Portfolio Review and Retirement Planning - Next 16 Years

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Topic Author
abracadabra11
Posts: 195
Joined: Sat May 01, 2010 2:09 pm

Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

Wife and I are fast approaching our planned early retirement and have aggressively saved and invested so that this may soon be a reality. Getting to this stage would not have been possible without the collective wisdom and insights littered throughout these forums. So thank you to everyone that has contributed. The intent of this post is to provide a snapshot of where we stand and chart a course for the next two phases of our financial lives. We’ll define these phases as follows:

Phase 1 – Now to Retirement (~6 years)
Phase 2 – First 10 Years or Early Retirement

Portfolio Composition

Emergency funds: 3 months living expenses (likely don't need a separate E-fund)

Debt: $0

Tax Filing Status: MFJ

Tax Rate: 24% Federal, 0% State

State of Residence: FL

Age: 36

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

Current Asset Allocation: 79% stocks / 21% bonds
Current International allocation: 24.5% of stocks

Portfolio Size: Low seven figures

Current retirement assets

Taxable
41% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
13% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
2% Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWIUX) (0.17%)

His TSP
12% G fund (0.043%)
6% I Fund (0.042%)

Her 401k
5% State Street S&P 500 Index Fund - Class A (0.003%)
7% State Street U.S. Bond Index Fund - Class A (0.012%)

Roth IRA at Vanguard (combined values for his/her for post simplicity)
6% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
8% Vanguard REIT Index Fund Admiral Shares (VGSLX) (0.12%)

Contributions

New annual Contributions
$19,500 his TSP
$19,500 her 401k
$6,000 his Backdoor Roth IRA
$6,000 her Backdoor Roth IRA
$65,000 Taxable

Available funds
Not included – happy with fund selection.

Other Relevant Information
Annual Expenses: ~$110k/year currently (high COL area, includes ~$36k/year daycare expenses)
Retirement Expenses: ~$125k/year (expect H/MCOL area, strong preference for no tax state)
Retirement Pension: ~$60k COLA starting in 2026
Retirement Portfolio Withdrawal Rate: 3.25%
Retirement Tax Rate: 12% Federal, 0% State
Retirement Healthcare: Tricare Prime
Retirement Life Insurance: Payment into Survivor Benefit Plan (SBP)
Children: 2 (both <2 years old)
College: Assume Funded

Questions:

Phase 1 – Now to Retirement (~6 years)

Portfolio and Taxes:
1. Should we consider a glidepath to reduce our equity exposure to start retirement with a more conservative allocation?
  • a. Tentative Plan: Shift from 80/20 to 60/40 between now and retirement
    b. Rationale: Sequence of returns risk (SRR), particularly in the first 10 years of retirement, appears to be the largest risk for early retirees and a glidepath to lower equity allocation seems to somewhat mitigate this risk
    c. Notes: https://earlyretirementnow.com/2017/09/ ... lidepaths/
2. Should we eliminate our REIT holdings?
  • a. Tentative Final Plan: Maintain REIT holdings from portfolio
    b. Rationale: REITs were originally incorporated into the portfolio because of an expected risk-adjusted performance improvement to the overall portfolio. Although the performance improvement has not manifested over the period held, it may occur in the future if the asset class mean-reverts. Consideration for removing REIT is primarily driven by a desire for simplicity, though its inclusion doesn’t really add much complexity.
    c. Notes: N/A

3. Should we continue to purchase munis?
  • a. Tentative Plan: Purchase munis until retirement then shift to treasuries.
    b. Rationale: Munis appear to be a decent fixed income option in our current tax bracket, but strong preference for highest quality bonds in retirement
    c. Notes: Muni holdings are currently a small part of overall portfolio and purchasing treasuries starting now would reduce the need for future changes.
4. Should we add EE bonds and/or I-Bonds to our portfolio?
  • a. Tentative Plan: No EE or I-Bonds.
    b. Rationale: Minimize complexity and number of accounts.
    c. Notes: Primary reason for not adding these bonds is the clunky Treasury Direct site (We previously held I-Bonds) and the desire to minimize account complexity. Managing the accounts isn’t difficult, but I also have an eye on keeping things simple should I unexpectedly pass. Adding EE bonds seems sensible given current long-term treasury rates and EE bond return at 20 years, but we wouldn’t be able to redeem them until 14 years into retirement.
5. Should we continue to purchase international in TSP?
  • a. Tentative Final Plan: Purchase international in taxable only. Use TSP for rebalancing, if needed.
    b. Rationale: Maximize portfolio growth. Foreign tax credit and international in taxable provides slightly higher after-tax return than international in tax-free or tax-deferred.
    c. Notes: Slight tax advantage calculated to holding international in taxable accounts.


