Retirement allocations/withdrawals

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Retirement allocations/withdrawals

Postby EdMP » Mon Jan 24, 2011 12:24 pm

I'm a long time Vanguard investor, now about one year from retirement at 63. Having taken advantage this year of the financial "plan" offered by Vanguard a situation came up which is still unresolved in my mind, and perhaps a discussion of this might help others with this issue as well.
My overall asset allocation is currently 60:40 stocks:bonds. 2/3 of my funds are in tax advantaged accounts IRA/401K (latter to be transferred on retirement to the Vanguard IRA) with allocation 69%stocks and 31% bonds. 1/3 of funds are in taxable accounts with allocation 42% stocks and 58%bonds.

What I've been told and understand is that I would first draw down from my taxable retirement funds and then from all the IRA accounts. I can do the former for probably 8 or 9 years before having to touch my IRA funds (withdrawals will be mandated per IRS) and was planning to use Lucia's "bucket" model as a guide. My Vanguard advisor stressed the importance of having bonds (dividend yielding investments) in my IRA's and stocks (ie. Vanguard Total Stock Market e.g.) in my taxable accounts to take advantage of the lower capital gains taxes. To consolidate my holdings the recommendation was to switch many but not all funds in the IRA to more weighted Vanguard TBM and switch a portion of my bond funds in my taxable account towards Vanguard TSM. Of course the overall allocation will still be 60:40 or perhaps even 55:45 (I haven't decided yet about my risk tolerance) However, it goes against my thinking, one year away from retirement, to switch funds from bonds (mostly tax free bonds) into a stock fund with money which will be utilized in the earlier years of retirement. I don't want to ignore some of the advise of the planner without good reason, but am somewhat uncomfortable with the recommendations.
I do appreciate comments from this group, and hope I've provided enough information at this time
Thanks,
Ed
EdMP
 
Posts: 2
Joined: Mon Jan 24, 2011 11:15 am

Re: Retirement allocations/withdrawals

Postby YDNAL » Mon Jan 24, 2011 12:38 pm

EdMP wrote:My Vanguard advisor stressed the importance of having bonds (dividend yielding investments) in my IRA's and stocks (ie. Vanguard Total Stock Market e.g.) in my taxable accounts to take advantage of the lower capital gains taxes. To consolidate my holdings the recommendation was to switch many but not all funds in the IRA to more weighted Vanguard TBM and switch a portion of my bond funds in my taxable account towards Vanguard TSM. Of course the overall allocation will still be 60:40 or perhaps even 55:45 (I haven't decided yet about my risk tolerance)
Ed,

The VG advisor is giving you good input. The end-game is all about the amount of money you keep after taxes.

We don't know enough about you, but depending on your tax-bracket (now and after retirement), it is typically advantageous to hold taxable Bonds in IRA, 401K, etc. and to hold Stocks in Taxable.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13712
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Postby dbr » Mon Jan 24, 2011 1:31 pm

When you sell stocks to withdraw from your taxable account, you can sell bonds and buy stocks in the tax deferred account to maintain the desired AA while you withdraw. If stocks are depressed, you would be selling bonds and buying stocks, not selling stocks.
dbr
 
Posts: 14693
Joined: Sun Mar 04, 2007 9:50 am

Postby livesoft » Mon Jan 24, 2011 1:42 pm

You should also see if conversion of some of your IRA assets to a Roth IRA can be done at favorable tax rates.

http://www.bogleheads.org/wiki/Placing_ ... ed_Account is a web page about selling stocks in taxable and buying bonds in tax-advantaged in order to reduce your taxes.
livesoft
 
Posts: 34803
Joined: Thu Mar 01, 2007 8:00 pm

Postby trico » Mon Jan 24, 2011 1:50 pm

60/40 stock/bonds seems a little aggresive for your age. John Boggle use to recommend your age in bonds. I am 58 an have 58% bonds 42% stocks. Seems to be working well, as I retired at 58 this year. :)
trico
 
Posts: 684
Joined: Wed Nov 12, 2008 7:04 pm

Re: Retirement allocations/withdrawals

Postby mptfan » Mon Jan 24, 2011 4:36 pm

EdMP wrote:What I've been told and understand is that I would first draw down from my taxable retirement funds and then from all the IRA accounts. I can do the former for probably 8 or 9 years before having to touch my IRA funds (withdrawals will be mandated per IRS) and was planning to use Lucia's "bucket" model as a guide.

This may be a bad idea, depending on your other sources of income. Do you plan on having other sources of taxable income, like a pension, or social security, or part time earnings? If the answer is no, then you should definitely withdraw first from your tax deferred accounts in order to fill up your 0% and 10% tax brackets, and probably your 15% tax bracket also. After that, you should withdraw from your taxable funds.
mptfan
 
Posts: 3106
Joined: Mon Mar 05, 2007 9:58 am

Postby livesoft » Mon Jan 24, 2011 5:50 pm

Rather than "withdraw", it might make more sense to convert to a Roth and use your taxable for living expenses and perhaps taxes on conversion. It's something that you will have to work out. And it is not "either-or", you can do a combination.
livesoft
 
Posts: 34803
Joined: Thu Mar 01, 2007 8:00 pm

Postby jimkinny » Tue Jan 25, 2011 11:32 am

EdMP
I appreciate the seeming conundrum and I felt the same way when I first read that Vanguard and others recommend drawing down the taxable portion of a portfolio first, then the IRA's when in the withdrawal phase. I am your age and about one year away from retiring. I already have a tax efficient portfolio such as Vanguard is recommending to you. For me, this means I have capital gains to pay when I sell the stock funds (I hope). I intend to keep the same asset allocation in retirement that I have now, but with gradually increasing bonds. If I sell enough stock funds to go below my planned allocation to stock funds, I will exchange some bond funds to get back to my stock funds target allocation. This may mean having some tax efficient funds in tax protected accounts. I assume protecting the returns of bond funds from taxes is more important than protecting LT capital gains from taxes in that I will be in a 25% bracket when retired.
jimkinny
 
Posts: 1063
Joined: Sun Mar 14, 2010 1:51 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: No registered users and 23 guests