Newbie nearing retirement

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Topic Author
KINGTUT1
Posts: 7
Joined: Tue Dec 23, 2014 1:05 pm

Newbie nearing retirement

Post by KINGTUT1 »

I’ve read the posts about posting, but the document I created is quite involved, so I hesitate to post a full description of how I got from there to here. I can offer lots of info, but let me briefly state some facts and ask a few questions. I just found out about this site, reading a Bogleheads book. I’ve learned a bit just scrolling through some forum discussions, so thank you for existing.

I am married, 58, nearing retirement, no debt, own our home, currently have $1.5M in investments, and I have followed John Bogle’s advice since I learned about Vanguard and him in the 1990s. I am 100% convinced regarding Index Funds. However, I read around the same time that stocks and bonds generally march in the same direction, but by different degrees (a Jonathan Clements book, among others), so I used REITs and International Index funds as my diversification strategy. We have our investment accounts allocated as follows, and as I get paid this is how I invest every 2 weeks: 25% in S&P 500, 25% in Mid-Cap, 25% in Small Cap, 5% in REIT, and 20% in Total International Stock. I rebalance every January.

My strategy has mostly worked, although it’s been a wild ride a couple of times. How much less of a wild ride would it have been had I invested in one of the Vanguard Retirement Funds, specifically one that is age-appropriate? Would we be worth what we are now? Less? More?

Essentially, as I get closer to retirement, I worry more about the wild swings and what would have happened had I retired in 2008. Recent reading has strongly suggested that my reading on bonds in the 1990s is now incorrect, and in Bogleheads on Investing, the correlation of the Total Bond Market Index is .1 to the S&P 500. Should I move some money from the stock Index funds to the Bond fund?

Another way to ask the bond question more specifically is, should I scrap my strategy and move all of my IRA and 403b investments to something like Vanguard Retirement 2020 and be done with it?

A related question about bonds: since the Fed has kept interest rates so low for so long, and they will certainly allow an upward climb in rates in the near future, isn’t now just a spectacularly bad time to move to 40-50% bonds? I’m not a market timer, just curious. I could move funds from my investments in a monthly progression, slowly but surely, dollar-cost averaging…

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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Newbie nearing retirement

Post by Watty »

KINGTUT1 wrote:We have our investment accounts allocated as follows, and as I get paid this is how I invest every 2 weeks: 25% in S&P 500, 25% in Mid-Cap, 25% in Small Cap, 5% in REIT, and 20% in Total International Stock. I rebalance every January.

Being 100% in stocks at your age is very risky.

You might try some of your number in Firecalc to see how that would have worked out in the past.

http://www.firecalc.com/

One of the problem you have with a volatile portfolio in retirement is that you have a sequence of returns risk and if you get unlucky and have poor returns in the first few years while you are withdrawing money you might not have enough cash left to recover well when the stock market comes back.

If you are worried about a decline in bonds then you also need to be worried about the stock market since after the last few years of high returns a significant drop would not be unusual.
I don't have a link handy but shorter term bond funds tend to recover pretty quickly after an interest rate increase since it the new bonds that are purchases will be earning higher interest.
Topic Author
KINGTUT1
Posts: 7
Joined: Tue Dec 23, 2014 1:05 pm

Re: Newbie nearing retirement

Post by KINGTUT1 »

firecalc is wonderful. thanks for the tip. to some degree, since we only spend about $60K annually, and are pretty boring folks, no matter what % of the portfolio was in stocks vs. bonds, we successfully made it last for the 40 years, at least according to firecalc, and that mirrors other calculators I've used over time (although not as awesomely as firecalc).

If anyone else wants to weigh in on the future of bonds and tell me what you think the wisest course of action would be, feel free. Like my original post stated, I'm tempted to toss the while portfolio into a Target Retirement fund and call it a day.

Much obliged.
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: Newbie nearing retirement

Post by livesoft »

If your question is should you change your asset allocation to have some bond funds in it now, then my answer would be an Emphatic YES!

I would say your portfolio should be at least 30% fixed income including cash, CDs, and bond funds. Other folks might say that one needs even more in fixed income around your age, but maybe you have a pension coming online or something else. I see no reason to go to 40% or 50% bonds at this time. Moving all your IRA and 403(b) assets to a target retirment fund is not a bad idea, but you might just want to control your asset allocation yourself with a small set of index funds.

Oh, you are not a newbie if you have been using index funds for 25 years already.
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skibum
Posts: 27
Joined: Sat Feb 15, 2014 3:08 pm

Re: Newbie nearing retirement

Post by skibum »

The article below demonstrates the sequence of returns risk for an all equity portfolio, and some rationale to dial down risk when the finish line is in sight.

http://finance.yahoo.com/news/tell-reti ... 00668.html
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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: Newbie nearing retirement

Post by Watty »

KINGTUT1 wrote:Like my original post stated, I'm tempted to toss the while portfolio into a Target Retirement fund and call it a day.

That would be a very reasonable choice especially since it does not appear that you have any need to take additional risk now. It would also be a lot safer to manage as you age or if a less financially savvy spouse needs to take over the management of the portfolio some day.

There are tax issues to consider though if much of this is in taxable accounts. If you sold everything and reinvested it in a target retirement fund then you might have a huge capital gains tax bill and the target retirement funds are not real tax efficient in a taxable account.

You can get essentially the same thing by using a three fund portfolio, that would require less selling of your current holdings and you could make sure that the most tax efficient funds are in your taxable account.

http://www.bogleheads.org/wiki/Three-fund_portfolio

If you haven't done it already then you might want to stop any dividends and capital gains distributions from being automatically reinvested in the taxable accounts. This would help you not to have to sell investments to re-balance or free up cash.
Topic Author
KINGTUT1
Posts: 7
Joined: Tue Dec 23, 2014 1:05 pm

Re: Newbie nearing retirement

Post by KINGTUT1 »

Newbie to Bogleheads, but not new to Index Funds. :-)

I'm still trying to wrap my head around going into bonds after all these years of not doing so, based on authors like Clements in the 90s. If everyone says I should have at least 30% in bonds at my age, that doesn't seem very contrarian, which I always took as one of the most important values of investing. Index Funds go against most of Wall Street telling you they can beat the market, so they help my contrarian sensibilities as well. Nevertheless, it does seem like the Bogleheads are speaking as one, both on the forum and in the book I just read. I hear you and thank you for your advice.

A fund of funds makes a lot of sense to me, in that as I age or die, my wife and kids can more easily handle the investments. Most of our money is in non-taxable accounts, at least until I start pulling it out, so a change will be easy there. In the taxable accounts, I hesitate to take out capital gains and dividends until I retire, because I don't need it now and they will just increase my annual tax burden. Still, that sounds like a great choice once I retire.
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