Phase 2 – First 10 Years or Early Retirement


Portfolio and Taxes:
6. Should we consider a glidepath to increase our equity exposure following retirement?
  • a. Tentative Plan: Shift from 60/40 to 80/20 following retirement
    b. Rationale: Higher equity exposures have proven to provide best long-term portfolio growth and attendant withdrawal rates, particularly for long retirement periods (i.e. >30 years). Although glidepath to 100/0 has shown superior outperformance for long retirement periods, 80/20 has proven to be a very compatible profile for our risk tolerance.
    c. Notes: N/A
7. What duration should we use for our treasury holdings?
  • a. Tentative Plan: Switch muni holdings to intermediate term treasuries starting in retirement
    b. Rationale: Simple option.
    c. Notes: Does not properly account for matching investment horizon with bond duration. Should we instead use long-term treasuries? What would this look like if we’re using the glidepath of increasing equity exposure as noted in #6? How do we balance this with G fund holdings and the ROTH conversions noted in #8 (i.e. reduced access to G fund by the amount converted to ROTH)?
8. Any recommendations for harvesting capital gains and conducting periodic TSP rollovers to a ROTH IRA for ROTH conversions?
  • a. Tentative Plan: Realize ~$50k/year in Long Term Capital Gains (LTCG) and ~$25k/year in ROTH conversions starting in year 1 of retirement until no longer necessary.
    b. Rationale: This will keep us in the 12% federal tax bracket to eliminate LTCG tax.
    c. Notes: All capital gains will likely be realized within a couple of years (after starting tax gain harvesting in retirement), but ROTH conversions will take much longer. Because of the 5-year window required between ROTH conversion and withdrawal and the need for immediate income at year 1, we’ll initially favor realizing more in Capital Gains. At Year 5, we’ll plan to increase the ROTH conversion amount to ~$48k since the initial ROTH conversion at Year 1 will become available for use and LTCG will no longer be realized. This will keep us in the 12% bracket. But should we instead continue to leave ROTH conversions untapped for maximum portfolio growth? Is there a better way to balance tax bracket, LTCG, ROTH conversions, maximum portfolio growth, and portfolio withdrawals?
Insurance:
9. Should we purchase life insurance for spouse once retired?
  • a. Tentative Plan: Purchase small term life policy to cover spouse
    b. Rationale: Assuming neither of us work once retired, our future earnings are primarily tied to our pensions. SBP would provide coverage for my pension, but we don’t have any coverage for her pension. Her pension is small (~$10k/year), so ~$250k term life policy might be appropriate. A larger policy may be more sensible if we consider the possibility of her returning to work at some point.
    c. Notes: N/A
10. Should I augment the SBP with term life for myself as well?
  • a. Tentative Plan: Purchase small term life policy to augment SBP
    b. Rationale: Spending would likely not decrease significantly if either myself or spouse passed away and SBP only pays 55% of previous pension.
    c. Notes: Coverage stops for children once they’re 18 (or 22 if in schooling).
11. Any recommendations for supplemental insurance to cover Dental and Vision?
  • a. Tentative Plan: None – Seeking recommendations
Thank you again for your help! :sharebeer
Last edited by abracadabra11 on Sun May 17, 2020 5:22 pm, edited 1 time in total.
Chip
Posts: 3172
Joined: Wed Feb 21, 2007 4:57 am

Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by Chip »

abracadabra11 wrote: Sat May 16, 2020 4:30 pm 1. Should we consider a glidepath to reduce our equity exposure to start retirement with a more conservative allocation?
I don't have a strong opinion one way or another on glidepaths. But 80/20 might feel a bit too aggressive once you retire. Things are just different once the paycheck is no longer coming in. I also believe that it is NOT the "first 10 years of retirement" where SORR is an issue. I think it's all but the last 20 years for someone who is retiring early.
2. Should we eliminate our REIT holdings?
I agree that eliminating them won't contribute much to simplicity. Plus you'd be selling after a period of underperformance. I say this from the point of view of someone who has plenty of small value and international and is sticking with both. :oops:
3. Should we continue to purchase munis?
This one I don't get. Why not more G or F fund in the TSP or a treasury fund in an IRA?
4. Should we add EE bonds and/or I-Bonds to our portfolio?
I agree with avoiding them for the reasons you stated. I am older and keeping things reasonably simple for my spouse is a factor in many decisions.
5. Should we continue to purchase international in TSP?
I think that's quite reasonable. If you decide to put them in taxable you'll need to be sure that you understand all of the ins and outs of claiming the full amount of foreign taxes paid as a credit. Especially if you're in early retirement in the 12% bracket. If you haven't read them, take a look at these two threads:

viewtopic.php?f=1&t=211120
viewtopic.php?f=1&t=312312
7. What duration should we use for our treasury holdings?
I don't know. But I would not overlook the free lunch aspects of the G fund.
8. Any recommendations for harvesting capital gains and conducting periodic TSP rollovers to a ROTH IRA for ROTH conversions?
  • a. Tentative Plan: Realize ~$50k/year in Long Term Capital Gains (LTCG) and ~$25k/year in ROTH conversions starting in year 1 of retirement until no longer necessary.
You are likely to vary your Roth conversions and capital gain realization wildly from year to year, depending on what is happening in the market and your cash needs. For example, I had a carefully thought out 4 year plan to realize capital gains in the 0% bracket on an individual stock position. The downturn this year allowed me to get it all done in one year due to TLH of other holdings. Looking back over prior years, I did gain harvesting early in 2008, then huge Roth conversions and TLH when the market was down in 2009. Then more gain harvesting in 2012, with Roth conversions in the other years. All I'm saying is it is very unlikely that you'll do 50k of this and 25k of that every year.

Your gain harvesting should probably be driven by cash needs rather than by a formula. Use Roth conversions to fill out the 12/15% bracket. I find it simpler to manage cash flow if I have a year or so of spending in cash equivalents. It's almost certainly not optimal from return standpoint but it provides simplicity.
9. Should we purchase life insurance for spouse once retired?
10. Should I augment the SBP with term life for myself as well?
It's probably appropriate to game out various scenarios before committing to these, though what you're proposing is inexpensive. I'm not sure that the assumption that spending won't decrease is necessarily valid.
11. Any recommendations for supplemental insurance to cover Dental and Vision?
We have dental and it's basically a prepaid plan for cleanings and exams. DW wants it so we have it. But the maximum annual coverage limit gets hit very quickly so it doesn't help us insure against major expenses (think implants). I don't know about vision, sorry.

I must say that was one of the most thorough posts here I've ever seen. And thanks for serving. :beer
Topic Author
abracadabra11
Posts: 195
Joined: Sat May 01, 2010 2:09 pm

Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

Chip - Thanks for taking the time to help.
Chip wrote: Sun May 17, 2020 8:56 am
abracadabra11 wrote: Sat May 16, 2020 4:30 pm 1. Should we consider a glidepath to reduce our equity exposure to start retirement with a more conservative allocation?
I don't have a strong opinion one way or another on glidepaths. But 80/20 might feel a bit too aggressive once you retire. Things are just different once the paycheck is no longer coming in. I also believe that it is NOT the "first 10 years of retirement" where SORR is an issue. I think it's all but the last 20 years for someone who is retiring early.

My internet sleuthing to date indicates that the first 10 years of retirement is most critical for SORR. The graph below from Kitces provides a good visual representation of that fact, so this is the period that I'm targeting for lower equity allocation starting retirement.

