Help me with my Dad's Retirement Portfolio

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Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Sun Jul 14, 2013 11:23 pm

Hello all,

So my dad and I were discussing investing, and I brought up some Boglehead elements of investing that he demonstrated some interest in. He has done some research on his own, and I have recommended that he read The Boglehead’s Guide to Investing and the Investor’s Manifesto to start. In the meantime, we were looking at some options for his 401k.

Up to this point, he has been using Sound Mind Investing’s Fund Upgrading Strategy, but would like to begin to shift to a simpler, more Boglehead-ish portfolio. All of his current investments are in his 401k, and he has a decent pension coming from his work – if he were let go or quit tomorrow, he would have about a $300k lump sum or $2k/month pension that he could access at age 65. Those figures will only increase (potentially up to $600k and around $5k/month) if he stays with the company until 55.

The remainder of his portfolio is 100% invested in stocks via the Fund Upgrading strategy, as noted above. The concept itself is fairly interesting – the investment advising company, Sound Mind Investing, sends out a newsletter each month recommending certain funds for the various elements of a portfolio (large cap, small cap, international, etc.), supposedly taking advantage of market momentum and what not. That said, it does entail market timing – and, of course, you are dependent on the newsletter and the (fairly minimal) costs that that entails. While I was initially surprised that his 401k stock allocation was so high, given the amount of his pension (which is currently about 40% of his overall portfolio), this is probably appropriate.

Emergency funds: Yes, about six months
Debt: $200k Mortgage at around 4%
Tax Filing Status: MFJ
Tax Rate: 28% Federal, 0% State
Age: 46
Desired Asset allocation: Probably 100% stocks, given certainty and size of pension
Desired International allocation: 30% of stocks

Approximate Portfolio Size (excluding pension): ~$500k

Current retirement assets

His 401k (percentages are approximate)
12% Aegis Value Fund (AVALX) (1.47)
17% Dodge & Cox Stock (DODGX) (0.52)
14% Fidelity Select Biotechnology (FBIOX) (0.79)
14% Oakmark International (OAKIX) (1.06)
12% Primecap Odyssey Aggressive Growth Fund (POAGX) (0.68)
15% Primecap Odyssey Growth Fund (POGRX) (0.67)
8% SMI Dynamic Allocation Fund (SMIDX) (1.99)
(plus some company stock)

Company match? Yes, 5%
Contributions

New annual Contributions
$19800 to 401k plus $8100 employer match for $27900 total.

Available funds

Funds available in his 401(k)
Vanguard TR funds 2015 – 2055 (ER: 0.07)
Dodge and Cox International 0.64
EV Large Cap Value 0.73
Large Cap Growth 0.84
Low Price Stock Fund 0.83
Mid Cap Stock Fund 0.61
NT S&P Index 0.03
OPPHMR Dev Mkts 0.88
Company Stock Fund 0.00
Russell 2000 SC index 0.04
T Rowe Small Cap Stk 0.92
BTC Core Bond Fund 0.11
BTC Tips Index 0.07
T Rowe Stable Value 0.06


Questions:
1. My first recommendation, for the sake of simplicity and to take advantage of the low ER via his company, was to simply move his current funds into the TR 2055 fund (again, using his pension as a substitute for his fixed-income portion of his portfolio). The problem here is that the TR fund does have about 10% in bonds, which increases his fixed-income allocation to a point that is perhaps too conservative for his goals (he would like to have about $2.5 – 3 million by retirement).

2. To avoid the bond portion of the TR fund, I thought about using more a slice-and-dice approach to his 401k, perhaps something like 55% to the S&P index, 15% to the Russell 2000 index, and 30% to Dodge and Cox International. Not perfect, but perhaps ok. I didn’t think obtaining dedicated mid-cap exposure was worth the relatively high ER.

3. Finally, any thoughts on Sound Mind Investing’s Fund Upgrading Strategy?
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 6:49 am

medstudent12 wrote:Tax Rate: 28% Federal, 0% State
Age: 46
Company match? Yes, 5%

New annual Contributions
$19800 to 401k plus $8100 employer match for $27900 total.
Problems with the math:

His 401k contribution limit is $17,500.

$8100/5% = $162,000. That would put his taxable income under $120,000, well below the 28% bracket. Maybe there's another $30,000 or so of income not accounted for? Maybe his wife also works?

