Hypothetical Question [Portfolio help]

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Topic Author
gholmes64
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Joined: Thu Dec 05, 2013 11:28 am

Hypothetical Question [Portfolio help]

Post by gholmes64 »

We are a 69 year old retired couple with an allocation of 60% Bonds and 40% stocks in IRAs. I model our finances using Jim Otar's program and the outcomes are favorable for us. We own our home, have little debt (An auto lease - as I like cars and trade up every 3 years) and have the cash/iBonds for emergencies and to supplement SSA and a small pension until RMDs kick in.

My question is this: Does it make sense to have a portion of my tax advantaged investments in a more risky fund with long term growth possibility? Small Cap Growth, etc? A "flyer" if you will. Or would it make more sense to just change my allocation from say LifeStrategy Conservative Growth to LifeStrategy Moderate Growth?

Thanks - and I love this Forum...
pkcrafter
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Re: Hypothetical Question

Post by pkcrafter »

An important piece of this puzzle is your current withdrawal rate. Second is why do you want to increase your stock allocation? If withdrawal rate is less than 3.5% you could probably go to a higher stock allocation, but I can't recommend small cap overweighting for retirees because it is temperamental and may stubbornly not appear for long periods of time. If you do raise it, go to maybe 50/50, although we really need to understand the reasoning and ability to do it.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
asif408
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Re: Hypothetical Question

Post by asif408 »

gholmes64,

Here is an interesting conversation that may be applicable: http://www.bogleheads.org/forum/viewtop ... 1&t=147055

And one quote in particular from the post:
Swampy wrote:I don't think asset allocation has to do with age.

It has more to do with the stage of life you are in. Some people retire at 40 while others keep working well past 70.

Personally I think, at retirement, a person should be between 20-40% equities and gradually increase as time passes. You avoid the dreaded IED - investment explosion and destruction - during those early years.

A decrease in equity exposure to the tune of 2-3% per year in the last 10 years prior to expected retirement would, in my opinion, be prudent.

That said, I was within months of retirement and was essentially 100% in equities - because I was going to be the exception to the rule.
It is a mistake I paid dearly for. I had the pedal to the metal with my investments and went off a cliff.
As a result, I had to work another 12+ years before that opportunity presented itself to me again.

It would not have happened had I done what I now recommend to others.
Topic Author
gholmes64
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Re: Hypothetical Question

Post by gholmes64 »

Thanks for the replies.

I am not withdrawing anything as yet and my withdrawal rate will be dictated by RMD when the time comes.

I'm pretty comfortable with a higher stock allocation since bond yields are so low and I have enough after tax cash to survive a market downturn. The higher risk investment is simply a gamble that should payoff in my lifetime - assuming, of course, that I don't make an early exit. I am just curious to see if others have used this variation on the "Bucket" approach.
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grabiner
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Re: Hypothetical Question

Post by grabiner »

gholmes64 wrote:We are a 69 year old retired couple with an allocation of 60% Bonds and 40% stocks in IRAs. I model our finances using Jim Otar's program and the outcomes are favorable for us. We own our home, have little debt (An auto lease - as I like cars and trade up every 3 years) and have the cash/iBonds for emergencies and to supplement SSA and a small pension until RMDs kick in.

My question is this: Does it make sense to have a portion of my tax advantaged investments in a more risky fund with long term growth possibility? Small Cap Growth, etc? A "flyer" if you will. Or would it make more sense to just change my allocation from say LifeStrategy Conservative Growth to LifeStrategy Moderate Growth?
What do you intend to do with the extra money? If you expect not to need it during your own lives, then it might be appropriate to allocate some of the money as if it were your children's retirement fund, and increase risk accordingly. For example, if you can live on half the portfolio, you could invest that half in 40% stock, and the other half in 80% stock (as appropriate for your children, who will inherit that half). This would make Moderate Growth a reasonable choice.
Wiki David Grabiner
sport
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Re: Hypothetical Question

Post by sport »

gholmes64 wrote:my withdrawal rate will be dictated by RMD when the time comes
You should be aware that your withdrawal rate is determined by your need for money to spend. The RMD is only the government making you pay some taxes. If you need more than the RMD, of course you will withdraw more. However, if you need less, the amount you don't spend can be reinvested in a taxable account. Thus, the government does not determine your withdrawal rate. You get to do that for yourself.
Jeff
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Peter Foley
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Re: Hypothetical Question

Post by Peter Foley »

I like Grabiner's suggestion. If you've not started withdrawals by age 69 you are no doubt in good shape. Increasing to about 60% stocks over the course of a few years is the approach that I would take.

Have you figured out what tax bracket you will be in when you take RMD's? Is it much higher than your current rate? If yes, you might consider taking some withdrawals from your IRA up to the top of the 15% bracket this year and next. (Taxable earning of about $74,000, gross earnings of about $90,000, are the top.) You could sell a bit of your bond allocation in your IRA to fund the withdrawals. I'm not sure if this works for you, but it's worth a look if your tax liability is going to change a lot.
Last edited by Peter Foley on Sun Sep 21, 2014 10:11 pm, edited 1 time in total.
Calm Man
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Re: Hypothetical Question [Portfolio help]

Post by Calm Man »

Why would you lease a car?
Topic Author
gholmes64
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Re: Hypothetical Question

Post by gholmes64 »

Peter Foley wrote:I like Grabiner's suggestion. If you've not started withdrawals by age 69 you are no doubt in good shape. Increasing to about 60% stocks over the course of a few years is the approach that I would take.

Have you figured out what tax bracket you will be in when you take RMD's? Is it much higher than your current rate? If yes, you might consider taking some withdrawals from your IRA up to the top of the 15% bracket this year and next. (Taxable earning of about $74,000, gross earnings of about $90,000, are the top.) You could sell a bit of your bond allocation in your IRA to fund the withdrawals. I'm not sure if this works for you, but it worth a look if your tax liability is going to change a lot.
I like that approach as well. I would like to leave more for the children yet not short ourselves.
Topic Author
gholmes64
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Re: Hypothetical Question [Portfolio help]

Post by gholmes64 »

Calm Man wrote:Why would you lease a car?
I lease because I don't want the trouble of selling or haggling on trade-in. It is just a budget line item for me and fits in my finances. I used to do it because I was self-employed but now I think it is easier for someone who trades on a regular basis and who puts a lot of miles on neat cars.
Topic Author
gholmes64
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Re: Hypothetical Question

Post by gholmes64 »

jsl11 wrote:
gholmes64 wrote:my withdrawal rate will be dictated by RMD when the time comes
You should be aware that your withdrawal rate is determined by your need for money to spend. The RMD is only the government making you pay some taxes. If you need more than the RMD, of course you will withdraw more. However, if you need less, the amount you don't spend can be reinvested in a taxable account. Thus, the government does not determine your withdrawal rate. You get to do that for yourself.
Jeff
My RMD fits in pretty closely with what I would like to spend. I plan to put any excess in iBonds, CDs or short term bonds.
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