asset allocation dilemma

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
gabe1955
Posts: 58
Joined: Thu Mar 15, 2012 9:32 am

asset allocation dilemma

Post by gabe1955 »

I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.  I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.  Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
JDSwim3
Posts: 156
Joined: Mon Dec 07, 2020 4:51 pm

Re: asset allocation dilemma

Post by JDSwim3 »

You've won the game; increase your spending, taking it from your non-taxable to help reduce eventual RMDs.
JDave
Posts: 591
Joined: Tue Oct 29, 2019 9:23 am

Re: asset allocation dilemma

Post by JDave »

If Social Security + pension covers almost all your expenses, why are you losing sleep over the asset allocation of money you mostly don't need? Do you want to leave a big bequest?
Topic Author
gabe1955
Posts: 58
Joined: Thu Mar 15, 2012 9:32 am

Re: asset allocation dilemma

Post by gabe1955 »

Yes, as it happens, I have three children and a wife to whom I do want to leave something. And increasing my spending is not so easy to accomplish.
User avatar
Bentonkb
Posts: 83
Joined: Sun Mar 07, 2021 5:47 am

Re: asset allocation dilemma

Post by Bentonkb »

gabe1955 wrote: Wed Oct 20, 2021 1:25 pm Yes, as it happens, I have three children and a wife to whom I do want to leave something. And increasing my spending is not so easy to accomplish.
Won't you have to start taking minimum distributions from your tax deferred account? Seems like you better get on it. Open up accounts for your kids and start making gift transfers to them every year. Find a charity or two that can put some of that money to use if you can't bring yourself to spend it on yourself.
User avatar
iceport
Posts: 6054
Joined: Sat Apr 07, 2007 4:29 pm

Re: asset allocation dilemma

Post by iceport »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.  I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.  Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
I'm in a somewhat similar position, so I definitely appreciate your dilemma. Only you can decide upon the best compromise between competing objectives. In my case, I've elected to let the higher equity allocation ride. So far, that's been limited to 10% above the target, not 15% like yours would.

However, my reasons are different than yours. (Selling equities in the Roth IRA would mean losing exposure to some of the specific equity sectors I target in my overall asset allocation.)

I don't know what your problem is with being 20/80 in the non-taxable account. Is it just that you'd prefer to have more growth in the tax-free account than in the taxable account?

Well, regardless, I also don't think it necessarily makes much sense to formally include your income streams in your asset allocation. But that doesn't mean that income needs to be ignored, either. Your other income really means that you have a great ability to withstand market risk in your portfolio. You might have neither the need nor the willingness to withstand that risk, but you do have the ability. With that in mind, and in consideration of the fact that your are investing your assets for the long term and an eventual bequest, it seems to me that electing to raise your overall equity allocation from 60% to 75% would be a reasonable trade-off.

If the market keeps going up, you might end up liking that decision. If the market then tanks, you might end up regretting it. But those are, hopefully, short term consequences. Over the long term, your heirs would likely benefit from the higher equity allocation.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Topic Author
gabe1955
Posts: 58
Joined: Thu Mar 15, 2012 9:32 am

Re: asset allocation dilemma

Post by gabe1955 »

Thank you, Iceport, for the serious reply.
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: asset allocation dilemma

Post by vanbogle59 »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm this seems like a far too conservative position for the non-taxable side. 
I think you are tying yourself in knots unnecessarily.
After handling whatever simple arithmetic is required for you to compare your before tax dollars to your after tax dollars, there really is no "side".
The only "risk" metric you have is the overall portfolio. It's not like the market can fall in your IRA but not in your taxable.
Select the appropriate AA and that's that. If the only way for you to get there is to pay some taxes, oh well!
The point is not to minimize taxes, it's to optimize your overall portfolio.

Of course, which AA you choose could easily be colored by this:
gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I don't think I'll ever need to draw on these retirement funds,
Then why are you concerned about the difference in risk between 50/50 and 75/25? Do WHATEVER you want.
Including:
gabe1955 wrote: Wed Oct 20, 2021 12:55 pm consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation
Sure. Why not. You don't think you will "ever need to draw on" the retirement funds, so why worry?
Blanco 5.0
Posts: 16
Joined: Sat Oct 09, 2021 6:52 am

Re: asset allocation dilemma

Post by Blanco 5.0 »

I too should never need to draw from my non taxable accounts. Mine is Roth so RMDs are not a consideration. So I look at the Roth as legacy and invest aggressively at 80/20 stock to bond. The pension & SS will carry meet all normal expenses and the taxable will supplement if needed.

