at 75/25 while the other account is at 100% fixed?


I think for the purpose of simplicity I thought we would do age-10 in bonds outside of the 7% option. This felt like it would be the smart move given the other retirement vehicles we have, but perhaps I should consider factoring the 403b into that overall asset discussion? Again my major concern is the ability to rebalance between asset classes in a downturn. We've really only known upside since we have been investing and I'm afraid of being in a situation where I can't get back to my desired asset allocation in a reasonable amount of time.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby pingo » Fri Jun 14, 2013 11:14 pm

retiredjg wrote:For international, I'd use the International Equity Fund (.34) offered in the 457. However, since it is an EAFE fund, you still would not have the emerging markets. Can you put some money into a Roth IRA to hold just the emerging markets?


I thought I'd still chime in to say that navigating this provided link describes the 457 International Equity Fund as a Developed Market-only fund.

However, navigating the other link shows that the fund has been updated to contain Emerging Markets and International Small Caps, and it's benchmark is the ACWI (All Counrty Country World Index) ex-US IMI, which is also confirmed in the fund's data sheet.

:beer
Last edited by pingo on Sat Jun 15, 2013 3:58 pm, edited 2 times in total.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 15, 2013 11:57 am

schneidy wrote:We just got to the point where we could max her 401k in addition to his 403b. In order to get the 4% match in the 401k we need to continue to contribute at least 5% of her salary (we're at about 13% to max it out). I could try to make up the difference in international in the 457. I'm not sure if I would be able to get small cap in in any meaningful way. As far as reducing contributions to the 403b to add to the 401k, it's kind of a nightmare and takes forever for changes to the account to be reflected in City's payroll. It's seen as a major joke in terms of how the plan is administered.

In order to help with this we need to know dollar amounts.

    -I'm assuming you will max out His 403b but don't know how many dollars that will be till the end of the year (including a match if there is one).

    -I'm assuming you will put enough in Her 401k to get the match, but don't know how many dollars that will be and how many dollars the match will be.

    -The rest can go to the 457 but don't know how many dollars that will be.

In order to direct money to the different funds, we need to know the dollar amount that will be added to each account. If you don't wish to post that information publically, just say so and I'll just make up an example.


retiredjg wrote:***This brings up the question of whether 75/25 is what you really want or do you want something more conservative that you are achieving by keeping that account at 75/25 while the other account is at 100% fixed?

I think for the purpose of simplicity I thought we would do age-10 in bonds outside of the 7% option. This felt like it would be the smart move given the other retirement vehicles we have, but perhaps I should consider factoring the 403b into that overall asset discussion?

It's your decision. What do you want? It can be done either way but you need to come up with a number because "age-10 outside of the 7% option" is not a number - it is a ratio that will change as the size of the accounts changes. It's something you came up with because it was simple and comfortable, but it does not really mean anything specific. Try to come up with a number (or range of numbers) that you are comfortable with for your whole portfolio.


Again my major concern is the ability to rebalance between asset classes in a downturn. We've really only known upside since we have been investing and I'm afraid of being in a situation where I can't get back to my desired asset allocation in a reasonable amount of time.

The solution to this is two fold. First, hold a 5% or 10% portion of bonds in Her 401k, knowing that you are paying a high cost for those bonds. During a crash, sell bonds and buy stocks in that account to try to maintain your stock to bond ratio.

When that option dries up, buy some stocks in His 403b instead of the 7% fund. Or keep sending all the 403b money to the 7% fund knowing that you are not buying stocks while stocks are on sale. You can do either one. Which seems smarter to you? Buying some stocks in the 403b may not mean you send all the money to stocks - just some of it.

This last issue you have (difficulty rebalancing during a crash) is not real. It is real to you because you can see it on paper. You don't see it the way you have things set up now but that is because the current set up not based on a decision of what you actually want. It is based on something easy to manage without regard to what your actual stock to bond ratio is.

