Too conversative allocation for retirement?

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Topic Author
TropicLiving
Posts: 7
Joined: Mon Mar 27, 2023 11:13 am

Too conversative allocation for retirement?

Post by TropicLiving »

I’m finally retiring in a couple of month and would like to seek some opinions on how to allocate my retirement savings.
When the interest rate was still high last year and earlier this year, I purchased several CD’s/corporate bonds to build a ladder that should provide interest and principal payments (from maturing CD/corporate bonds) for the next 8 years.

Year: Interest, Maturing CD/Bond Principal
2024: $40K, $100K
2025: $36K, $150K
2026: $30K, $170K
2027: $23K, $100K
2028: $20K, $180K
2029: $10K, no maturing CD/Bond
2030: $8K, $100K
2031: $2.5K, $100K

My expenses this year and next year will be higher than usual due to college tuition for my son. Here is my estimated withdrawals from (rollover IRA and roth IRA) after pension and SS, which I plan to start in 2028 at age 65:

Year: Rollover IRA withdraw, Roth IRA withdraw
2024: $100K, $16K
2025: $122K, $24K
2026: $120K, $18K
2027: $95K, $12K
2028: $98K, $12K
2029: $75K, $10K
2030: $78K, $10K

My rollover IRA (~$1.7M) allocation: 28% stocks / 72% bonds

CDs and corporate bonds maturing from 2024 to 2031: $900K (52%)
Life Strategy Growth (VASGX): 8%
Life Strategy Moderate Growth (VSMGX): 8%
Life Strategy Conservative Growth (VSCGX): 6%
Wellesley: 6%
Wellington: 19%
Long-term corporate bond: 1%

My roth IRA (~$200K) allocation: 52% stocks / 48% bonds

Life Strategy Growth (VASGX): 12%
Life Strategy Moderate Growth (VSMGX): 2%
Life Strategy Conservative Growth (VSCGX): 2%
Wellesley: 22%
Wellington: 50%
Long-term corporate bond: 7%
Money Market: 5%

Unfortunately, I don't have too much savings in taxable accounts, hence, I will rely mostly on IRA withdraw, pension and SS for my living expenses.

1. Is my rollover IRA allocation (28/72) too conservative assuming that my CD/Bond ladder should cover the SOR risk for the first 8 years of my retirement? Should I change my rollover IRA allocation to more stocks? Maybe 50/50?

2. Is it reasonable to assume that the investment returns from the mutual funds along with the CD/Bond dividends will cover my expenses without the need to use my maturing CD’s principal?

3. Both Wellesley and Wellington funds seem to pay higher dividends/long term capital gain. Would it be a good idea to move some money from the lifestrategy funds to these two funds? However, both Wellesley and Wellington do not have too much international stocks/bonds hence, they may not be too diversified.

4. My roth IRA has 7% allocation in Long-term corporate bonds. Is it a bad idea to hold bonds in a roth IRA?

Thanks!
KlangFool
Posts: 31226
Joined: Sat Oct 11, 2008 12:35 pm

Re: Too conversative allocation for retirement?

Post by KlangFool »

OP,

We cannot answer your question until we know your expense each year until 65 years old. What are those numbers? Please add them up. They are hidden some where in your long post.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
TropicLiving
Posts: 7
Joined: Mon Mar 27, 2023 11:13 am

Re: Too conversative allocation for retirement?

Post by TropicLiving »

Here are my predicted expenses until age 65:

2024: $116K
2025: $153K
2026: $138K
2027: $107K
2028: $110K

Thanks!
bonesly
Posts: 882
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Too conversative allocation for retirement?

Post by bonesly »

TropicLiving wrote: Sat Feb 10, 2024 5:28 pm 1. Is my rollover IRA allocation (28/72) too conservative assuming that my CD/Bond ladder should cover the SOR risk for the first 8 years of my retirement? Should I change my rollover IRA allocation to more stocks? Maybe 50/50?
As KlangFool said there's some information missing to answer your questions. If you use the template pinned to the top of the Personal Investments board, you'll likely provide things we need to know to do an analysis (things like age now, age at retirement, annual contributions now, annual expenses in retirement, other income like SocSec/Pension/Annuity, desired asset allocation, current holdings and type of accounts they're in, etc.). See Asking Portfolio Questions.

On the specific question of your asset allocation being too conservative (or not conservative enough), that depends on the objective for the money (typically to fund retirement), the time-frame (your remaining accumulation phase and all of your withdrawal phase, typically to age 95), and finally your personal risk-tolerance. Since the risk-tolerance part of it is very important and very unique to the individual, most people can't tell you what it should be. There are generic guides and you could take the Vanguard Investor Questionnaire to see what it recommends, but any suggestions should be tailored to fit your personal comfort level.