I would not worry nor overthink it.
Doctor Rhythm
Posts: 3061
Joined: Mon Jan 22, 2018 2:55 am

Re: asset allocation dilemma

Post by Doctor Rhythm »

You have an enviable dilemma. As someone who has ability to take more risk as well as no need to take more risk, it comes down to your willingness — so whatever you do will be fine.

Personally, I would not sell stock investments in the taxable account unless the need arose: you would incur capital gains taxes, whereas your heirs would get the step up in basis and be able to sell without the tax hit. I also wouldn’t worry if your tax-deferred accounts look too conservative in isolation. It’s the overall portfolio that matters. For instance, if you had an 80/20 portfolio with $2M in stock in taxable and $500K in bonds in tax-deferred, would you worry that the latter is too conservative despite the “aggressive” overall allocation? Choose the right asset allocation (for you) first. Every other decision (eg, which funds to pick and which assets to hold in each account) flows from that.

Also, it might help to post your overall financial picture to get more specific advice. In 2017, you said you were approaching 70 (we won’t ask about your secret to de-aging) and wouldn’t be collecting SS or a pension until then. You were also withdrawing from your savings at that time to cover around $50k in net expenses, and would do so until you started collecting pension, SS, and taking RMDs. Is that still the situation? Would have bearing on role of Roth conversions, and where to withdraw to cover expenses.
Last edited by Doctor Rhythm on Wed Oct 20, 2021 3:12 pm, edited 3 times in total.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: asset allocation dilemma

Post by dbr »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.  I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.  Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
Using an illogical dodge to justify something that makes perfectly good sense with no further justification just doesn't make sense.

If your objective is to take more risk to grow wealth for your heirs then do it and sleep well. If for some reason you don't feel okay about a 75/25 allocation then you should examine what the source of the discomfort is and address it directly. FWIW 60/40 and 75/25 are not very different within the wide range over which investment results can vary.
User avatar
calmaniac
Posts: 1325
Joined: Fri Jan 30, 2015 2:32 pm

Re: asset allocation dilemma

Post by calmaniac »

gabe1955,

I think your general analysis of the situation is sound. We are in a similar position, overfunded and with all of our fixed income in pre-tax retirement accounts. Thinking about the total asset allocation and then making that change to your pre-tax retirement accounts makes sense to me. Nearing retirement I am trying to stay with an overall 70/30 allocation despite my desire to have more equities. I may revisit this around age 70 and nudge up to 75/25, but keeping to my IPS for now.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
User avatar
patrick013
Posts: 3301
Joined: Mon Jul 13, 2015 7:49 pm

Re: asset allocation dilemma

Post by patrick013 »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
Some advisors think the next market crash won't last 3 years or
longer so target dating annual expenses for 3 to 5 years with a
3 to 5 year CD or TRSY bond ladder would lessen any portfolio
devaluation while the crash lasted. Devalued stocks would not
need to be sold and bonds redeemed at par provide scheduled
liquidity. You could keep your Roth in stock funds but selling
stocks funds in taxable and buying bonds there every year while
spreading taxes yearly somewhat would leave the portfolio in a
better position conceptually.
age in bonds, buy-and-hold, 10 year business cycle
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: asset allocation dilemma

Post by Dandy »

I have been in a similar position i.e. income from pension and SS almost equal normal expenses, large taxable equity heavy account with large cap gains, my TIRA has an allocation of 25/75 and overall my allocation is about 50/50. It was 45/55 so I may have to lower my TIRA equity allocation a bit. I'm 73.

Even with a low equity allocation my TIRA RMDs create a nice income but puts me in a high tax bracket. Despite 3 years of RMD the TIRA balance has never been higher. Growth in the TIRA just keeps pushing my income and taxes higher. Hey, I know how fortunate I am but I certainly don't want higher growth in my TIRA. I want it in taxable where I only have taxable distributions. I take those in cash rather than reinvest and think of the taxable account more for my children who may get the benefit of stepped up value upon inheriting those assets. Of course it is there if we need it.

Some retirees who have "won the game" continue to invest aggressively. I prefer a more modest, asset preservation approach.
Cubs Fan
Posts: 150
Joined: Wed Nov 11, 2020 11:22 am

Re: asset allocation dilemma

Post by Cubs Fan »

DH is 78, and DW 72. Asset allocation is 64/36 with zero international. There is no debt. We are allowing the AA to grow because we have $602,000.00 in VBTLX (Total Bond Fund). If we have a severe downturn we will have $60,000.00 per year for 10 years to draw from while allowing our equity portion to recover. Total portfolio is $1,700,000.00. Our goal is to live well and to provide a legacy for our 2 grown children and 5 grandchildren. Social Security and a small annuity provide $60,000.00 annually. Dividends, interest, RMDs and capital gains distributions provide $50,000.00 per year. The total reliable income is $110,000.00. When we need to buy vehicles or have an emergency we just sell something. We are LOW TEC investors. Low Taxes Expenses and Commissions.
wait until next year!
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: asset allocation dilemma

Post by grabiner »

If you don't expect to draw down your taxable portfolio (because your pension, SS, and IRA will cover your needs), then it isn't part of your retirement portfolio. It is your children's retirement fund, and your not-yet-born great-grandchildren's college fund, and your fund for donations to charity, so you can invest it accordingly.