If his wife isn't working she could make a deductible spousal TIRA contribution (unless his gross income is actually over $200,000). He could make Roth IRA contributions.
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Re: Help me with my Dad's Retirement Portfolio

Postby ieee488 » Mon Jul 15, 2013 8:37 am

medstudent12 wrote:1. My first recommendation, for the sake of simplicity and to take advantage of the low ER via his company, was to simply move his current funds into the TR 2055 fund (again, using his pension as a substitute for his fixed-income portion of his portfolio). The problem here is that the TR fund does have about 10% in bonds, which increases his fixed-income allocation to a point that is perhaps too conservative for his goals (he would like to have about $2.5 – 3 million by retirement).

2. To avoid the bond portion of the TR fund, I thought about using more a slice-and-dice approach to his 401k, perhaps something like 55% to the S&P index, 15% to the Russell 2000 index, and 30% to Dodge and Cox International. Not perfect, but perhaps ok. I didn’t think obtaining dedicated mid-cap exposure was worth the relatively high ER.

3. Finally, any thoughts on Sound Mind Investing’s Fund Upgrading Strategy?


Too conservative to his goals is different from too conservative for his financial piece of mind.
Is he really willing to see his retirement go down 40% in a downswing in stocks even with his pension?????
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 8:42 am

ieee488 wrote:piece of mind.
Is he really willing to see his retirement go down 40% in a downswing in stocks even with his pension?????
Good eggcorn. I agree that 100% stocks is not compatible with peace of mind.
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Re: Help me with my Dad's Retirement Portfolio

Postby ieee488 » Mon Jul 15, 2013 9:13 am

Bob's not my name wrote:
ieee488 wrote:piece of mind.
Is he really willing to see his retirement go down 40% in a downswing in stocks even with his pension?????
Good eggcorn. I agree that 100% stocks is not compatible with peace of mind.

LOL. good one.

Also, I learned a new word today "eggcorn".
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 9:32 am

Bob's not my name wrote:
medstudent12 wrote:Tax Rate: 28% Federal, 0% State
Age: 46
Company match? Yes, 5%

New annual Contributions
$19800 to 401k plus $8100 employer match for $27900 total.
Problems with the math:

His 401k contribution limit is $17,500.

$8100/5% = $162,000. That would put his taxable income under $120,000, well below the 28% bracket. Maybe there's another $30,000 or so of income not accounted for? Maybe his wife also works?

If his wife isn't working she could make a deductible spousal TIRA contribution (unless his gross income is actually over $200,000). He could make Roth IRA contributions.


I believe his company match is based off of his base pay, which is around $150-160k. He generally then gets about $20-30k in bonuses each year.

I was wondering about the 401k contributions also, though - it sounds like the contributions above the annual limit are going into a Roth 401k...I'll have to check on that, though.
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 9:35 am

ieee488 wrote:
medstudent12 wrote:1. My first recommendation, for the sake of simplicity and to take advantage of the low ER via his company, was to simply move his current funds into the TR 2055 fund (again, using his pension as a substitute for his fixed-income portion of his portfolio). The problem here is that the TR fund does have about 10% in bonds, which increases his fixed-income allocation to a point that is perhaps too conservative for his goals (he would like to have about $2.5 – 3 million by retirement).

2. To avoid the bond portion of the TR fund, I thought about using more a slice-and-dice approach to his 401k, perhaps something like 55% to the S&P index, 15% to the Russell 2000 index, and 30% to Dodge and Cox International. Not perfect, but perhaps ok. I didn’t think obtaining dedicated mid-cap exposure was worth the relatively high ER.

3. Finally, any thoughts on Sound Mind Investing’s Fund Upgrading Strategy?


Too conservative to his goals is different from too conservative for his financial piece of mind.
Is he really willing to see his retirement go down 40% in a downswing in stocks even with his pension?????


These were my initial thoughts as well. However, taking into account his pension, his current AA is something like 60/40 stocks/fixed-income. So while "100% stocks" for this portion of his portfolio sounds bad, it really might be a tad conservative. Using a TR fund, while a great option in general and perhaps the best in terms of simplicity, would bump him to around 50/50 - a bit too conservative for him at this point.
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 10:08 am

medstudent12 wrote:
Bob's not my name wrote:
medstudent12 wrote:Tax Rate: 28% Federal, 0% State
Age: 46
Company match? Yes, 5%

New annual Contributions
$19800 to 401k plus $8100 employer match for $27900 total.
Problems with the math:

His 401k contribution limit is $17,500.

$8100/5% = $162,000. That would put his taxable income under $120,000, well below the 28% bracket. Maybe there's another $30,000 or so of income not accounted for? Maybe his wife also works?