Do you have a target asset allocation now? If so, doesn't it say that you should be (about) 70/30, or does it say something else? Why are you questioning your plan rather than sticking to it (new situation that didn't exist when you created your plan?)? Or do you not have a plan?

This is the generic guide provided by Bogle in Common Sense on Mutual Funds, but again it needs to be tailored to your personal risk.
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TropicLiving wrote: Sat Feb 10, 2024 5:28 pm 2. Is it reasonable to assume that the investment returns from the mutual funds along with the CD/Bond dividends will cover my expenses without the need to use my maturing CD’s principal?
This is hard to answer without knowing what those expenses are in today's dollars (or a projection to a specific future year's dollars). It seems like your total portfolio for retirement is about $1.9M. If you only need it to last 30 years from now, then the 4% rule applies and you can safely withdraw $76K in year-1 and adjust the withdrawal by +3%/yr for inflation with a >90% chance of not running out of money early.

Is $76K > your estimated expenses in retirement? Are you 65 or older now or would this portfolio need to last longer than 30 years (which means a bigger balance at retirement or a lesser initial withdrawal than 4%)?
TropicLiving wrote: Sat Feb 10, 2024 5:28 pm 3. Both Wellesley and Wellington funds seem to pay higher dividends/long term capital gain. Would it be a good idea to move some money from the lifestrategy funds to these two funds? However, both Wellesley and Wellington do not have too much international stocks/bonds hence, they may not be too diversified.
Wellesley and Wellington are actively managed US funds while LifeStrategy is passive index with 60% US and 40% Int'l (per the global market allocation). Switching because of dividends, LTCG, or recent performance isn't a good reason. You should switch funds when the fund your holding changes and now exceeds your desired risk; or the fund your holding increases its fees and a different fund with similar risk but lower cost is available to switch into. There could be other reasons (active management is consistently not meeting expectations, passive management has excessive tracking error to the underlying index, the fund composition is a known algorithm that can be exploited like Front Running on Russell 2000 Index, etc.).

TropicLiving wrote: Sat Feb 10, 2024 5:28 pm 4. My roth IRA has 7% allocation in Long-term corporate bonds. Is it a bad idea to hold bonds in a roth IRA?
It's not ideal Tax-Efficient Fund Placement since a Roth should hold those assets that have the greatest potential for appreciation to maximize benefit of tax-free withdrawals on gains. Bonds typically don't appreciate much if at all, so those are preferred in a tax-deferred account (Trad IRA or 401K).
Topic Author
TropicLiving
Posts: 7
Joined: Mon Mar 27, 2023 11:13 am

Re: Too conversative allocation for retirement?

Post by TropicLiving »

Thank you, KlangFool and bonesly. Sorry for the missing information. This is my first time to ask this forum:-)

Here are some details:

Age 60, retiring in April 2024

The predicted expenses is after my FERS pension (~$46K/yr before tax) and FERS Supplement (~$20K which is only available until age 62).

I don't have a target allocation. Though my desire allocation is 40/60
MarkVH0518
Posts: 234
Joined: Tue Dec 13, 2016 1:14 pm

Re: Too conversative allocation for retirement?

Post by MarkVH0518 »

TropicLiving wrote: Sat Feb 10, 2024 6:58 pm I don't have a target allocation. Though my desire allocation is 40/60
I'm having difficulty determining your expenses.
Nevertheless, if you expect to withdraw $100K from a $1.9M portfolio beginning at age 60, you do not have a recommendable plan.
This has nothing to do with the asset allocation.

Personally, I believe 40/60 stock/bond allocation is acceptable, but that is the minimum acceptable stock allocation.
If one holds less than 40% stock in your allocation then inflation can significantly impact you.

Regards,
Mark
The advantage of Get Rich Slow is that you actually Get Rich.
bonesly
Posts: 882
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Too conversative allocation for retirement?

Post by bonesly »

TropicLiving wrote: Sat Feb 10, 2024 6:58 pm Thank you, KlangFool and bonesly. Sorry for the missing information. This is my first time to ask this forum:-)

Here are some details:

Age 60, retiring in April 2024

The predicted expenses is after my FERS pension (~$46K/yr before tax) and FERS Supplement (~$20K which is only available until age 62).

