Late start, need advice on allocation and fund selection

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Topic Author
psyrnpsy
Posts: 6
Joined: Mon Sep 14, 2020 1:42 pm

Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Hello!

I have been reading posts here for a while and am grateful for all the generous folks who post their thoughts, recommendations and wisdom here. I have learned so much and am continuously inspired by what I read here. Thank you all so much!

I am 60 years old, started saving 5 years ago. Total household income 250k per year. Partner retired, collects 1,800/month in Social Security. I plan to work full-time until at least age 70, likely until 75 (I am a professional medical provider and can likely work as long as I want and am able); reality is I love what I do and will likely work part-time well into retirement; I am an essential worker, highly skilled, very well paid and in demand, so feel very secure professionally. I plan to start collecting Social Security at age 70. I will be vested in a pension in May 2021 and if I work until age 70, projected benefit will exceed 9k per month pre-tax.

I have access to Fidelity 403B, 457B and a Defined Contribution Plan. I have been contributing to the default fund (Target Dated 2035), weighted toward US and foreign stock (75%) and about 25% bonds. We just increased our saving to 7k a month and we still live comfortably; we plan to increase that by 6k a year each year going forward.

Our greatest challenge right now is determining my allocation and whether I should stick with the Target Date Fund or create my own mix from the other choices I describe below. We am new to this, and newly serious about rescuing our retirement. I know we are very late to the table, but we come with a couple of aces in our hands. The Boglehead investment philosophy resonates with us and we like the idea of having a simple mix of domestic and foreign stocks, and high quality bonds.

In terms of risk - I have taken the online risk questionnaires and they all recommend I go with a 70/30 mix. At the onset of the pandemic, I stayed the course and actually increased my contributions to the 403/457 and began making contributions to the DCP. I didn't lose any sleep when the market tanked in March; neither did my partner. I think I am pretty risk-tolerant. I've never been without work/income and likely never will be, and we have some savings already; with our combined Social Security and projected pension alone, we will have more than enough to cover basic expenses. Still, I think we can save significantly over the next decade, perhaps more by the time I am 75.

Emergency funds: 100k in liquid funds (high-interest savages/checking account, although not so high interest anymore!)

Debt: None!

Tax Filing Status: We file as domestic partners

Tax Rate: 35% Federal, 7.25% State

State of Residence:California

Age:60

Current Asset allocation: 75% stocks / 25% bonds

Current International allocation: 20% of stocks

We have 250k total assets - 100k in cash, 75k in my Fidelity retirement account, 75k in partner's account

50% of our investments (mine) are in the University of California Pathway 2035 Target Date Fund (same allocation for all three accounts - 403B, 457B and DCP). 75% stock (44% domestic/30% foreign)/25% bonds (domestic), tiny percentage in cash and "other."

50% of our investments (my partner's) are with T Rowe Price - mostly high quality bonds. He no longer makes contributions and has not started to withdraw yet.

Contributions

Annual Contributions
$26,000 to my 403B (no employer match)
$26,000 to my 457B (no employer match)
$32,000 to my DCP (no employer match)
$1,200 to my pension ($500 per month employer match)

Here are the funds that are available in my Fidelity retirement account:

Target Date Funds

1. UC Pathway 2020. 45%/50% allocation. 0.04 expense ratio
2. UC Pathway 2025. 58%/37% allocation. 0.04 expense ratio
3. UC Pathway 2030. 68%/28% allocation. 0.03 expense ratio
4. UC Pathway 2035. 75%/25% allocation. 0.02 expense ratio (currently enrolled in this by default)
5. UC Pathway 2040. 80%/20% allocation. 0.02 expense ratio
There are other Target Date Funds past 2040 but I am not considering those - they are far too aggressive for me!