Perhaps what you actually want is not 75/25 but really something else? Or did you not realize that doing it this way actually changes your stock to bond ratio?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 15, 2013 12:00 pm

pingo wrote:However, navigating the other link shows that the fund has been updated to contain Emerging Markets and International Small Caps, and it's benchmark is the ACWI (All Counrty World Index) ex-US IMI, which is also confirmed in the fund's data sheet.

Good catch pingo! I looked at the information too quickly. You are right and that makes the international fund a very good choice. It is actively managed instead of index, but the cost is low so being actively managed is not a big problem.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby pingo » Sat Jun 15, 2013 4:05 pm

retiredjg wrote:It is actively managed instead of index, but the cost is low so being actively managed is not a big problem.


Exactly. It's a composite of mostly-active funds (probably "boutique" firms that are hopefully closet indexers anyway). It's structured and weighted to be close to market-neutral and the price is right.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Sat Jun 15, 2013 7:44 pm

retiredjg wrote:In order to help with this we need to know dollar amounts.

-I'm assuming you will max out His 403b but don't know how many dollars that will be till the end of the year (including a match if there is one).

-I'm assuming you will put enough in Her 401k to get the match, but don't know how many dollars that will be and how many dollars the match will be.

-The rest can go to the 457 but don't know how many dollars that will be.

In order to direct money to the different funds, we need to know the dollar amount that will be added to each account. If you don't wish to post that information publically, just say so and I'll just make up an example.


This is great. Thanks!

We are maxing the accounts so figure for the sake of simplicity that 1/2 of 17,500 will be split between her 401k and his 457 with the full yearly contribution going to the 403b. Based on a full year of contributions this will work out like this:

Her 401k requires 5% to get a 4% of match:

$6750+$5400 =$12,150

This leaves $17,500-$6750=$10,750 based on our current contribution for the 457.

The 403b will get $17500 (or the full amount allowed) yearly.

retiredjg wrote:Perhaps what you actually want is not 75/25 but really something else? Or did you not realize that doing it this way actually changes your stock to bond ratio?


I understood this in reality, but i think it was easier for me to see the 403b as an amazing bonus separate from the rest of the portfolio back when I had a tiny balance. Now that it is a quarter of my overall assets, I get that I have to think this through more comprehensively. After talking with my wife, we'd like to keep the allocation close to 75/25 but this assumes normal bonds. How can we think this through given these bonds pay what they do risk free?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 15, 2013 7:57 pm

schneidy wrote: After talking with my wife, we'd like to keep the allocation close to 75/25 but this assumes normal bonds. How can we think this through given these bonds pay what they do risk free?

Why do you think this fund should be thought of differently?

Thanks for the update on the dollar amounts. I'll have to look at that part tomorrow morning.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Sat Jun 15, 2013 8:08 pm

retiredjg wrote:
schneidy wrote: After talking with my wife, we'd like to keep the allocation close to 75/25 but this assumes normal bonds. How can we think this through given these bonds pay what they do risk free?

Why do you think this fund should be thought of differently?

Thanks for the update on the dollar amounts. I'll have to look at that part tomorrow morning.


It's a good question. I guess it's because they pay out at a crazy high rate relative to other bonds (at least for now) with no risk. Also,I get stability plus guaranteed return. Because of this, I'm throwing every possible dollar to the 403b where I wouldn't do this with a intermediate term bond index fund or a total bond fund. Am I missing something?

Thanks for the continued help.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 15, 2013 9:01 pm

schneidy wrote:It's a good question. I guess it's because they pay out at a crazy high rate relative to other bonds (at least for now) with no risk. Also,I get stability plus guaranteed return. Because of this, I'm throwing every possible dollar to the 403b where I wouldn't do this with a intermediate term bond index fund or a total bond fund. Am I missing something?

I don't think you are missing anything (assuming your understanding of the fund is accurate). I just don't see any reason to see it as any different from any other allocation to a fixed asset investment.