I don't have a target allocation. Though my desire allocation is 40/60
Your withdrawal phase is 35 years (rather than the Trinity study assumption of 30 years), so the initial withdrawal should likely drop from 4% to 3.7% to maintain a portfolio survival rate of about 91.3±0.9%. 3.7% of $1.9M is $70.3K from portfolio plus $46K from FERS + $20K from supplement = $136.3K. That's a bit short for 2025 and 2026 given your predicted expenses:
2024: $116K
2025: $153K - short by $16.7K
2026: $138K - short by $1.7K

2027: $107K
2028: $110K

If you simply withdraw extra to meet your spending in future dollars (assuming that yearly list is in today's dollars), then I don't see a problem. The Monte Carlo below has year-2 adjusted by $17K*1.03 and year-3 tweaked by $2K*1.03^2. The success rate with the added withdrawals in 2025 & 2026 (years 2 & 3) is still acceptable. The image below is a bit small but you can right-click and open in a new tab for a clearer look if interested.
Image
Navillus1968
Posts: 926
Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: Too conversative allocation for retirement?

Post by Navillus1968 »

TropicLiving wrote: Sat Feb 10, 2024 5:28 pm I’m finally retiring in a couple of month and would like to seek some opinions on how to allocate my retirement savings.
When the interest rate was still high last year and earlier this year, I purchased several CD’s/corporate bonds to build a ladder that should provide interest and principal payments (from maturing CD/corporate bonds) for the next 8 years.

<snip>

My expenses this year and next year will be higher than usual due to college tuition for my son. Here is my estimated withdrawals from (rollover IRA and roth IRA) after pension and SS, which I plan to start in 2028 at age 65:

Year: Rollover IRA withdraw, Roth IRA withdraw
2024: $100K, $16K
2025: $122K, $24K
2026: $120K, $18K
2027: $95K, $12K
2028: $98K, $12K
2029: $75K, $10K
2030: $78K, $10K

My rollover IRA (~$1.7M) allocation: 28% stocks / 72% bonds

CDs and corporate bonds maturing from 2024 to 2031: $900K (52%)
Life Strategy Growth (VASGX): 8%
Life Strategy Moderate Growth (VSMGX): 8%
Life Strategy Conservative Growth (VSCGX): 6%
Wellesley: 6%
Wellington: 19%
Long-term corporate bond: 1%

My roth IRA (~$200K) allocation: 52% stocks / 48% bonds

Life Strategy Growth (VASGX): 12%
Life Strategy Moderate Growth (VSMGX): 2%
Life Strategy Conservative Growth (VSCGX): 2%
Wellesley: 22%
Wellington: 50%
Long-term corporate bond: 7%
Money Market: 5%

Unfortunately, I don't have too much savings in taxable accounts, hence, I will rely mostly on IRA withdraw, pension and SS for my living expenses.

1. Is my rollover IRA allocation (28/72) too conservative assuming that my CD/Bond ladder should cover the SOR risk for the first 8 years of my retirement? Should I change my rollover IRA allocation to more stocks? Maybe 50/50?
Yes, I would reduce bond percentage in TIRA since $900k in CDs represents about 47% of your $1.9M portfolio in fixed income, covering you against SORR until after SS begins.
I would simplify my stock holdings in TIRA & Roth down to just VTSAX & VTIAX, split 80/20 across TIRA & Roth. I am bad at math, but I think that works out thusly- remaining $800k in TIRA split- $600k VTSAX, $200k VTIAX. Roth gets re-balanced: $200k VTSAX.
I think that leaves you with about 47% fixed income, all in TIRA ($900k CDs) & 53% stocks ($1M, split between TIRA $600k VTSAX, TIRA $200k VTIAX, & Roth $200k VTSAX).
I think that's close enough to 50/50 for the moment & has the virtue of simplicity, with only 2 mutual funds plus CDs vs your current setup, which has multiple "funds of funds," making tracking your AA more complicated.
If stocks continue to grow, once you hit 55/45 you can re-balance back to 50/50 or let it ride to 60/40, if your risk tolerance allows. I probably wouldn't go above 60/40.
2. Is it reasonable to assume that the investment returns from the mutual funds along with the CD/Bond dividends will cover my expenses without the need to use my maturing CD’s principal?
If stocks have a positive year, probably yes? If a correction/dip happens, you can use the CD principal rather than sell depressed shares.
3. Both Wellesley and Wellington funds seem to pay higher dividends/long term capital gain. Would it be a good idea to move some money from the lifestrategy funds to these two funds? However, both Wellesley and Wellington do not have too much international stocks/bonds hence, they may not be too diversified.
See Question 1 for re-balancing suggestion.
FWIW, I don't think dividends or capital gains generated inside TIRA/Roth have much meaning- in TIRA, any withdrawal is taxed as OI. Roth withdrawals are tax-free. In neither case are you paying LTCG tax, nor can you TLH in either account. In the 'olden days' where brokerages had commissions on stock sales, dividend income was free vs paying a commission on each sale, so QDI was attractive. These days, trading is free, so there's no difference between QDI & selling shares to generate cash.
4. My roth IRA has 7% allocation in Long-term corporate bonds. Is it a bad idea to hold bonds in a roth IRA?