Asset Class Options:

6. UC Growth Company Fund. 98% domestic stock. 0.35 expense ratio
7. UC Domestic Equity Index Fund. 100% domestic stock. 0.005 expense ratio
8. UC Social Equity Fund. 100% domestic stock. 0.01 expense ratio
9. UC Domestic Small Cap Equity Fund. 100% domestic stock. 0.01 expense ratio
10. UC Diversified International Fund. 80% foreign stock/85 domestic stock/3% cash/other. 0.48 expense ration
11. UC International Equities Fund. 98% foreign stock/2% domestic stock. 0.01 expense ratio
12. UC Emerging Market Equities Fund. 98% foreign stock/2% cash. 0.01 expense ratio
13. UC Real Estate Fund. 100% real estate. 0.01 expense ratio
14. UC Bond Fund. 90% domestic bonds/6% foreign bonds/3% cash. 0.01 expense ratio
15. UC Short-Term TIPS. 100% domestic bonds. 0.01 expense ratio
16. UC TIPS Fund. 97% domestic bonds/3% cash
17. UC Savings Fund (short-term bonds). 70% domestic bonds/27% cash/3 foreign bonds. 0.03 expense ratio

Questions:
1. Given our situation, what allocation recommended? We're not risk-averse, but we don't have more than 15 years to recoup major sustained losses. We will have resources in retirement even without a huge nest-egg, but we do want to travel to Europe once a year and take a week or two in wine country. We'd also like to leave something to our nieces.

2. What recommendations for mix of funds from the list I provided do more experienced folks recommend? Should I stay with the Target Dated Fund, or would I do better to create my own mix of domestic equities, foreign equities and high quality stocks/TIPS?

3. I notice that none of the above Fidelity funds are Mutual Funds (per the little information window about the fund). Does that make any difference?

4. Any other thoughts or recommendations on how to maximize savings/save more intelligently?

Many, many thanks for taking the time to read our story, and in advance for your thoughts and recommendations. This is a generous group and I am happy that I found you.
000
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Joined: Thu Jul 23, 2020 12:04 am

Re: Late start, need advice on allocation and fund selection

Post by 000 »

UC Pathway 2035. 75%/25% allocation. 0.02 expense ratio
I don't see a problem with these funds.

Have you thought about contributing to a (Roth) IRA?

Have you thought about investing some of the $100k in a taxable brokerage account in stock index funds?

If you choose to do this, what would your overall asset allocation be? Many would say 75% of the whole portfolio in stocks would be too aggressive.
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CyclingDuo
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Re: Late start, need advice on allocation and fund selection

Post by CyclingDuo »

psyrnpsy wrote: Tue Sep 15, 2020 4:29 pm Questions:
1. Given our situation, what allocation recommended? We're not risk-averse, but we don't have more than 15 years to recoup major sustained losses. We will have resources in retirement even without a huge nest-egg, but we do want to travel to Europe once a year and take a week or two in wine country. We'd also like to leave something to our nieces.

2. What recommendations for mix of funds from the list I provided do more experienced folks recommend? Should I stay with the Target Dated Fund, or would I do better to create my own mix of domestic equities, foreign equities and high quality stocks/TIPS?

3. I notice that none of the above Fidelity funds are Mutual Funds (per the little information window about the fund). Does that make any difference?

4. Any other thoughts or recommendations on how to maximize savings/save more intelligently?

Many, many thanks for taking the time to read our story, and in advance for your thoughts and recommendations. This is a generous group and I am happy that I found you.
Projected monthly income in retirement:

$9000 from pension
$1800 from partner's SS
$XXXX from your SS starting at age 70
$13,000-14,000 guesstimated monthly income in today's dollars

$156-168K annual gross before taxes

What are your current annual expenses?

The traditional three legged stool of retirement income - pension, SS, risk portfolio - is what, in combination, provides the income streams to cover all of your expenses. We know the pension and at least 1/2 of your household's SS (you can create an account and login at Social Security to get your projected SS benefit amount at age 70), and we could set a target for your risk portfolio size simply based on the current amount you hold and the annual contributions you are throwing at it ($84K alone at the DCB/403b/457b). With your current balance of $250K and throwing $84K a year at it, you will be over $1M in ten years on contributions alone, not counting for gains. If you had an allocation that returned 6% nominal, your portfolio would grow to be $1.5M by age 70. At age 70, you are not going to live forever and need to finance as long of a retirement as say a 55 or 60 year old. Likewise, the amount you contribute between age 60 and 70 is more important than the actual asset allocation at this point in time. Whether you are invested 50/50, 60/40, or even 70/30 - it will be the amount of your contributions that provide the lion's share of your portfolio. Since you have such a generous pension and the dual SS, you may not have to be as conservative with your asset allocation as an investor who does not have such a pension. That is entirely a personal decision.

