Allocation Questions from Fed -- TSP and Roth IRA

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Allocation Questions from Fed -- TSP and Roth IRA

Postby globalexpat » Sun Jul 07, 2013 3:26 am

First of all, thanks to all who responded to my original question: viewtopic.php?f=1&t=101371. I've read and re-read this and other posts and am now ready to make some changes.

To recap: I currently contribute the maximum to my TSP and a Roth IRA. In each of those, I'm fully invested in Target Date funds (L2040 and VTIVX [2045]). I have decided to begin looking at my retirement assets holistically and to change my allocations to overcome the blind spots in the TSP's international holdings. I also hope to have some additional cash available in the next 12-18 months to open up a taxable account and wanted to be able to work that into my overall AA.

My (proposed) revised portfolio is as follows:

Thrift Savings Plan (Traditional) -- 70%
38% C Fund
17% S Fund
5% F Fund
10% G Fund

Roth IRA at Vanguard -- 30%
25% (VGTSX) Vanguard Total International Stock Market Index Fund
5
% (VGSIX) Vanguard REIT Index Fund Investor Shares

I've loosely based this off of Vanguard's Life Strategy Growth Fund (VASGX) and am generally comfortable with an aggressive asset allocation at this stage. I'm still young (33) and do not expect to retire until I am 65.

I would be very grateful for suggestions on revisions of these particular allocations or my strategy in general. In particular, I am uncertain as to the optimal breakdown between the G Fund and F Fund within the TSP.

Thank you!
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby Duckie » Sun Jul 07, 2013 7:08 pm

Your proposed portfolio has an AA of 85% stocks, 15% bonds, with 30% of stocks in international. This breaks down to 60% US stocks, 25% international stocks, and 15% bonds. 15% is really low on bonds for age 33.

You also have 38% large caps and 22% mid/small caps (REITs are mid/small caps). This is overweighting mid/small caps which are roughly 20% of the US stock market (48% large caps / 12% mid/small caps). This overweighting is fine if you know why you're doing it.

The G Fund is like a goosed stable value fund. It won't lose money. The F Fund will make more at times, but will lose at times. Right now, the G Fund is a better deal. Your current AA of one-third F Fund and two-thirds G Fund is fine. You could also have all G Fund.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby globalexpat » Tue Jul 09, 2013 10:37 am

Thank you for your feedback. If you were in my situation, what would your portfolio look like?
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby Duckie » Tue Jul 09, 2013 7:26 pm

globalexpat wrote:If you were in my situation, what would your portfolio look like?

I'd increase the bonds to 25%, and decrease the S Fund. So 75% stocks, 25% bonds, with 30% stocks in international, breaking down to 52% US stocks, 23% international stocks, and 25% bonds.

Thrift Savings Plan -- 70%
36% C Fund (0.027%)
9% S Fund (0.027%) <-- 80% C Fund to 20% S Fund.
10% F Fund (0.027%)
15
% G Fund (0.027%)

Roth IRA at Vanguard -- 30%
25% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%) <-- This is a smidge overweight for now.
5
% (VGSIX) Vanguard REIT Index Fund Investor Shares (0.24%)

I also hope to have some additional cash available in the next 12-18 months to open up a taxable account and wanted to be able to work that into my overall AA.

Will this taxable account be for retirement purposes or for your house-downpayment savings. It makes a big difference.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby globalexpat » Fri Jul 26, 2013 3:35 pm

Thank you for your feedback, Duckie. If I'm reading it correctly, the Vanguard 2045 (VTIVX) [my approximate retirement age] currently has only 10% invested in bonds. You mention that even a 15% stake in bonds is really low for a 33 yr old. Does Vanguard tend to be aggressive in this respect? I note that the TSP 2040 lifecycle fund is 23% bonds.

I may end up scrapping the REIT holdings, especially since I own property. More things to consider....
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby Duckie » Fri Jul 26, 2013 7:53 pm

globalexpat wrote:Does Vanguard tend to be aggressive in this respect?

Vanguard's Target Retirement funds are very aggressive and I believe inappropriately so. There are a lot of comments on this board about this issue. We constantly tell people to choose the fund by the AA inside instead of the date in the title.

However, Vanguard's TR funds are similar to most other fund companies' target date funds. I think it's a marketing decision. If Vanguard's 2040 fund had more bonds it would not do as well as some other company's 2040 fund when stocks are doing well. It wouldn't look as good in comparison.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby grabiner » Fri Jul 26, 2013 10:48 pm

Duckie wrote:Your proposed portfolio has an AA of 85% stocks, 15% bonds, with 30% of stocks in international. This breaks down to 60% US stocks, 25% international stocks, and 15% bonds. 15% is really low on bonds for age 33.