As a separate matter, the pension is not a bond, but its existence has the same risk-reduction effect as a bond. Thus your own retirement portfolio can have a higher percentage in stocks than the portfolio of an equally risk-tolerant investor with no pension but a larger portfolio.
Wiki David Grabiner
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: asset allocation dilemma

Post by placeholder »

JDSwim3 wrote: Wed Oct 20, 2021 1:22 pm You've won the game; increase your spending, taking it from your non-taxable to help reduce eventual RMDs.
Why increase spending?
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: asset allocation dilemma

Post by Northern Flicker »

One option would be just to put the IRA in Vanguard Target Retirement Income vtinx (30% stock) or Vanguard LifeStrategy Income vasix (20% stock).
chemocean
Posts: 1573
Joined: Mon Dec 19, 2016 8:45 pm

Re: asset allocation dilemma

Post by chemocean »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses. 
Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
As far as income stream, take a look at concept of Retirement Income Optimization Plan(CR). Wade Pfau addresses this concept and using a guaranteed income stream as equivalent to safe assets in his book on safety-first retirement. He also has a new book out this year.
deikel
Posts: 1616
Joined: Sat Jan 25, 2014 6:13 pm

Re: asset allocation dilemma

Post by deikel »

I guess I would go three steps back

why do you want a 60/40 AA in the first place ? If SS and pension cover your expenses (or almost so), then why this particular number ?

If you follow the Trinity study, then between 80/20 stock/bonds and almost 20/80 there is not much different in its outcome in the time period tested then. I would argue an 80%bond allocation is a bit odd for the current times, but besides the point. you can easily go to 80/20 without compromising anything

In your particular case (and with the current bond yield at say 4%), your dividends in index funds are already giving you 2% yield. plus SS and pension - you may not need a bond allocation at all. This isn't even from a perspective of increasing the overall portfolio to its maximum for a greater inheritance - even from a safety perspective, you simply don't 'need' any bonds.

Your portfolio can tank in a crash by 50% and you would still have enough money in the moment to stay the course and not sell anything
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
User avatar
Wiggums
Posts: 7050
Joined: Thu Jan 31, 2019 7:02 am

Re: asset allocation dilemma

Post by Wiggums »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.  I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.  Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
I would not rebalance the taxable account.

You do need to think about future RMDs and how the money gets moved from the tax deferred accounts. We have a larger balance, and doing small Roth conversions each year. Especially now while tax rates are lower.
"I started with nothing and I still have most of it left."
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: asset allocation dilemma

Post by retiredjg »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.  I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.  Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
I think using the AA you are comfortable with is way more important than making money you don't need anyway.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: asset allocation dilemma

Post by Northern Flicker »

deikel wrote: Thu Oct 21, 2021 3:55 pm I guess I would go three steps back

why do you want a 60/40 AA in the first place ? If SS and pension cover your expenses (or almost so), then why this particular number ?

If you follow the Trinity study, then between 80/20 stock/bonds and almost 20/80 there is not much different in its outcome in the time period tested then. I would argue an 80%bond allocation is a bit odd for the current times, but besides the point. you can easily go to 80/20 without compromising anything
That may be correct for a 3% inflation-adjusted withdrawal rate (SWR), but 50/50 was superior to both 75/25 and 25/75 at a 4% SWR. I think it is reasonable to infer that 50/50 is safer for a 3% SWR as well.

https://www.financialplanningassociatio ... nity-study
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: asset allocation dilemma

Post by aristotelian »

Seems like you are letting the tail wag the dog, letting tax efficiency determine your risk exposure. If you need to go 20/80 in one account in order to hit your target allocation, that's what you have to do. I am sure you have gotten plenty of tax benefit during your accumulation phase. You do not need to take more risk just to get bigger tax benefit now.
Thesaints
Posts: 5108
Joined: Tue Jun 20, 2017 12:25 am