Having a handle on your current expenses would allow you to see if an annual gross income of $156-$168K from pension and SS covers it all, or what the gap is you need to fill from the risk portfolio to cover the expenses and travel. If the gap is only $15-$25K, then you obviously will not need as large of a portfolio than if the gap was $50-$75K.

You are golden with the pension and dual SS stream. Without your annual expenses in today's dollars - we have no idea how to attack the risk portfolio leg of your retirement income three legged stool. If you can give us an idea on what you spend annually now, that at least gives us an idea of what - if any - gap there might be come retirement to cover your current lifestyle and the desire to travel.

Image

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright
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Brianmcg321
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Re: Late start, need advice on allocation and fund selection

Post by Brianmcg321 »

It’s a good plan. Your savings rate at this point will be a much bigger determinant to your ending value than the particular funds. But what you are choosing is fine, unless you want something more aggressive, but it’s not necessary.

If you have maxed out all your retirement accounts, you can always save more in just a regular brokerage account. You can put it in a target date fund in there also. No need to make it more complicated.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
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Brianmcg321
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Re: Late start, need advice on allocation and fund selection

Post by Brianmcg321 »

000 wrote: Wed Sep 16, 2020 2:26 am
UC Pathway 2035. 75%/25% allocation. 0.02 expense ratio
I don't see a problem with these funds.

Have you thought about contributing to a (Roth) IRA?

Have you thought about investing some of the $100k in a taxable brokerage account in stock index funds?

If you choose to do this, what would your overall asset allocation be? Many would say 75% of the whole portfolio in stocks would be too aggressive.
I would agree on the aggressive part except for the following:
1. Op has just started saving. The account size is very low compared to the new investments.
2. Her savings rate acts like the bond to offset any downturn in the market.
3. The target date funds will get less aggressive over the next 10 years.

If i were in her shoes and I was able to save this amount relative to my account size I would be 100% equities until I turned 70. But I’m a wild man.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
000
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Joined: Thu Jul 23, 2020 12:04 am

Re: Late start, need advice on allocation and fund selection

Post by 000 »

Brianmcg321 wrote: Wed Sep 16, 2020 8:05 am I would agree on the aggressive part except for the following:
1. Op has just started saving. The account size is very low compared to the new investments.
2. Her savings rate acts like the bond to offset any downturn in the market.
3. The target date funds will get less aggressive over the next 10 years.

If i were in her shoes and I was able to save this amount relative to my account size I would be 100% equities until I turned 70. But I’m a wild man.
Sure, unless a job loss happens during the next bear market and the novice investor sells low.

I'm not saying it will happen.

But it could.
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Brianmcg321
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Re: Late start, need advice on allocation and fund selection

Post by Brianmcg321 »

000 wrote: Wed Sep 16, 2020 8:21 am
Brianmcg321 wrote: Wed Sep 16, 2020 8:05 am I would agree on the aggressive part except for the following:
1. Op has just started saving. The account size is very low compared to the new investments.
2. Her savings rate acts like the bond to offset any downturn in the market.
3. The target date funds will get less aggressive over the next 10 years.

If i were in her shoes and I was able to save this amount relative to my account size I would be 100% equities until I turned 70. But I’m a wild man.
Sure, unless a job loss happens during the next bear market and the novice investor sells low.

I'm not saying it will happen.

But it could.
From her post, “a highly skilled medical provider”, makes me think she doesn’t need to worry about a job loss. If she was an administrative assistant in a widget factory I would give different advice.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Topic Author
psyrnpsy
Posts: 6
Joined: Mon Sep 14, 2020 1:42 pm

Re: Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Thank you OOO so much for your feedback! I really appreciate this.