If his wife isn't working she could make a deductible spousal TIRA contribution (unless his gross income is actually over $200,000). He could make Roth IRA contributions.


I believe his company match is based off of his base pay, which is around $150-160k. He generally then gets about $20-30k in bonuses each year.

I was wondering about the 401k contributions also, though - it sounds like the contributions above the annual limit are going into a Roth 401k...I'll have to check on that, though.
I think that would be an after-tax 401k, not Roth. After-tax contributions, if allowed and if the employer allows in-service rollovers to a Roth IRA, are great, but I'm not an expert on them.

I still don't think he'd be in the 28% bracket at $170,000-$180,000 gross income, but maybe at $190,000 gross. At a minimum his deductions and exemptions would total $20,000, his 401k is $17,500, and presumably he has some pre-tax health, dental, and disability insurance premiums, so even $186,000 gross would be under $146,400 taxable income.
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Re: Help me with my Dad's Retirement Portfolio

Postby JW Nearly Retired » Mon Jul 15, 2013 10:36 am

medstucent12 wrote:Tax Filing Status: MFJ

You imply by omission there are no IRAs for him or spouse, and indicate he is making after-tax contributions to the 401k. Putting that money into his and spouse Roth IRAs would be a much superior investment. Some mix of Roth and pre-tax funds is very good to have.
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 10:41 am

Bob's not my name wrote:I think that would be an after-tax 401k, not Roth. After-tax contributions, if allowed and if the employer allows in-service rollovers to a Roth IRA, are great, but I'm not an expert on them.

I still don't think he'd be in the 28% bracket at $170,000-$180,000 gross income, but maybe at $190,000 gross. At a minimum his deductions and exemptions would total $20,000, his 401k is $17,500, and presumably he has some pre-tax health, dental, and disability insurance premiums, so even $186,000 gross would be under $146,400 taxable income.


You know what, I think you are correct regarding the after-tax contributions. My bad.

Regarding his tax bracket, I calculated that off of a rough estimate of his income without actually looking at his tax return. It's somewhere around there. But any thoughts on his investment possibilities?
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 10:42 am

JW Nearly Retired wrote:
medstucent12 wrote:Tax Filing Status: MFJ

You imply by omission there are no IRAs for him or spouse, and indicate he is making after-tax contributions to the 401k. Putting that money into his and spouse Roth IRAs would be a much superior investment. Some mix of Roth and pre-tax funds is very good to have.
JW


You are correct. He currently is not taking advantage of any backdoor Roths, but we have been discussing this and he will probably begin using his after-tax contributions to max out backdoor Roths at least for himself and possibly my mother as well - though he would also like to pay down his mortgage a bit faster than scheduled, if possible.
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 10:46 am

Why back door? He's eligible for direct Roth IRA contributions. She's eligible for a deductible spousal TIRA or a direct Roth IRA. His gross income would have to be close to $200,000 for the phaseouts to be a problem.
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 10:56 am

Bob's not my name wrote:Why back door? He's eligible for direct Roth IRA contributions. She's eligible for a deductible spousal TIRA or a direct Roth IRA. His gross income would have to be close to $200,000 for the phaseouts to be a problem.


Well, we'll have to run the exact numbers. We just started talking about it. But according to this, the phase out range for MFJ is $173-183k, which might complicate things a bit for him. But again, that's a good point, and we'll have to look at his actual income figures later.
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 11:14 am

Last year's numbers aren't relevant. It's too late for a 2012 Roth contribution. If his gross isn't going to come close to $200,000 he'll be fine, and in any case he can just wait until tax time to confirm that and then make his 2013 contributions.

Example:

$199,000 gross income
- $17,500 401k contributions
- $3,500 pre-tax health, dental, and disability insurance premiums withheld from his pay (guess, maybe it's a lot less)
------------
$178,000 AGI --> bottom of the Roth IRA and spousal TIRA phaseouts for 2013
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 11:33 am

Bob's not my name wrote:Last year's numbers aren't relevant. It's too late for a 2012 Roth contribution. If his gross isn't going to come close to $200,000 he'll be fine, and in any case he can just wait until tax time to confirm that and then make his 2013 contributions.

Example:

$199,000 gross income
- $17,500 401k contributions
- $3,500 pre-tax health, dental, and disability insurance premiums withheld from his pay (guess, maybe it's a lot less)
------------
$178,000 AGI --> bottom of the Roth IRA and spousal TIRA phaseouts for 2013


That's good. I'll let him know.