Image
Chip wrote: Sun May 17, 2020 8:56 am
abracadabra11 wrote: Sat May 16, 2020 4:30 pm
3. Should we continue to purchase munis?
This one I don't get. Why not more G or F fund in the TSP or a treasury fund in an IRA?
I would definitely purchasing more G Fund or Bond-equivalent fund in our TSP/401k if we had the space. But since we don't, we need to purchase in taxable. So the consideration here is whether we should purchase Munis, Total Bond, or Treasury in taxable. I've favored munis (though as you'll note this is a recent addition to our portfolio) because of our current federal tax bracket.
Chip wrote: Sun May 17, 2020 8:56 am
abracadabra11 wrote: Sat May 16, 2020 4:30 pm
8. Any recommendations for harvesting capital gains and conducting periodic TSP rollovers to a ROTH IRA for ROTH conversions?
  • a. Tentative Plan: Realize ~$50k/year in Long Term Capital Gains (LTCG) and ~$25k/year in ROTH conversions starting in year 1 of retirement until no longer necessary.
You are likely to vary your Roth conversions and capital gain realization wildly from year to year, depending on what is happening in the market and your cash needs. For example, I had a carefully thought out 4 year plan to realize capital gains in the 0% bracket on an individual stock position. The downturn this year allowed me to get it all done in one year due to TLH of other holdings. Looking back over prior years, I did gain harvesting early in 2008, then huge Roth conversions and TLH when the market was down in 2009. Then more gain harvesting in 2012, with Roth conversions in the other years. All I'm saying is it is very unlikely that you'll do 50k of this and 25k of that every year.

Your gain harvesting should probably be driven by cash needs rather than by a formula. Use Roth conversions to fill out the 12/15% bracket. I find it simpler to manage cash flow if I have a year or so of spending in cash equivalents. It's almost certainly not optimal from return standpoint but it provides simplicity.
Thanks for the insight.
Chip
Posts: 3172
Joined: Wed Feb 21, 2007 4:57 am

Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by Chip »

abracadabra11 wrote: Sun May 17, 2020 11:39 am My internet sleuthing to date indicates that the first 10 years of retirement is most critical for SORR. The graph below from Kitces provides a good visual representation of that fact, so this is the period that I'm targeting for lower equity allocation starting retirement.
You have probably done more sleuthing than I, but most articles I have read talking about the first 10 years being important are all referencing 30 year retirements, as is the Kitces chart. You're planning to retire at age 42, a 50+ year retirement. I think that might make a difference.
I would definitely purchasing more G Fund or Bond-equivalent fund in our TSP/401k if we had the space. But since we don't, we need to purchase in taxable. So the consideration here is whether we should purchase Munis, Total Bond, or Treasury in taxable. I've favored munis (though as you'll note this is a recent addition to our portfolio) because of our current federal tax bracket.
Between your TSP and your wife's 401k you have 40% of your portfolio available for bonds. Why not use that space?
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ram
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by ram »

If your total portfolio is 2 million, then there is 100K worth of S&P500 index in your wife's 401K and 40K of munis in your taxable. Why not sell 40 K of the S&P and buy treasurys (or other bonds).

Then swap the munis for S&P index in taxable.

Overall looks like a very good plan.
Ram
Fishing50
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by Fishing50 »

We're 4 yrs ahead of you, retiring in 2022 with a military pension. My plan for Fishing at 50, has been derailed by an unexpected promotion which has us working until 52yrs old. An extra tour definately improves the retirement pension and financial situation.
abracadabra11 wrote: Sat May 16, 2020 4:30 pm Retirement Expenses: ~$125k/year (expect H/MCOL area, strong preference for no tax state)
Retirement Pension: ~$60k COLA starting in 2026
Retirement Portfolio Withdrawal Rate: 3.25%
You have a sustainable plan.If 3.25% withdrawal rate produces enough income. If not consider to continue working after you retire. Financial burden of 02x children is the unknown that can put your plan at risk.


1. I think a decreasing equity glidepath is more important for people without a pension. Pensions reduces our risk to SSR, so we can accept increased equity risk. Rising equity glidepath in retirement improves success rate for an extended retirement which concerns me departing the workforce during my peak earning years. I choose to take more equity risk to ensure we have enough in 30yrs. I like Prime Harvesting https://earlyretirementnow.com/2017/04/ ... arvesting/
2. You have REITs in the correct placement with ordinary income sheltered in tax advantaged account. You won't incur capital gains by selling.
3. I recommend equities in taxable and G Fund in TSP. If SRR meets you in early retirement making taxable equities unattractive, you can delay Roth Conversions and use a 72T withdrawals at lower tax rates than waiting for RMDs at 72yrs old. COVID is going to strain municipal governments. I like your current muni allocation as a EF. For military members making taxable contributions, I really like: https://earlyretirementnow.com/2016/05/ ... ency-fund/
4. I recommend G Fund.
5. Purchase I Fund if necessary for allocation. US and Intl equities in taxable is tax efficient, a little foreign tax credit is nice also. I wouldn't go so far as only having intl in taxable.
abracadabra11 wrote: Sat May 16, 2020 4:30 pm Phase 2 – First 10 Years or Early Retirement[/u][/b]