Well, in a way I do. Paying that much with absolutely no risk? Sounds a little too good to be true. There is always reason to be cautious of investments that are too good to be true. So you need to keep an eye on it and be sure things don't change. And I'm not sure I would have my entire fixed income allocation in that one fund. But for the most part, I'd just call it "bonds" and carry on.

That might be because I just don't know enough about it. That's why I wondered why you asked if it should be treated differently.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Sat Jun 15, 2013 9:14 pm

retiredjg wrote:
schneidy wrote:It's a good question. I guess it's because they pay out at a crazy high rate relative to other bonds (at least for now) with no risk. Also,I get stability plus guaranteed return. Because of this, I'm throwing every possible dollar to the 403b where I wouldn't do this with a intermediate term bond index fund or a total bond fund. Am I missing something?

I don't think you are missing anything (assuming your understanding of the fund is accurate). I just don't see any reason to see it as any different from any other allocation to a fixed asset investment.

Well, in a way I do. Paying that much with absolutely no risk? Sounds a little too good to be true. There is always reason to be cautious of investments that are too good to be true. So you need to keep an eye on it and be sure things don't change. And I'm not sure I would have my entire fixed income allocation in that one fund. But for the most part, I'd just call it "bonds" and carry on.

That might be because I just don't know enough about it. That's why I wondered why you asked if it should be treated differently.


The 7% is guaranteed by state law. That's the major reason I've been treating it like such a special situation.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 15, 2013 9:22 pm

schneidy wrote:The 7% is guaranteed by state law. That's the major reason I've been treating it like such a special situation.

I understand that. How does that change how you look at this as an investment? Do you think you should hold more of it than you would hold in bonds? Do you think you should hold less?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Sun Jun 16, 2013 9:37 am

I think it changes it in the sense that I would be ok with a guaranteed 7% if it were my only investment. Considering it's coming from fixed income I think it changed how I understand risk from equities. Additionally, I to contribute as much as I can to this account so that if I leave the system I'll be able to continue to reap as much benefit from it as possible. At this point I'm vested in the pension and 403b and won't be forced to roll over my contributions should I leave.

That said, I'm having a hard time thinking about an overall asset allocation and I'm wondering how to proceed. Given the dollar amounts I laid out can you help me think about what this could look like if I wanted to really do 75/25? What about 50/50 which is what it would be closer to if I maintained the current contributions I am making?
Last edited by schneidy on Sun Jun 16, 2013 4:46 pm, edited 1 time in total.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sun Jun 16, 2013 2:27 pm

Starting with what you have....

Her 401k 75% ($75k) <--getting an additional $12,150 this year
56.3% 500 Index
18.8% PIMCO bonds

His 403b 25% ($25k) <--$8,750 more this year
25% Fixed at 7%

His 457 0% <--$10,750 this year

Ignoring market growth for the time being, at the end of this year, it would look something like this if you decide to hold 75% stocks/25% bonds for your entire portfolio. Total of $131,650 by the end of 2013.

Her 401k 66.2% ($87,150) (exchanged all of the bonds into stocks)
66.2% 500 Index

His 403b 25.6% ($33,750)
25.6% Fixed at 7%

His 457 8.2% ($10,750)
8.2% International Equity

What's good about this is that most of the basis are covered (US stock, foreign stock, fixed). What's bad is that only US Large Caps are represented - you are missing the mid and small cap stocks.

Does that matter? Opinions differ, but if you compare the 500 Index against the Total Market Index, there is very little difference in performance. Some people interpret this to mean that just holding 500 Index is fine.

The other thing that is "bad" is that your international percentage would be low - about 11% of stocks. Unless you have a reason to avoid foreign stocks, most people believe that 20% to 40% would be a better approach than 11%. This, however, would likely be achieved in 2014. I didn't do the math though. You might want to. After that, you could add the small cap equity into the 457. Or both the mid and small cap equity if you prefer.

That brings us up to 2014. If you continue on your present course, about half your contributions would go to the 7% fixed fund and half to stocks. Obviously, that is going to move you toward a higher bond allocation that 25%. It is at that point you have to decide if you would rather invest more in the 7% fixed fund or if you'd rather try to maintain 75/25.

