Advice on Selling Out of Target Retirement Date Funds

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jp3760
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Joined: Tue May 14, 2024 10:30 am

Advice on Selling Out of Target Retirement Date Funds

Post by jp3760 »

I'm 64, single and recently laid off. I don't have enough retirement savings, so I've changed my lifestyle so that I don't need to take any withdrawals from my investments over the next 15 years. My goal is to grow these investments as aggressively as my risk tolerance will allow, so that by age 80-85, I can afford a nice retirement community.

My investments are all in Vanguard TRD funds. Total value is about $500,000. I would like grow this to at least a million in 12-15 years.
Current Accounts:
60% in taxable TRD 2025 with 53/47 AA
40% in IRA's: TRD 2030 with 63/37 AA

Moving to: VTSAX, VTIAX & VBTLX

I would like to exchange/sell these funds in 2025 & 2026 - just selling half the taxable account each year to reduce the LTCG taxes. The strategy I'm most comfortable with is "140 minus my age" so that I'm starting with a more aggressive 75/25 AA and moving to a safer 60/40 AA by age 80. I would delay the retirement home as long as possible, but not knowing if I would need to move and possibly have to withdraw money for a large entry fee between age 75 or age 85, I feel more comfortable have a safer AA by those ages.

My concern is about the current over valuation of US stocks. I don't want to try to time the market, but I do feel that there is value in looking at P/E ratios and I am worried about stocks prices resetting over the next few years. I'm wondering if it would be wiser to move to a 60/40 AA while we are in this high inflation/high stock valuation period and watch to see if stocks do reset at lower levels, at which time I would move to the "140 minus my age" strategy.

I'd appreciate your thoughts on if the '140 minus my age' glide path best fits my needs and also if I'm falling into a 'trying to time the market' black hole.
southernlucky
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by southernlucky »

Hi op. Sorry about the job situation. My 2 cents…
1. Personally I would not incur a tax bill to exchange out of your TDF in taxable acct. Fox index based TDF and low income brackets the tax drag on your portfolio is likely 0.2% more than if you had all stocks. Over 15 yrs investing that is about 3% less overall portfolio value. Not terrible. And if the TDF with its hands off automatic rebalancing helps you stay the course that small cost is worth it imho. If you do decide to switch in taxable here is a helpful wiki:
https://www.bogleheads.org/wiki/Paying_ ... itch_funds

2. To increase your stock allocation overall I would just exchange your TDF in tax advantaged accounts (which incurs no tax consequences) to some later date fund to achieve your desired overall AA. Plus by having more stocks in tax advantaged accounts as you spend down from taxable account first you will be naturally increasing your overall stock allocation over time which seems to be one of your desires too. Just be sure you are fully comfortable with the higher volatility and drawdowns that comes with more stocks. Search the internet for online articles from Kitces about Rising Equity Glide Path or Bond Tent. Here is one:
https://www.kitces.com/blog/managing-po ... -red-zone/

3. If you decide to switch in taxable and implement a 3 fund portfolio (which is fine btw) be sure to check out these helpful wikis:
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Asset_a ... e_accounts

4. Using these historical and Monte Carlo calculators it appears any AA above 30% stocks can achieve your desired $1M portfolio goal in 15 yrs (at lower 25th percentile but nominal). No need to get super aggressive.
https://www.wealthmeta.com/calculator/ ... =50&cash=0
https://www.portfoliovisualizer.com/mo ... 79RVQZuWn0

Good luck!
"Rely heavily on index funds, and begin with the idea of a 50/50 bond/stock ratio, adjusting the ratio in accordance with your own financial profile"--J Bogle commentary on Pillar 2 of 12
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retired@50
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by retired@50 »

jp3760 wrote: Wed May 15, 2024 10:04 am
I'd appreciate your thoughts ...
Welcome to the forum.

I agree with southernlucky on the first point...