Re: asset allocation dilemma

Post by Thesaints »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm I'm 65 and have a pension and social security which mostly cover my annual expenses.  I have $2 million invested, split evenly between a taxable and non-taxable account. The taxable portion is 100% VTI.  If I want to have a 60/40 overall portfolio, then I have to be 20/80 in my non-taxable IRA account. Yet since I don't think I'll ever need to draw on these retirement funds, this seems like a far too conservative position for the non-taxable side.
What does it matter ? You should only look at risk on the total portfolio. Otherwise, with a 1/99 allocation, that "1" is 100% stocks and therefore too risky, right ?
I am loath to rebalance my taxable account because of the enormous capital gains taxes that would ensue.  So I'm thinking that I should assume much more risk--say 50/50--in my non-taxable account. But that puts me into almost a 75/25 overall position.
Isn't that what you want to do ? Taking on more risk since your pension+SS covers your back ?
Should I consider my SS and pension income to be part of my bond holdings and feel okay about the aggressive seeming asset allocation?
You already have when you wrote " have a pension and social security which mostly cover my annual expenses".
If you really want to include them in your AA there are methods for estimating their current value and, yes, that current value would be in the bonds bucket: very safe bonds, assuming your pension payer is also very safe.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: asset allocation dilemma

Post by Northern Flicker »

aristotelian wrote: Fri Oct 22, 2021 1:59 pm Seems like you are letting the tail wag the dog, letting tax efficiency determine your risk exposure. If you need to go 20/80 in one account in order to hit your target allocation, that's what you have to do. I am sure you have gotten plenty of tax benefit during your accumulation phase. You do not need to take more risk just to get bigger tax benefit now.
+1
User avatar
oldcomputerguy
Moderator
Posts: 17930
Joined: Sun Nov 22, 2015 5:50 am
Location: Tennessee

Re: asset allocation dilemma

Post by oldcomputerguy »

An off-topic exchange that was derailing the thread was removed. Please keep the replies centered around the OP's original question.
There is only one success - to be able to spend your life in your own way. (Christopher Morley)
DIYtrixie
Posts: 384
Joined: Sun Sep 13, 2020 12:11 pm

Re: asset allocation dilemma

Post by DIYtrixie »

gabe1955 wrote: Wed Oct 20, 2021 12:55 pm $2 million invested, split evenly between a taxable and non-taxable account.
OP, please clarify: is your “non-taxable” account tax-deferred (like a traditional IRA), or post-tax (like a Roth IRA)?

One reason why you’re getting a wide range of suggestions is because a tax-deferred account will have RMDs starting in your 70s, whereas post-tax will not.
Topic Author
gabe1955
Posts: 58
Joined: Thu Mar 15, 2012 9:32 am

Re: asset allocation dilemma

Post by gabe1955 »

<OP, please clarify: is your “non-taxable” account tax-deferred (like a traditional IRA), or post-tax (like a Roth IRA)?>

Thanks for all the thoughtful responses thus far. The non-taxable account is a a traditional IRA and I will be taking RMDs in 7 years--ugh.
deikel
Posts: 1616
Joined: Sat Jan 25, 2014 6:13 pm

Re: asset allocation dilemma

Post by deikel »

Northern Flicker wrote: Fri Oct 22, 2021 1:49 pm
deikel wrote: Thu Oct 21, 2021 3:55 pm I guess I would go three steps back

why do you want a 60/40 AA in the first place ? If SS and pension cover your expenses (or almost so), then why this particular number ?

If you follow the Trinity study, then between 80/20 stock/bonds and almost 20/80 there is not much different in its outcome in the time period tested then. I would argue an 80%bond allocation is a bit odd for the current times, but besides the point. you can easily go to 80/20 without compromising anything
That may be correct for a 3% inflation-adjusted withdrawal rate (SWR), but 50/50 was superior to both 75/25 and 25/75 at a 4% SWR. I think it is reasonable to infer that 50/50 is safer for a 3% SWR as well.

https://www.financialplanningassociatio ... nity-study
Your own link shows that that is not a correct interpretation of Trinity (the second table showing current market conditions shows that quite nicely). Even at the first table (which is supposed to show the study itself under its historical conditions) you can see very minor changes of 2-5% at 3-4% withdrawals if you move from 75/25 to 50/50, if you go to the 5% withdrawel, which would be a better stress test, you see the advantage of a higher stock allocation - even at that time. If you plot the data as a area plot you see its a pretty stable plateau and not a short peak

Certainly true for current times and low bond yields. 50/50 is not appreciably safer (also not much more inefficient if you want to turn the argument around) - its just not in the data - here is the link to the original work: https://www.retailinvestor.org/pdf/Bengen1.pdf
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
Post Reply