Thanks!
Yes, bad idea. See Question 1 for re-balancing suggestion into 100% VTSAX in Roth.

PS- Have you plugged your SS PIA into https://opensocialsecurity.com/ ? If you wait until FRA of 67, your SS benefit will rise over 13% compared to age 65, with additional 8% yearly delayed retirement credits after 67. Depending on your health, claiming SS after FRA might be an easy way to increase your retirement income over the long term. Click the button at the top of the Open SS page to select a different mortality table if you're in excellent health.

ETA- Have you looked at IRMAA once you turn 63? I think pension of $43k + >$100k of TIRA withdrawals will put you in the IRMAA crosshairs, filing Single. You might want to save your Roth withdrawals for later & live on 100% TIRA withdrawals between ages 60-62. If you are nearing an IRMAA cliff, you can withdraw Roth funds vice TIRA to stay under the limit. IRMAA Tier 1 is probably unavoidable in your case, but perhaps you can use Roth w/d to stay out of Tier 2. Just a thought.
https://thefinancebuff.com/medicare-irm ... a-brackets
Topic Author
TropicLiving
Posts: 7
Joined: Mon Mar 27, 2023 11:13 am

Re: Too conversative allocation for retirement?

Post by TropicLiving »

Thank you for all your analysis and recommendations! I will definitely adjust my allocation to be more aggressive.

Going forward, I will use the $900K in CD for the next 7-8 years or so and don't touch the money in the mutual funds (40/60 to 60/40 allocation). I will also reinvest the dividends to let the mutual funds grow in number of shares.

My original plan was to use the dividends/LG gain from Wellesley and Wellington and the dividends are paid quarterly. However, if the investment returns from the index fund (VASGX) will likely exceed the dividends/LG gain, then I will move more money to the VASGX fund.

I like the VASGX fund instead of doing the 80% VTSAX / 20% VTIAX because the lifestrategy funds automatically rebalance.

For my roth IRA, I will likely use the VSMGX fund because I may need to withdraw some money to reduce my taxable income (from pension and withdraw from rollover IRA).

Thank you for the reminder about IRMAA, Navillus1968. I totally forgot about this!
Navillus1968
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Location: FL Tampa Bay

Re: Too conversative allocation for retirement?

Post by Navillus1968 »

TropicLiving wrote: Sun Feb 11, 2024 9:45 pm Thank you for all your analysis and recommendations! I will definitely adjust my allocation to be more aggressive.

Going forward, I will use the $900K in CD for the next 7-8 years or so and don't touch the money in the mutual funds (40/60 to 60/40 allocation). I will also reinvest the dividends to let the mutual funds grow in number of shares.

My original plan was to use the dividends/LG gain from Wellesley and Wellington and the dividends are paid quarterly. However, if the investment returns from the index fund (VASGX) will likely exceed the dividends/LG gain, then I will move more money to the VASGX fund.

I like the VASGX fund instead of doing the 80% VTSAX / 20% VTIAX because the lifestrategy funds automatically rebalance.

For my roth IRA, I will likely use the VSMGX fund because I may need to withdraw some money to reduce my taxable income (from pension and withdraw from rollover IRA).

Thank you for the reminder about IRMAA, Navillus1968. I totally forgot about this!
The sentence I bolded above is true, but I don't think the internal re-balancing that occurs inside VASGX to maintain a roughly 80/20 AA inside the LifeStrategy MF will save you from manually re-balancing your overall portfolio AA over time.
If VASGX grows at 9% & your CDs average 4.5%, at the end of 3-5 years, your AA will have strayed from your starting AA, regardless of the internal re-balancing happening inside VASGX. You will need to sell VASGX shares & buy more fixed income to maintain a 60/40 AA, just like you'd be selling VTSAX if those shares' growth outpaced your fixed income growth.
Unless I'm missing something, the presence of CDs in the portfolio, separate from VASGX, will result in your AA moving away from your initial percentage over time.

Also, I think you're in the 24% tax rate, filing Single, with a fair amount of headroom inside that bracket above your income level. You might want to consider doing partial Roth conversions in 2024 & 2025, filling up the current 24% bracket with Roth conversion income.