I have thought about IRA accounts, but I believe I earn too much to qualify for a Roth IRA (my own pre-tax income is $230,000 a year; that's before contributions to my retirement accounts).

I find the income rules about Traditional IRA's confusing; some of what I read says there are income limits, and other sources say that I can't take tax deduction contributions above a certain income. At some point I will likely max out my savings options, so would like to know more about IRA's. Am doing more research.

I HAVE thought about investing some of the 100k emergency fund. I think we over-saved in cash, given how cash poor we each were when we grew up, and how we lived paycheck-to-paycheck for so long. It just felt safe to have a lot of cash, but we feel more secure now so would likely be willing to invest some of that money.

I'm still not sure about our overall asset allocation. My retirement money is now in the default Target Dated fund at 75%/25%; I am worried it is too aggressive and would result in a huge loss in a bear market, but on the other hand we have at least 10 years to recoup any losses. It would be more catastrophic if a bear market occurred just as I stop working, so there's that to consider. I'm leaning toward a 60%/40% mix at this point.
Topic Author
psyrnpsy
Posts: 6
Joined: Mon Sep 14, 2020 1:42 pm

Re: Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Thank you so much for your thoughtful reply, CyclingDuo!

I think you are right on the money (!) guesstimating our annual gross income from both SS and pension streams - I calculated about $13,000 a month/$156,000 annual.

Our current monthly expenses (after tackling the budget yet again) are about $6,300/month (after tax), $75,6000 annual (after tax). My projected SS income at age 70 will be $3,796 per month pre-tax. I guesstimate that we will clear something around $8,500 a month after taxes with the SS/pension streams. I am pretty confident in our ability to cover all basic expenses with the two Social Security incomes and the pension. We may even have some left over if we stick to the budget.

Your calculations regarding how much we can save in 10 years fit mine, which is re-assuring. We think we can save over $1M in contributions alone, not counting gains. I agree that with interest, we are likely to have something in the ball-park of $1.25-1.5M in 10 years.

What I find most thought-provoking and re-assuring is your insight that the amount we contribute between now and age 70 is more important than the actual asset allocation at this point. I had not thought this through fully until I got your response. I feel very confident in my ability to make large, sustained contributions going forward, and I am not concerned about losing my jobs; demand is high for my skill-set and jobs are still plentiful (I am a psychiatric mental health nurse practitioner).

Thank you very much for your input! We really appreciate this.
Last edited by psyrnpsy on Wed Sep 16, 2020 4:44 pm, edited 1 time in total.
Topic Author
psyrnpsy
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Joined: Mon Sep 14, 2020 1:42 pm

Re: Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Thank you Brianmcg321! We really appreciate your thoughts and feedback!

You and CyclingDuo agree that our savings rate is what counts at this point. From just your post and that of CyclingDuo, we now realize that we do not have to take a lot of risk, and that being aggressive is not necessary; we may WANT to shoot for higher returns, but at least we know we don't HAVE to do so to have a comfortable retirement. This means a great deal to us, so I thank you both for helping us to think this through.

I like your take on our savings rate acting like a bond fund to offset any market downturn. I hadn't thought about it in that way until your reply. This is most helpful and makes sense to us.

It's also nice to hear from someone who would be willing to be more aggressive. We admire the "wild man" in you and may take some inspiration from that.

By the way, I'm a guy. No offense taken. My screen name alludes to the fact that I am a nurse, and most nurses are women; I broke that mold a long time ago. I am grateful that you shared your thoughts with us. Thank you so much.

As an aside, to you and to OOO - I am not inclined to sell at ANY point, even in a severe drop. I thought this was my potential future investing style well before I started investing; it was confirmed for me when the pandemic hit and the market tanked. Instead of panicking and running, I actually increased my contributions.
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CyclingDuo
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Re: Late start, need advice on allocation and fund selection

Post by CyclingDuo »

psyrnpsy wrote: Wed Sep 16, 2020 4:30 pm What I find most thought-provoking and re-assuring is your insight that the amount we contribute between now and age 70 is more important than the actual asset allocation at this point. I had not thought this through fully until I got your response. I feel very confident in my ability to make large, sustained contributions going forward, and I am not concerned about losing my jobs; demand is high for my skill-set and jobs are still plentiful (I am a psychiatric mental health nurse practitioner).