Any thoughts on the possible investment plans?
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Re: Help me with my Dad's Retirement Portfolio

Postby Bob's not my name » Mon Jul 15, 2013 11:57 am

I leave that to the experts here :)
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 12:19 pm

Bob's not my name wrote:I leave that to the experts here :)


Thanks for your help!
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Re: Help me with my Dad's Retirement Portfolio

Postby damjam » Mon Jul 15, 2013 12:37 pm

medstudent12 wrote:Questions:
1. My first recommendation, for the sake of simplicity and to take advantage of the low ER via his company, was to simply move his current funds into the TR 2055 fund (again, using his pension as a substitute for his fixed-income portion of his portfolio). The problem here is that the TR fund does have about 10% in bonds, which increases his fixed-income allocation to a point that is perhaps too conservative for his goals (he would like to have about $2.5 – 3 million by retirement). This is a no muss no fuss solution. The amount of bonds were talking about is small and your father may wish to become more conservative as he gets closer to his retirement.

2. To avoid the bond portion of the TR fund, I thought about using more a slice-and-dice approach to his 401k, perhaps something like 55% to the S&P index, 15% to the Russell 2000 index, and 30% to Dodge and Cox International. Not perfect, but perhaps ok. I didn’t think obtaining dedicated mid-cap exposure was worth the relatively high ER. This fits your fathers goals and is a variation of the Three-fund portfolio. I don't have a problem with it. Especially since your father is already 100% stock in his 401k. How did he handle 2009 when the market tanked?

3. Finally, any thoughts on Sound Mind Investing’s Fund Upgrading Strategy? As you noted this is market timing and Bogleheads avoid that like the plague.


You did not ask, but I'm going to address the pension vs. lump sum question. It is almost always better to take the pension. There are some cases when that is not true. Such as when someone has a short life expectancy or the pension plan is in danger of being taken over by the PBGC because the company is in rough financial shape. But of course the question should be more deeply delved into when the proper time comes. Just thought I'd mention it as food for thought.
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Mon Jul 15, 2013 3:42 pm

damjam wrote:
medstudent12 wrote:Questions:
1. My first recommendation, for the sake of simplicity and to take advantage of the low ER via his company, was to simply move his current funds into the TR 2055 fund (again, using his pension as a substitute for his fixed-income portion of his portfolio). The problem here is that the TR fund does have about 10% in bonds, which increases his fixed-income allocation to a point that is perhaps too conservative for his goals (he would like to have about $2.5 – 3 million by retirement). This is a no muss no fuss solution. The amount of bonds were talking about is small and your father may wish to become more conservative as he gets closer to his retirement.

2. To avoid the bond portion of the TR fund, I thought about using more a slice-and-dice approach to his 401k, perhaps something like 55% to the S&P index, 15% to the Russell 2000 index, and 30% to Dodge and Cox International. Not perfect, but perhaps ok. I didn’t think obtaining dedicated mid-cap exposure was worth the relatively high ER. This fits your fathers goals and is a variation of the Three-fund portfolio. I don't have a problem with it. Especially since your father is already 100% stock in his 401k. How did he handle 2009 when the market tanked?

3. Finally, any thoughts on Sound Mind Investing’s Fund Upgrading Strategy? As you noted this is market timing and Bogleheads avoid that like the plague.


You did not ask, but I'm going to address the pension vs. lump sum question. It is almost always better to take the pension. There are some cases when that is not true. Such as when someone has a short life expectancy or the pension plan is in danger of being taken over by the PBGC because the company is in rough financial shape. But of course the question should be more deeply delved into when the proper time comes. Just thought I'd mention it as food for thought.


Regarding the TR fund, I agree that this is the simplest solution to the issue. That said, it would mean that his stock/bond allocation would essentially then be 50/50. After we discussed things, we both felt that a 70/30 or so allocation would be more appropriate for him. It seems like it would be difficult to get the requisite rate of return on his overall portfolio with a 50/50 AA, but it certainly would be the easiest solution.

Regarding how he handled 2008-09, he stayed the course and kept to his previous plan. Again, while "100% stock" sounds really aggressive, within the greater portfolio his allocation is more like 60/40 stock/fixed-income, which is a tad conservative already. Of course, they only way to fix this is add new cash...

Which brings us to the best approximation of the TR fund ex-bonds that we can create using his available funds. Thanks for looking that over. Anyone else see any issues here? It would require him to rebalance (ex. using something like 5% bands), but otherwise would keep him more aggressive than the TR fund would. Also, the ERs for the large blend and small cap funds are great. The international ER is a bit high, but not terrible as far as funds go.