Incurring a capital gains tax bill to switch around the taxable account may not make sense, unless the gain for the current fund is very small, or you already have carryover capital losses from a prior year that will eliminate the tax impact.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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windaar
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by windaar »

1. Yes, you are using all of the language of someone attempting to time the market, which cannot be reliably and repeatedly done.

2. If someone wants or needs "more" money in the future, this is best done by investing more money into the existing AA, not just shifting to a more aggressive AA. Because that aggressive AA can just as easily go way down as way up. And a 12 year horizon is pretty different from a 40 year horizon.
Nobody knows nothing.
bonesly
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by bonesly »

jp3760 wrote: Wed May 15, 2024 10:04 am I'm 64, single and recently laid off. I don't have enough retirement savings, so I've changed my lifestyle so that I don't need to take any withdrawals from my investments over the next 15 years. My goal is to grow these investments as aggressively as my risk tolerance will allow, so that by age 80-85, I can afford a nice retirement community.
I concur with southerlucky that swapping the taxable from TRD 2025 into VTSAX and VTIAX is probably not worth the tax hit unless you've only held this fund in taxable for a few years or less. The potential higher return isn't guaranteed but the higher volatility is a near certainty; that higher volatility just creates a bigger spread on the range of potential outcomes. Here's two Monte Carlo results for: a) leaving taxable as is and replacing TRD 2030 in the IRAs with only VTSAX and VTIAX (the 2030 holding is already over your 25% bond target unfortunately); and b) using a 3-fund portfolio across taxable and IRAs.

If you did want to go 75/25 and pay the tax bill, these are the dollar allocations to get there (not recommended).
Image

TRD 2030 in taxable + VTSAX & VTIAX in IRAs: Starts at 71.8% / 28.2% and glides down to 54.7% / 45.3% by age 79
End-Bal Percentile
$796.9K 5th
$1,256.8K 25th
$1,745.0K 50th
$2,323.7K 75th
$3,484.5K 95th

75/25 fixed for 15 years
End-Bal Percentile
$770.7K 5th
$1,254.9K 25th
$1,815.5K 50th
$2,610.4K 75th
$4,443.3K 95th

There's a 95% chance with the TRD 2030 in taxable and pure stocks in IRAs that you'll have $797K. There's a 95% chance that with a 75/25 fixed allocation for 15 years you'll have $771K. The conservative 5th percentile outcome is actually lower due to the higher volatility for the more aggressive 75/25 fixed allocation. That more aggressive allocation is only about the same at the 25h percentile (about $1,255K for glide-path and 75/25 fixed); being more aggressive didn't buy you anything at the 25th percentile. Planning on higher percentile outcomes is just setting up for disappointment (50th percentile is a coin-toss of higher or lower result, 95th percentile has a 95% chance of a lower result), so planning is usually down at a low percentile like 5th or 10th.

Investing more aggressively is not the solution to "I don't have enough." The most reliably way to address that is to: a) save more (hard if you're laid off, but find another job); b) invest longer (part of your current plan); c) or a mix of both. Investing more aggressively doesn't pay off unless you're still earning and have 20+ years until you want to tap the funds; added volatility for shorter periods is a disadvantage, not an advantage.

You could do this:
Taxable $300K TRD 2025
IRAs $120K VTSAX
IRAs $80K VTIAX

...but it's not going to be much different than if you just "stay the course" with what you have for 15 years (and staying the course is going to be less volatile). If your overall allocation hits 40/60 then you might want to swap the IRAs to LifeStrategy Conservative or Moderate Growth Fund (VSCGX or VSMGX) to stop the glide path in the IRA (again I don't see a great advantage to swapping TRD in taxable, despite that the bonds it holds are not tax-efficient in taxable). Maybe it is worth it to you: see Paying a Tax Cost to Switch Funds.

Again if you're W-2 income is halted and then your tax bracket might drop and it might be Ok to do swaps in the 0% capital gains bracket, but paying 15% just to restructure taxable doesn't seem like a great idea if it won't significantly increase your 5th percentile end-balance at age 79. Holding only stocks in Taxable and adding more bonds in Tax-Deferred would be better Tax-Efficient Fund Placement.