Thank you very much for your input! We really appreciate this.
Jonathan Clements (who has appeared on the panel at the Bogleheads Conference before and is a long time financial writer) wrote an article entitled "Show Me The Money" on his Humble Dollar website that talks about how important the amount you save is. If a young investor has the luxury to take advantage of the power of time and compounding, they can get away with saving less over decades of investing. However, when starting late such as in your 40's, 50's or 60's - it really is the amount you save that matters.

Here's a quote...

That brings us to a perverse conclusion—one I’m almost reluctant to mention: Because savings are so crucial, and because they’re the key driver of your ultimate nest egg, how you invest is somewhat less important.

https://humbledollar.com/2019/09/show-me-the-money/

I always like to use visuals. You are in good shape with your current rate of saving (thanks to your nice salary) to add to your pension and SS legs of retirement income streams. These visuals are simply just to illustrate the difference between starting early and starting later to reach one's goals.

Image

Image

You will surpass the $1M mark in 10 years with the amount you are socking away and with your expenses, be just fine with the pension and SS. Bravo and keep up the good work!

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright
Topic Author
psyrnpsy
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Joined: Mon Sep 14, 2020 1:42 pm

Re: Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Thank you again CyclingDuo!
000
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Re: Late start, need advice on allocation and fund selection

Post by 000 »

psyrnpsy wrote: Wed Sep 16, 2020 4:10 pm I have thought about IRA accounts, but I believe I earn too much to qualify for a Roth IRA (my own pre-tax income is $230,000 a year; that's before contributions to my retirement accounts).

I find the income rules about Traditional IRA's confusing; some of what I read says there are income limits, and other sources say that I can't take tax deduction contributions above a certain income. At some point I will likely max out my savings options, so would like to know more about IRA's. Am doing more research.
I suggest reading this: https://www.bogleheads.org/wiki/Traditional_IRA
psyrnpsy wrote: Wed Sep 16, 2020 4:10 pm I HAVE thought about investing some of the 100k emergency fund. I think we over-saved in cash, given how cash poor we each were when we grew up, and how we lived paycheck-to-paycheck for so long. It just felt safe to have a lot of cash, but we feel more secure now so would likely be willing to invest some of that money.
I once thought as you. Although I still have a cash allocation, I've become more concerned that cash won't keep value relative to inflation.
psyrnpsy wrote: Wed Sep 16, 2020 4:10 pm I'm still not sure about our overall asset allocation. My retirement money is now in the default Target Dated fund at 75%/25%; I am worried it is too aggressive and would result in a huge loss in a bear market, but on the other hand we have at least 10 years to recoup any losses. It would be more catastrophic if a bear market occurred just as I stop working, so there's that to consider. I'm leaning toward a 60%/40% mix at this point.
I think you should keep in mind the possibility you may not have 10 years to recoup any losses.

You could lose your job due to an economic downturn or disability.

And, stocks don't have to recover after 10 years.
Topic Author
psyrnpsy
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Joined: Mon Sep 14, 2020 1:42 pm

Re: Late start, need advice on allocation and fund selection

Post by psyrnpsy »

Hello again 000. Thank you for the link to the IRA's wiki, I will read that.

I'm definitely thinking hard on the idea of investing some of that cash; it's a horse in the barn at this point, and it could be running; like you, I am concerned about it losing value over time. Thanks again for prodding me to think about this.

I also appreciate your words of caution about the potential for a job loss or disability; I am not terribly worried about not being able to find a job, but disability and not being able to work scare the wits out of me, as does a prolonged loss of value in the market. I'll keep those possibilities in mind and plan accordingly.

Thanks again for so generously sharing your thoughts with me.
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