Finally, thanks for bringing up the pension issue. We discussed this as well. As I said before, if he stays with the company until 55, he can choose to take a $600k lump sum or about $5k/mo for life. However, assuming he can at least get to $2 million, which is reasonable using an estimated 5% rate of return over the next 20 or so years (and that doesn't even take into account new contributions, which he will be making regularly), that would allow for about $60k/year of income at a 3% withdrawal rate plus around $30k of SS - not too shabby. And that's not even taking into account the pension. At this point, I think he feels that he would like to leave what he can behind for his surviving family, and is leaning towards taking out the pension as a lump sum. While it might be slightly better for them financially if they took the pension, they should be more than fine regardless. That said, it will be easier to determine how that should play out when we get closer.

So I'm going to go over all of these posts with him later on, but in the meantime, any more thoughts on the possible two routes we could take his portfolio? Thanks to everyone who has answered thus far!

Edit: Oh, regarding Sound Mind Investing - I thought as much. However, there is something to be said about momentum (see Bernstein's take here). That said, I honestly don't know how these guys are determining next month's picks. They have a good track record, but we all know how useful that is. He won't stick with them regardless, most likely, but I just thought it was an interesting side note.
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Re: Help me with my Dad's Retirement Portfolio

Postby Duckie » Tue Jul 16, 2013 12:06 am

medstudent12, I think your father should ignore the pension for AA purposes. He has no control over it now. He cannot use it for rebalancing now. Later, when he begins to take it he can reconsider.* Even though right now bonds have a bit of a bad rep because of low returns they aren't just about returns. They're also about diversification, cushioning the fall, and having dry powder (money for rebalancing).

At age 46 I think he should use (VTWNX) Vanguard Target Retirement 2020 Fund which is about 63% stocks, 37% bonds at the moment.

* Some people think of a pension as a (potential) bond which means they feel they can take more risks and therefore hold fewer actual bonds. Some think of it as a reliable income stream which means they have less need for risk and therefore hold fewer stocks. I've always thought of my pension as an income stream which lessens my need to pull money from my other retirement assets, but it doesn't affect my AA either way.
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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Tue Jul 16, 2013 11:29 am

Duckie wrote:medstudent12, I think your father should ignore the pension for AA purposes. He has no control over it now. He cannot use it for rebalancing now. Later, when he begins to take it he can reconsider.* Even though right now bonds have a bit of a bad rep because of low returns they aren't just about returns. They're also about diversification, cushioning the fall, and having dry powder (money for rebalancing).

At age 46 I think he should use (VTWNX) Vanguard Target Retirement 2020 Fund which is about 63% stocks, 37% bonds at the moment.

* Some people think of a pension as a (potential) bond which means they feel they can take more risks and therefore hold fewer actual bonds. Some think of it as a reliable income stream which means they have less need for risk and therefore hold fewer stocks. I've always thought of my pension as an income stream which lessens my need to pull money from my other retirement assets, but it doesn't affect my AA either way.


Thanks for your input, Duckie.

I was initially surprised that my dad's stock allocation was so high. I know opinions on how to treat a future pension differ, and I appreciate your perspective. That will certainly be something to consider. In this case, while you would not consider his pension part of his AA, do you at least think that it is reasonable to do so, given the size and certainty if it? He is already fully vested, and it will only increase from this point on. Additionally, while it would be ideal to take less risk, given his retirement goals he has a need (he requires probably at least a 5% inflation-adjusted return), ability (he weathered 2008-09), and willingness (desires certain amounts at retirement) to take risk.
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Re: Help me with my Dad's Retirement Portfolio

Postby Default User BR » Tue Jul 16, 2013 12:51 pm

I would not (and do not) consider a pension as part of an asset allocation. As Duckie mentioned, you can't buy, sell, exchange, or otherwise rebalance a pension. Or Social Security either.

The pension should be used in financial planning and deciding when "enough is enough".


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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Tue Jul 16, 2013 3:33 pm

Hmm....we'll have to discuss that further. Any more votes for/against counting an essentially guaranteed pension as part of his AA?
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Re: Help me with my Dad's Retirement Portfolio

Postby Default User BR » Tue Jul 16, 2013 3:46 pm

medstudent12 wrote:Hmm....we'll have to discuss that further. Any more votes for/against counting an essentially guaranteed pension as part of his AA?

This has been discussed numerous times in the past. Use the Google search in the upper right corner with asset allocation pension.


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Re: Help me with my Dad's Retirement Portfolio

Postby medstudent12 » Wed Jul 17, 2013 8:50 am

Thanks everyone for your help!
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