6. I recommend maintaining your target asset allocation approaching and during retirement. You are good savers, you will have a large portfolio with numerous withdrawal options. Choose an appropriate asset allocation and maintain it.
7. I recommend G Fund. Develop a plan to pay for Roth Conversions as you near retirement in 6yrs and current tax rates expire.
8. Plan to maximize the lowest tax brackets for tax gain harvesting and Roth conversions. Again, you'll have to wait until you near retirement. Right now, in service rollovers out of TSP are not available. In retirement, we plan to withdraw TSP to the account minimum to separate tax exempt, traditional, and Roth contributions. Our original plan says to roll traditional balance back to TSP for G Fund, but my pension puts us in the 22% tax bracket. As tax rates expire, I may maximize the 22% (possibly 24%) tax brackets to convert my entire traditional balance to Roth.
c. I understand your intent, but it's too far away for a detailed plan. You already have Roth IRAs, so I don't think you need to worry about 5yr clock.
abracadabra11 wrote: Sat May 16, 2020 4:30 pm Insurance:
9. If you rely on her income, you'll need insurance. We won't get a policy for DW because my pension will provide enough.
10. SBP is complicated. If 55% of the pension doesn't solve the problem, there's no need to purchase it. Choose term life instead, which immediately solves the loss of income. DW doesn't concur, we haven't decided yet. We do have fairly accurate numbers to use.
- Portfolio x 3.25% withdrawal rate = income without pension
- Retirement Expenses - investment income = income required from insurance policy
If I die the day my pension begins, we know how much she needs to meet the annual expenses.
Ten years later, she has the option to take SS early to supplement retirement income which decrease the income needed.
I'm thinking a 20 yr term policy insuring against the first year required income is sufficient. It will cost less than SBP.
With those numbers, I'm over insured on active duty with SGLI and Survivor Benefits.

11. Not sure about dental and vision insurance. :sharebeer
2yrs from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
Topic Author
abracadabra11
Posts: 195
Joined: Sat May 01, 2010 2:09 pm

Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

Chip wrote: Sun May 17, 2020 11:48 am Between your TSP and your wife's 401k you have 40% of your portfolio available for bonds. Why not use that space?
We will definitely use all of the TSP and 401K space for future G Fund/Bond contributions. However, we need additional space in taxable to get to 60/40 within the next 6 years from our current allocation.
Topic Author
abracadabra11
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

ram wrote: Sun May 17, 2020 1:18 pm If your total portfolio is 2 million, then there is 100K worth of S&P500 index in your wife's 401K and 40K of munis in your taxable. Why not sell 40 K of the S&P and buy treasurys (or other bonds).

Then swap the munis for S&P index in taxable.

Overall looks like a very good plan.
Munis make up closer to 1% than 2% of overall portfolio, but I rounded up since it was the last thing I calculated and wasn't using any decimals in the percentages. The 401k was previously all bonds, but rebalanced into equities during last periodic rebalancing. But will definitely use it in the future as part of the glideslope to higher bond allocation.
Topic Author
abracadabra11
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