A stock-heavy allocation is reasonable for a government worker, because government workers will also have a pension for guaranteed income, and have secure jobs (and thus bond-like human capital).

The real issue is your psychological risk tolerance; did you have a significant portfoliio which was mostly in stock in 2007-2009? If you did, then you know how much stock market risk you can handle and stay the course, and 85% stock (or even more) is fine.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby MnD » Sat Jul 27, 2013 9:27 am

I'll second that - a COLA'd moderate-amount pension, full social security participation, more secure than average work income, retiree health care gives you a huge "shadow" bond position before you buy a single bond fund share. I'm "age - 25" in bonds (70-30 currently) and consider that very conservative, especially that I expect to have no debt at retirement and will plan a retiree budget such that only a relatively small portion of expenses is reliant on portfolio withdrawal. I plan to fix the allocation at 60/40 at age 65.

Your allocation to equity is fine, your domestic/international weighting is fine, your 2:1 tilt to the G fund versus F (TBM) is very smart in my opinion given the extremely low yields and probable direction of interest rates. You are getting virtually the same yield with vastly less risk by tilting to G. Putting the international all in the Roth solves the emerging market and international small cap problem with the TSP. So nice job and I see no issues with implementing this as is.

A couple things to consider - both the G and F (total bond market) fund are treasury-linked with the former and very heavily weighted to government bonds in the latter fund. Jack Bogle has mentioned this and suggested tilting to corporates with a 50:50 mix of TBM and a corporate fund. So you might consider adding a intermediate term corporate fund like VCIT in the Roth at some point - perhaps after a few years when rates have normalized to something closer to historical levels of yield relative to inflation. For now, hunkering in the G is great. You also mentioned you own domestic real estate. You could go higher on your foreign allocation, so you could consider adding an international REIT like VNQI instead of a domestic one.

I'm not sure if VCIT is available in a regular mutual fund and I think the fund version of VNQI has some expense and purchase-redemption fee issues however. So maybe those aren't good ideas if you don't have a Vanguard brokerage option in the Roth. I wish Vanguard would allow one account for holding funds and ETF's.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby stan1 » Sat Jul 27, 2013 10:08 am

MnD wrote:I'll second that - a COLA'd moderate-amount pension, full social security participation, more secure than average work income, retiree health care gives you a huge "shadow" bond position before you buy a single bond fund share.


OP is 33. I think its unwise to assume FERS and FEHB retiree medical benefits will remain unchanged for 50+ years, or that OP will stay in a federal job until eligible to retire. I'd save and invest as if you don't have a pension for another 20 years then reassess when you are within 10 years of retirement. I think 15% bonds is OK if you can "stay the course" during a market drop. I'd still move 1% per year to bonds so you'd be 35% bonds when you are 53. Some will want a more conservative approach.
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Re: Allocation Questions from Fed -- TSP and Roth IRA

Postby MnD » Sat Jul 27, 2013 12:24 pm

I think it's unwise to tilt much more conservatively into bonds than the Vanguard asset allocation model he's stated he's comfortable with and the one that would be the appropriate target date fund. Especially so given his federal employee status. Pretending that things that do exist don't exist (pensions, social security, home equity) seems to be a popular strategy but it isn't a great strategy in my opinion, unless one is just looking for reasons to always be moving in a more conservative direction than what AA experts advocate. Of course anything could change in the future. But what's wrong with taking stock of what you have and taking a midline allocation?

Target retirement 2025 assumes 12 years to retirement so at age 53 Vanguard would suggest 30% in bonds. "Age minus 25" which i think is perfectly suitable for someone with the additional security of both a pension, social security and retiree health care is almost the same - 28%. At age 33 both the appropriate target date fund and age-25 in bonds are below what the OP has currently in bonds.

"35% at age 53 and some will want a more conservative approach" implies a range that's outside professionally designed allocations. I don't see the hard rationale for suggesting that especially in the case of a federal employee. I know many federal employees that set their AA at 100% equity years or decades ago and and have just left it there for their entire career. They are relatively uninterested in investing, check the numbers perhaps once per year, groan a bit in bad years but never make any changes.

This proposed portfolio is much more refined than that and I don't understand all the "this is really low on bonds" comments.
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