It appears to me that your preference would be to invest more in the 7% fixed fund. As far as I can see, that is not a bad choice as long as you know that you are sacrificing your stock to bond ratio for the guaranteed 7%. It is, in fact, more or less what you are doing now. Over time, if you continue to invest half in the 7% fund and half in stocks, you will end up with a 50/50 portfolio. That would take several (probably many) years.

On the other hand, as you move along in your investing career, you may find you can save another bit of money and put it into Roth IRA. That would tip the balance back a little toward stocks. You could use your Roth IRA to hold the Vanguard Extended Market Index (mid and small caps) to "complete" your 500 index.

So, I know you are going to ask about rebalancing in a crash. You couldn't unless you are willing to exchange some of the 7% fund or contributions into stocks. I think this would be smart because those stocks (bought at rock bottom prices) will eventually pay more than 7% if the stock market recovers (which I assume but don't know that it will). However, I'm not sure that would be your choice. And if you don't chose that, I guess it is no big deal because you will still be able to buy stocks at rock bottom prices in Her 401k and His 457.

Which brings us full circle to how you are going things now. It appears that you could rebalance in a crash but in reality, you would only be holding extra bonds all the time instead. Just like you can say that account is at 75/25 today and in a crash you could maintain it. But in reality your portfolio is not 75/25 - it is actually 56% stocks and 44% bonds and holding the bonds in Her 401k just makes the bond percentage higher than it needs to be.

I hope that all made sense. I realize I didn't answer the specific questions you asked, but that is the process I had to go through to figure out where the portfolio is headed.

In short, I haven't considered it before, but your situation might be a case where it is better to let the stock to bond ratio float rather than try to maintain a certain ratio. If you do this, you will have a conservative portfolio paying more like a more aggressive portfolio. You will also see smaller drops in a crash and there's nothing wrong with that. But you will never be able to maintain 75/25 if half of your contributions are going to bonds. I'm not sure that matters much.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Sun Jun 16, 2013 8:51 pm

Thanks for the thoughts and analysis. You make a lot of excellent points and I think I need to just get myself over the the psychological hurdle of the difficult rebalancing issue. Looking at the math definitely helps me see that I'm in a good spot either way. I just have a severe case of FOMO (fear of missing out) as that's how I would imagine getting myself through a down market.

I assume I know your answer to this, but it seems like another way out of this would be to work toward maxing both the 401k and 457 which would give me more flexibility with trying to maintain an asset allocation. This would bring my total potential in fixed income closer to 33% over time. Would this be advisable before getting into the extended market fund in my ROTH?
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Sat Jun 22, 2013 5:29 pm

schneidy wrote:I assume I know your answer to this, but it seems like another way out of this would be to work toward maxing both the 401k and 457 which would give me more flexibility with trying to maintain an asset allocation. This would bring my total potential in fixed income closer to 33% over time. Would this be advisable before getting into the extended market fund in my ROTH?

So sorry about the delay. I'm moving and things have been a little nuts.

This is not an either/or situation. If you put more money into the 457, you can use the mid cap/small cap funds there (or just the small caps for simplicity) to do the same thing that the Extended Market Index would do in the Roth IRA. Any way to increase money going to the 457 or to Roth IRA would rectify your "problem" keeping your stock to bond ratio higher.

About your fear of missing out, don't forget the obvious. For most cases, the stock to bond ratio determines much of how much return you will get. Higher stock percentages should result in higher returns. But with your fixed income fund paying 7%, that whole scenario is thrown out the window because your bond side is paying more than normal. This is why I'm not concerned that your stock to bond ratio might seem low or might vary over time - it simply doesn't matter as long as that fixed income fund is paying 7%.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby schneidy » Tue Jul 16, 2013 10:21 am

retiredjg wrote:Starting with what you have....