I think in 2024, with $46k pension & $100k of TIRA w/d, you have about $60k headroom inside the 24% tax rate ($191.95k 24% bracket top + $14.6k standard deduction= $206.55k. $206.55k- $146k pension & TIRA w/d= $60.55k headroom).
Converting $60k in both 2024 & 2025 to Roth will grow your Roth IRA by about 60%, from $200k to $320k, giving you more flexibility in managing your MAGI in the IRMAA years to stay in Tier 1 by using Roth withdrawals to reduce your income over a longer period of time before the Roth is drawn down.
Topic Author
TropicLiving
Posts: 7
Joined: Mon Mar 27, 2023 11:13 am

Re: Too conversative allocation for retirement?

Post by TropicLiving »

Great point about the need to re-balance VASGX manually over time. I will definitely consider using the 80% VTSAX and 20% VTIAX and let them sit over the next 8 years...

I really like your suggestion to do partial Roth conversion in 2024 and 2025. However, I don’t have enough cash in taxable account to cover the tax on the conversion unless I withdraw from tIRA, which will increase my taxable income.

For tax returns, we filed married jointly and our itemized deduction last year is around $30K (from house property tax and mortgage interest from a rental house). However, because in 2024 and 2025 I will have more expenses to cover college tuition, my estimated taxable income is likely to be $210K. This consists of ~$120K from wages (salary from January to April plus payment of unused annual leaves) + pension and FERS supplement (May to December) and an estimated withdraw of $90K from tIRA. Hence, our tax bracket will likely be 24%. For 2025, my estimated taxable income will also be around $210K.

When my son graduates in 2025 (if all goes well), my taxable income should back down to $150K after 2025.
Navillus1968
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Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: Too conversative allocation for retirement?

Post by Navillus1968 »

TropicLiving wrote: Mon Feb 12, 2024 10:28 am Great point about the need to re-balance VASGX manually over time. I will definitely consider using the 80% VTSAX and 20% VTIAX and let them sit over the next 8 years...

I really like your suggestion to do partial Roth conversion in 2024 and 2025. However, I don’t have enough cash in taxable account to cover the tax on the conversion unless I withdraw from tIRA, which will increase my taxable income.

For tax returns, we filed married jointly and our itemized deduction last year is around $30K (from house property tax and mortgage interest from a rental house). However, because in 2024 and 2025 I will have more expenses to cover college tuition, my estimated taxable income is likely to be $210K. This consists of ~$120K from wages (salary from January to April plus payment of unused annual leaves) + pension and FERS supplement (May to December) and an estimated withdraw of $90K from tIRA. Hence, our tax bracket will likely be 24%. For 2025, my estimated taxable income will also be around $210K.

When my son graduates in 2025 (if all goes well), my taxable income should back down to $150K after 2025.
I don't mean to dissuade you from using VASGX in your portfolio, just to point out that there's no free lunch in terms of re-balancing your AA whether you invest in VASGX or VTSAX/VTIAX. Actually, the 20% bond component of VASGX will somewhat reduce the frequency of re-balancing, since VASGX should grow more slowly than VTSAX as a result.

Since your OP used 'I' & 'my' pronouns, I assumed you were filing Single, sorry! The good news is the MFJ 24% bracket is huge, reaching up to taxable income of about $393k in 2024, so your headroom for Roth conversions in your current bracket is significant, even with taxable income of $210k.

Paying Roth conversion taxes from a taxable account is definitely an advantage, but that doesn't mean that paying the taxes with TIRA funds is a bad idea, as long as your current tax rate is lower than the future rate (It's definitely a bad idea for those younger than 59.5). In essence, you are pre-paying the taxes that would be due later.
Your taxable income in 2025 & later of ~$150k should put you in the future 25% rate, a point higher than today.
If you search BH, you should find threads that discuss Roth conversions paid out of TIRA funds. This situation is also discussed in the Trad vs Roth IRA wiki, under the Simplest Situation paragraph.
https://www.bogleheads.org/wiki/Traditi ... lculations

PS- If you're married, you really should use the Open SS calculator, because claiming strategies for a couple are quite a bit more complex than for Singles, because of Spousal & Survivor benefits that single folks don't need to worry about.
https://opensocialsecurity.com/
dknightd
Posts: 3690
Joined: Wed Mar 07, 2018 10:57 am

Re: Too conversative allocation for retirement?

Post by dknightd »

Honestly I do not think you can be financially too conservative. When you decide not to get income from working - you still have bills to pay. Probably for a long time. So I guess we need growth.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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