Fishing50 wrote: Sun May 17, 2020 2:00 pm We're 4 yrs ahead of you, retiring in 2022 with a military pension. My plan for Fishing at 50, has been derailed by an unexpected promotion which has us working until 52yrs old. An extra tour definately improves the retirement pension and financial situation.
The finish line is near - congratulations and enjoy the final two years.
Fishing50 wrote: Sun May 17, 2020 2:00 pm 1. I think a decreasing equity glidepath is more important for people without a pension. Pensions reduces our risk to SSR, so we can accept increased equity risk. Rising equity glidepath in retirement improves success rate for an extended retirement which concerns me departing the workforce during my peak earning years. I choose to take more equity risk to ensure we have enough in 30yrs. I like Prime Harvesting https://earlyretirementnow.com/2017/04/ ... arvesting/
I'll take a look - thanks.
Fishing50 wrote: Sun May 17, 2020 2:00 pm 3. I recommend equities in taxable and G Fund in TSP. If SRR meets you in early retirement making taxable equities unattractive, you can delay Roth Conversions and use a 72T withdrawals at lower tax rates than waiting for RMDs at 72yrs old. COVID is going to strain municipal governments. I like your current muni allocation as a EF. For military members making taxable contributions, I really like: https://earlyretirementnow.com/2016/05/ ... ency-fund/
We have not had a dedicated emergency fund (EF) for several years - and the 3 months in the OP is really just the typical balance that we carry on our checking account rather than a dedicated EF. But I was definitely giving consideration to having a dedicated EF in retirement, so I'll take a closer look at the muni advice - thanks.
Fishing50 wrote: Sun May 17, 2020 2:00 pm 10. SBP is complicated. If 55% of the pension doesn't solve the problem, there's no need to purchase it. Choose term life instead, which immediately solves the loss of income. DW doesn't concur, we haven't decided yet. We do have fairly accurate numbers to use.
Not following the logic here related to SBP or term life only. Why not consider SBP plus term life to cover the additional 45% that's uninsured? That seems like a cheaper option than term life alone. But at some point, SBP coverage may be sufficient that we'll be able to eliminate term life entirely. My biggest concern is the first 14 years of retirement (i.e. estimated time until children complete college).
Topic Author
abracadabra11
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

Updated the OP to close out #2 and #5.

Appreciate any input on remaining items under consideration.
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vineviz
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by vineviz »

abracadabra11 wrote: Sat May 16, 2020 4:30 pm 1. Should we consider a glidepath to reduce our equity exposure to start retirement with a more conservative allocation?
  • a. Tentative Plan: Shift from 80/20 to 60/40 between now and retirement
    b. Rationale: Sequence of returns risk (SRR), particularly in the first 10 years of retirement, appears to be the largest risk for early retirees and a glidepath to lower equity allocation seems to somewhat mitigate this risk
A glide path makes a lot of sense starting now, since SRR is strong in the 10 years BEFORE retirement as well as the 10 years after. Of course a poor sequence in the next few years can be mediated by simply working longer....
abracadabra11 wrote: Sat May 16, 2020 4:30 pm 4. Should we add EE bonds and/or I-Bonds to our portfolio?
  • a. Tentative Plan: No EE or I-Bonds.
    b. Rationale: Minimize complexity and number of accounts.
    c. Notes: Primary reason for not adding these bonds is the clunky Treasury Direct site (We previously held I-Bonds) and the desire to minimize account complexity. Managing the accounts isn’t difficult, but I also have an eye on keeping things simple should I unexpectedly pass. Adding EE bonds seems sensible given current long-term treasury rates and EE bond return at 20 years, but we wouldn’t be able to redeem them until 14 years into retirement.
I think maxing out your savings bond purchases (both EE and I) would make a lot of sense. It might not be a LOT of money, but they represent the best returns available for long-duration assets.

abracadabra11 wrote: Sat May 16, 2020 4:30 pm 6. Should we consider a glidepath to increase our equity exposure following retirement?
  • a. Tentative Plan: Shift from 60/40 to 80/20 following retirement
    b. Rationale: Higher equity exposures have proven to provide best long-term portfolio growth and attendant withdrawal rates, particularly for long retirement periods (i.e. >30 years). Although glidepath to 100/0 has shown superior outperformance for long retirement periods, 80/20 has proven to be a very compatible profile for our risk tolerance.
Again, I think starting to raise your equity allocation after retirement makes some sense (starting around age 55 or so, perhaps).

abracadabra11 wrote: Sat May 16, 2020 4:30 pm 7. What duration should we use for our treasury holdings?
The longest duration you can get, obviously. I'd probably set up a TIPS ladder to cover your non-discretionary expenses for the period from the expected date of retirement to the expected date of Social Security filing, and put the rest of the bonds in savings bonds and the longest duration Treasury fund you can access (e.g. VGLT or EDV).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
abracadabra11
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by abracadabra11 »

