AA for before retirement non-qualified savings?

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Topic Author
CompoundedInterest
Posts: 8
Joined: Fri Mar 08, 2019 11:52 pm

AA for before retirement non-qualified savings?

Post by CompoundedInterest » Tue Feb 11, 2020 5:02 pm

We're mid-40s, no debt, retirement funded, and budget for foreseeable future expenses (using YNAB, which we love) before retirement. As such we have a large amount of non-qualified savings (weddings, cars, potential college costs above our 529 balances, vacation house, big toys, etc).

I keep a simple spreadsheet of the need, amount, and date the money will likely be needed/wanted. I aggregate those needs up and invest needs of similar maturity with the same AA.

Instead of reinventing the wheel when I started this a while back, I just looked around for an idea and co-opted the age-based allocation changes our 529 plan used for reducing risk as kids get closer to college age. It seemed like a good starting point for a risk glideslope.

That approach had three broad asset classifications: reserves, bonds, stocks. For each of those broad classifications, I choose some EFTs.
Reserves: 50%/50% GSY Invesco Ultra Short Duration & NEAR iShares Short Maturity
Bonds: 50% / 50% AGG iShares US Aggregate Bond & BNDX Vanguard Total Intl Bond
Stocks: 100% VTI Vanguard Total Stock Market

For each bucket of time left to invest, I have the following allocations:
0-1 Years = 100% Reserves / 0% Bonds / 0% Stocks
1-2 = 75% Reserves / 25% Bonds / 0% Stocks
2-3 = 50% Reserves / 45% Bonds / 5% Stocks
3-4 = 25% Reserves / 65% Bonds / 10% Stocks
4-5 = 0% Reserves / 75% Bonds / 25% Stocks
5-7 = 0% Reserves / 65% Bonds / 35% Stocks
7-10 = 0% Reserves / 50% Bonds / 50% Stocks
10-15 = 0% Reserves / 25% Bonds / 75% Stocks
15+ = 0% Reserves / 0% Bonds / 100% Stocks

Our 12+ months of living expenses are thrown into the mix. I have 50% of it in the 0-1 year bucket, 50% in the 1-2 year bucket -- trading any lost gain for preservation since, by definition, it's for an emergency and I won't know when/if it will be needed.

Every 3 months we check my spreadsheet, see if the amount in each bucket changed based on the maturity getting closer, add/remove anything that's changed, and update the portfolio. We use M1 Finance, making this update simple -- just match the % in each bucket at M1 to my spreadsheet and press Enter. The whole process takes less than 10 mins, 4X a year.

My big questions:
1. Are the broad allocations per bucket sound, since I just basically copied it from a 529 age-based option glide path? It's worked fine but it sticks in my mind how arbitrarily I choose it. Too risky / not risky enough? I just don't know.

2. Are the funds being used for each type of asset (reserves/bonds/stocks) sound? I just went for low cost, low turnover, broadly diversified.


Thanks in advance for your time and responses.

sycamore
Posts: 269
Joined: Tue May 08, 2018 12:06 pm

Re: AA for before retirement non-qualified savings?

Post by sycamore » Tue Feb 11, 2020 5:42 pm

CompoundedInterest wrote:
Tue Feb 11, 2020 5:02 pm
...
My big questions:
1. Are the broad allocations per bucket sound, since I just basically copied it from a 529 age-based option glide path? It's worked fine but it sticks in my mind how arbitrarily I choose it. Too risky / not risky enough? I just don't know.

2. Are the funds being used for each type of asset (reserves/bonds/stocks) sound? I just went for low cost, low turnover, broadly diversified.


Thanks in advance for your time and responses.
1. They're reasonable. I know you didn't ask, but all those buckets feels like overkill. (a) 3 buckets seems plenty, e.g., 0-2 years, 3-7 years, 7+ years. And (b) eventually some of your spending needs that you think are definitely, say, 4 years away will happen much sooner than you think, or maybe never. At some point your allocation to each bucket is "wrong" and will need to be adjusted, possibly incurring capital gains taxes or losses. I think this will end up happening frequently.

But bottom line is you're right about it being arbitrary. It's neither inherently right or wrong. It's the one you picked that makes sense to you. If that helps you stick to your plan, more power to ya!

2. Generally they're sound.

I would add some international stocks. Of your stock allocation, use 20-30% in VTIAX (Vanguard Total International Stock).

Also, for the Bonds, I'd only use AGG. Nothing really wrong with BNDX, but I don't think that it adds much (though over the past 2 or 3 years it's done a little bit better than just AGG/BND, so my loss).

Topic Author
CompoundedInterest
Posts: 8
Joined: Fri Mar 08, 2019 11:52 pm

Re: AA for before retirement non-qualified savings?

Post by CompoundedInterest » Wed Feb 12, 2020 11:07 am

Thank you very much for your response.

With your 3 bucket approach - 0-2, 3-7, 7+ -- what AA would you suggest for each?

This is the crux of what I am unclear about. I don't want to let inflation eat away, but I don't want to throw caution to the wind and put in all in stocks. All the "there x% chance of negative return with stocks over Y years" come in, bonds have rock bottom yields and bound to eventually drop in price, etc, and I'm left scratching my head on a good, prudent allocation of the different buckets.

Many thanks

retired@50
Posts: 1364
Joined: Tue Oct 01, 2019 2:36 pm

Re: AA for before retirement non-qualified savings?

Post by retired@50 » Wed Feb 12, 2020 11:33 am

CompoundedInterest wrote:
Wed Feb 12, 2020 11:07 am
This is the crux of what I am unclear about.
So is the rest of the world.
CompoundedInterest wrote:
Wed Feb 12, 2020 11:07 am
All the "there x% chance of negative return with stocks over Y years" come in, bonds have rock bottom yields and bound to eventually drop in price, etc, and I'm left scratching my head on a good, prudent allocation of the different buckets.
No amount of statistical analysis will always lead to the right answer. The "correctness" of your choices can only be learned in hindsight.

My advice is to do what allows you to get some sleep. Best of luck.

Regards,
Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

rkhusky
Posts: 8150
Joined: Thu Aug 18, 2011 8:09 pm

Re: AA for before retirement non-qualified savings?

Post by rkhusky » Wed Feb 12, 2020 11:44 am

I would choose buckets: 0-2 years: cash/CD/MM/short bonds, 3-10 years: intermediate bonds/Total Bond, 10 years+: stocks

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Tamarind
Posts: 1988
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Re: AA for before retirement non-qualified savings?

Post by Tamarind » Wed Feb 12, 2020 11:49 am

I might be inclined to treat differently those savings for items which it would be painful or disruptive to delay (college, functional used car) vs those that could be scaled back or waited on (wedding, toys, vacation). I would be very hesitant to use any stocks for the first group unless they were at least 10 years out.

I sometimes think 529s are a bit aggressive with their glidepaths given how seriously most take college.

sycamore
Posts: 269
Joined: Tue May 08, 2018 12:06 pm

Re: AA for before retirement non-qualified savings?

Post by sycamore » Thu Feb 13, 2020 8:24 am

CompoundedInterest wrote:
Wed Feb 12, 2020 11:07 am
...
With your 3 bucket approach - 0-2, 3-7, 7+ -- what AA would you suggest for each?
...
0-2: high yield savings / money-market fund / short-term T-bills - whatever's convenient and highest yielding
3-7: intermediate-term bonds, like Total Bond Fund
7+: stocks

There's no "just right" definition of which buckets or allocation within those buckets, but there are "good enough" definition. In the face of uncertainties, I go with something good enough (and of course keep on working and saving)

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