Should AA change based on pension?

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jerome99
Posts: 193
Joined: Tue Jan 10, 2012 8:38 am

Should AA change based on pension?

Post by jerome99 » Tue Aug 20, 2013 12:07 pm

My wife works for the federal government and in addition to her TSP, she will receive an annuity paying ~$2,750/month.

My #1 question is, should we adjust our bond allocation based on the above?

Combined income is $300,000

Emergency Funds- 6 months
Additional House Downpayment Fund- $140,000

Debt: Only debt is 15 yr mortgage (14 years remaining) 2.875% fixed, $107K balance

Tax Filing Status: Married

Tax Rate: 33% Federal 3.4% State, IN

Age: 31 years old, Wife is 27

Current Asset Allocation: 75% Stocks/ 25% Bonds

Current International Allocation: 32% of Stocks

Current Portfolio including 401K is ~$380,000

His Taxable Account
Vanguard Intl- VTIAX- 23.4%
Vanguard TSM- VTSMX- 13.9%

His 401K
American Funds (RWMCX)- 16.1%
American Funds (RGACX)- 16.1%

Her TSP
Bonds- G Fund- 19.9%

His Roth
Vanguard Extended Market- VEXAX- 3.2%

Her Roth
Vanguard Bonds- VBTLX- 4.3%
Vanguard TSM- VTSMX- 1.2%

His HSA
MetroWest Total Bond- MWTRX- 2.9%


His 401K American Funds (401K doesnt allow for additional after tax money)

Company Match- $6,039 Annually

Funds available in 401K
American Funds AMCAP Fund R3 (RAFCX) (1.05)
American Funds SMALLCAP World Fund R3 (RSLCX) (1.41)
Royce Premier R (RPRRX) (1.78)
INVESCO Small Cap Growth Fund - R (1.50)
American Fund Inv Co. Amer. (RICCX) (.97)
American Funds Gr Fund Amer. (RGACX) (.97)
American Funds Wash Mut (RWMCX) (.97)
American Funds Global Bal Fund (RGBCX) (1.28)
American Funds Cap World Bond (RCWCX) (1.21)
PIMCO Total Return Fund (PTRRX) (1.10)
All American Funds Target Date Funds (1.10)

Other Funds available in her TSP
Don't think this matters as its best place for Bonds (G-Fund)- Correct?

New Annual Contributions
$23,339 his 401K (incuding company match)
$19,700 her TSP (including match)
$5,000 her Roth- backdoor
$5,000 his Roth- backdoor
$5,000/month to the most tax efficient/lowest cost fund/funds- Need considerable help on this.

Questions
1. With taxable becoming more and more of a higher % of the overall balance, what can be done to reduce taxes? I-Bonds? Treasuries?
2. Should Munis be considered?

levendis
Posts: 59
Joined: Fri Feb 10, 2012 12:58 pm

Re: Should AA change based on pension?

Post by levendis » Tue Aug 20, 2013 12:14 pm

Your wife is 27, she has no idea what her annuity is going to pay, or if she'll even stay with the federal government nonstop for the rest of her career. Congress is already trying to cut back on the FERS benefits, and it's impossible to predict what they'll be in 30 years. Think of it like Social Security - whatever it is will be a nice extra, but don't plan your investments around it.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Should AA change based on pension?

Post by dbr » Tue Aug 20, 2013 12:19 pm

The existence of various income streams including pensions should be taken into account when evaluating need, ability, and willingness to take risk. This does not mean converting the income stream to an imputed bond, which is a bad idea. Depending on the situation, considering the pension rather than ignoring it could cause a person to decide on a more risky asset allocation or on a less risky asset allocation.

As pointed out, the existence of this pension is subject to many unknown considerations. In any case a pension that will exist in the future is a different issue from a pension that does exist now.

jerome99
Posts: 193
Joined: Tue Jan 10, 2012 8:38 am

Re: Should AA change based on pension?

Post by jerome99 » Tue Aug 20, 2013 12:29 pm

Thank you for the responses. Based on our income and tax bracket should we be purchasing both I Bonds and Treasuries with the estimated $60,000 of savings left over after all tax effecient savings are completed?

IlliniDave
Posts: 2284
Joined: Fri May 17, 2013 7:09 am

Re: Should AA change based on pension?

Post by IlliniDave » Tue Aug 20, 2013 12:32 pm

Depending on your retirement needs and what fraction of that is covered by the annuity you possibly could make a change. I suspect the annuity is a long way off. Better to revisit that question 20 or so years down the road when you're beginning to make specific plans for transitioning into retirement and you're positioning your allocation for distribution.

In taxable accounts, large-cap/total market index funds and municipal bonds work best.
Don't do something. Just stand there!

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Should AA change based on pension?

Post by dbr » Tue Aug 20, 2013 1:30 pm

You can investigate what the best match in your 401K for tax efficient investing might be. I can't see easily how close you are to not having tax deferred space for bonds given you could use the PIMCO fund.

Tax comes due on I-bonds at thirty years. You should think about that before going all in on I bonds. The purchase limitation might be an issue for you.

Munis make sense at your tax bracket after all else.

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