vineviz wrote: Tue May 19, 2020 1:18 pm
abracadabra11 wrote: Sat May 16, 2020 4:30 pm 4. Should we add EE bonds and/or I-Bonds to our portfolio?
I think maxing out your savings bond purchases (both EE and I) would make a lot of sense. It might not be a LOT of money, but they represent the best returns available for long-duration assets.
How would this work? If we max out EE and I bonds for the next 6 years, then we'll have 6 years where EE bonds provide $40k/year starting in year 14 of retirement. But this would only provide coverage from years 14-20 (assuming we're only purchasing them while still working).
vineviz wrote: Tue May 19, 2020 1:18 pm
abracadabra11 wrote: Sat May 16, 2020 4:30 pm 7. What duration should we use for our treasury holdings?
The longest duration you can get, obviously. I'd probably set up a TIPS ladder to cover your non-discretionary expenses for the period from the expected date of retirement to the expected date of Social Security filing, and put the rest of the bonds in savings bonds and the longest duration Treasury fund you can access (e.g. VGLT or EDV).
Can you help me think this through a bit? The glidepath (assume 80/20->60/40 during the next 6 years) will have me accumulating twice as much in bonds as I have now (realistically more than double assuming portfolio growth, but let's keep it simple for now). Let's also assume the glidepath back from 60/40->80/20 will be over the course of 15 years (~1.3%/year). So ~half of my bonds (those 'newly added' between now and retirement) should have a duration of ~11 years ([6+15]/2). The 'remainder' of the bonds should have a duration well into the future (let's call it 20+ years for simplicity).

Given the above (and I'm not convinced I'm looking at this properly), how would you recommend structuring the portfolio's bonds?
The easiest part to answer seems to be that the 'remainder' should be long in duration.
The harder part that I don't see clearly is how to structure the 'newly added' and balance that with adding EE bonds, I bonds, and G Fund.
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vineviz
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Re: Portfolio Review and Retirement Planning - Next 16 Years

Post by vineviz »

abracadabra11 wrote: Tue May 19, 2020 10:45 pm How would this work? If we max out EE and I bonds for the next 6 years, then we'll have 6 years where EE bonds provide $40k/year starting in year 14 of retirement. But this would only provide coverage from years 14-20 (assuming we're only purchasing them while still working).
As long as the return on the Savings Bonds is favorable relative to marketable (i.e. normal) bonds, it probably will make sense to keep purchasing them after you retire. You'd fund this by selling your bonds from the taxable account and purchasing the amount of savings bonds. Right now, at least, the yield on these savings bonds is 2x or 3x the yield on equivalent marketable securities which IMHO makes the hassle of dealing with Treasury Direct worthwhile.
abracadabra11 wrote: Tue May 19, 2020 10:45 pm Can you help me think this through a bit? The glidepath (assume 80/20->60/40 during the next 6 years) will have me accumulating twice as much in bonds as I have now (realistically more than double assuming portfolio growth, but let's keep it simple for now). Let's also assume the glidepath back from 60/40->80/20 will be over the course of 15 years (~1.3%/year). So ~half of my bonds (those 'newly added' between now and retirement) should have a duration of ~11 years ([6+15]/2). The 'remainder' of the bonds should have a duration well into the future (let's call it 20+ years for simplicity).

Given the above (and I'm not convinced I'm looking at this properly), how would you recommend structuring the portfolio's bonds?
The easiest part to answer seems to be that the 'remainder' should be long in duration.
The harder part that I don't see clearly is how to structure the 'newly added' and balance that with adding EE bonds, I bonds, and G Fund.
Structuring your portfolio is, admittedly, a bit of a logistical puzzle but conceptually I'd probably say during retirement years 1 through 13 you are primarily going to be selling bonds from your taxable accounts to a) fund your living expenses and b) purchase savings bonds (as long as the terms remain favorable, as above).

I'd probably tackle this by purchasing individual TIPS maturing in years 2026 through 2038. If you gave us your total portfolio value I missed it, so I can't determine whether this TIPS ladder should be part, most, or all of your bond allocation.

The additional complication is going to be withdrawing from your tax-advantage accounts before age 55 or 59 1/2, and I haven't seen this discussed. There are some strategies for avoiding the penalty on early withdrawals (use the money for medical expenses and/or college are the big ones), but this is an aspect you are planning for.

Will you have enough money in taxable accounts to get you through the first 15-20 years of retirement? If not, you might rethink your contributions to the TSP, IRA, and 401k plan accounts over the next six years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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