Her 401k 75% ($75k) <--getting an additional $12,150 this year
56.3% 500 Index
18.8% PIMCO bonds

His 403b 25% ($25k) <--$8,750 more this year
25% Fixed at 7%

His 457 0% <--$10,750 this year

Ignoring market growth for the time being, at the end of this year, it would look something like this if you decide to hold 75% stocks/25% bonds for your entire portfolio. Total of $131,650 by the end of 2013.

So I decided to go ahead and put 100 percent of my new 457 contributions into the international fund. I'll also be changing my wife's 401k contributions to 100% S&P 500 fund. The only issue is that none of this will go into effect until mid-September due to the school system's crazy way of dealing with summer payroll issue (hence the hiatus from this thread). Any thoughts?
Her 401k 66.2% ($87,150) (exchanged all of the bonds into stocks)
66.2% 500 Index

His 403b 25.6% ($33,750)
25.6% Fixed at 7%

His 457 8.2% ($10,750)
8.2% International Equity

What's good about this is that most of the basis are covered (US stock, foreign stock, fixed). What's bad is that only US Large Caps are represented - you are missing the mid and small cap stocks.

Does that matter? Opinions differ, but if you compare the 500 Index against the Total Market Index, there is very little difference in performance. Some people interpret this to mean that just holding 500 Index is fine.

The other thing that is "bad" is that your international percentage would be low - about 11% of stocks. Unless you have a reason to avoid foreign stocks, most people believe that 20% to 40% would be a better approach than 11%. This, however, would likely be achieved in 2014. I didn't do the math though. You might want to. After that, you could add the small cap equity into the 457. Or both the mid and small cap equity if you prefer.

That brings us up to 2014. If you continue on your present course, about half your contributions would go to the 7% fixed fund and half to stocks. Obviously, that is going to move you toward a higher bond allocation that 25%. It is at that point you have to decide if you would rather invest more in the 7% fixed fund or if you'd rather try to maintain 75/25.

It appears to me that your preference would be to invest more in the 7% fixed fund. As far as I can see, that is not a bad choice as long as you know that you are sacrificing your stock to bond ratio for the guaranteed 7%. It is, in fact, more or less what you are doing now. Over time, if you continue to invest half in the 7% fund and half in stocks, you will end up with a 50/50 portfolio. That would take several (probably many) years.

On the other hand, as you move along in your investing career, you may find you can save another bit of money and put it into Roth IRA. That would tip the balance back a little toward stocks. You could use your Roth IRA to hold the Vanguard Extended Market Index (mid and small caps) to "complete" your 500 index.

So, I know you are going to ask about rebalancing in a crash. You couldn't unless you are willing to exchange some of the 7% fund or contributions into stocks. I think this would be smart because those stocks (bought at rock bottom prices) will eventually pay more than 7% if the stock market recovers (which I assume but don't know that it will). However, I'm not sure that would be your choice. And if you don't chose that, I guess it is no big deal because you will still be able to buy stocks at rock bottom prices in Her 401k and His 457.

Which brings us full circle to how you are going things now. It appears that you could rebalance in a crash but in reality, you would only be holding extra bonds all the time instead. Just like you can say that account is at 75/25 today and in a crash you could maintain it. But in reality your portfolio is not 75/25 - it is actually 56% stocks and 44% bonds and holding the bonds in Her 401k just makes the bond percentage higher than it needs to be.

I hope that all made sense. I realize I didn't answer the specific questions you asked, but that is the process I had to go through to figure out where the portfolio is headed.

In short, I haven't considered it before, but your situation might be a case where it is better to let the stock to bond ratio float rather than try to maintain a certain ratio. If you do this, you will have a conservative portfolio paying more like a more aggressive portfolio. You will also see smaller drops in a crash and there's nothing wrong with that. But you will never be able to maintain 75/25 if half of your contributions are going to bonds. I'm not sure that matters much.
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Re: Portfolio Check In - New 457 to Think About (UPDATED)

Postby retiredjg » Tue Jul 16, 2013 8:54 pm

I don't think I see a comment or question in your post, schneidy. Did I miss something?
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