My Excel models I used for the numbers above:
Asset Allocation Sheet
AA Current and Proposed

Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo
Withdrawal Monte Carlo

You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).

This is the Monte Carlo Accumulation image from the 71.8 / 28.2 with a glide path only in taxable:
Image
momopi
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by momopi »

jp3760 wrote: Wed May 15, 2024 10:04 am I'm 64, single and recently laid off. I don't have enough retirement savings, so I've changed my lifestyle so that I don't need to take any withdrawals from my investments over the next 15 years. My goal is to grow these investments as aggressively as my risk tolerance will allow, so that by age 80-85, I can afford a nice retirement community.
Considering your age and situation, as others have already said, it's not recommended to touch the taxable account just for re-balancing. You could re-balance the IRA account for more equity exposure if desired.

If you're concerned about your retirement nest egg being insufficient in the US, you could look into retirement or partial retirement abroad. There are numerous web sites and online forums that you can research and talk to ex-pat retirement communities.
Topic Author
jp3760
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Joined: Tue May 14, 2024 10:30 am

Re: Advice on Selling Out of Target Retirement Date Funds

Post by jp3760 »

bonesly wrote: Thu May 16, 2024 12:43 pm I concur with southerlucky that swapping the taxable from TRD 2025 into VTSAX and VTIAX is probably not worth the tax hit unless you've only held this fund in taxable for a few years or less. The potential higher return isn't guaranteed but the higher volatility is a near certainty; that higher volatility just creates a bigger spread on the range of potential outcomes. Here's two Monte Carlo results for: a) leaving taxable as is and replacing TRD 2030 in the IRAs with only VTSAX and VTIAX (the 2030 holding is already over your 25% bond target unfortunately); and b) using a 3-fund portfolio across taxable and IRAs.
Thanks for taking the time to include such a thorough response - I really appreciate it. The data and links are very helpful. It's clear that just focusing on a more aggressive AA is ignoring a lot of other factors that I need to consider. Time to do some more homework...
delamer
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by delamer »

Do you own a home? Is it mortgage-free or will it be so by the time you want to move to a CCRC (which I assume is what you mean by retirement community)?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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illumination
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by illumination »

Not what you're asking, but my advice in general is not to buy Target Date funds in taxable accounts. I would only buy those in retirement accounts.

That being said, I wouldn't sell and take that tax hit either.
DIYtrixie
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by DIYtrixie »

jp3760 wrote: Wed May 15, 2024 10:04 am I'm 64, single and recently laid off. I don't have enough retirement savings, so I've changed my lifestyle so that I don't need to take any withdrawals from my investments over the next 15 years. My goal is to grow these investments as aggressively as my risk tolerance will allow, so that by age 80-85, I can afford a nice retirement community.

My investments are all in Vanguard TRD funds. Total value is about $500,000. I would like grow this to at least a million in 12-15 years.
Current Accounts:
60% in taxable TRD 2025 with 53/47 AA
40% in IRA's: TRD 2030 with 63/37 AA

Moving to: VTSAX, VTIAX & VBTLX

I would like to exchange/sell these funds in 2025 & 2026 - just selling half the taxable account each year to reduce the LTCG taxes. The strategy I'm most comfortable with is "140 minus my age" so that I'm starting with a more aggressive 75/25 AA and moving to a safer 60/40 AA by age 80. I would delay the retirement home as long as possible, but not knowing if I would need to move and possibly have to withdraw money for a large entry fee between age 75 or age 85, I feel more comfortable have a safer AA by those ages.

My concern is about the current over valuation of US stocks. I don't want to try to time the market, but I do feel that there is value in looking at P/E ratios and I am worried about stocks prices resetting over the next few years. I'm wondering if it would be wiser to move to a 60/40 AA while we are in this high inflation/high stock valuation period and watch to see if stocks do reset at lower levels, at which time I would move to the "140 minus my age" strategy.

I'd appreciate your thoughts on if the '140 minus my age' glide path best fits my needs and also if I'm falling into a 'trying to time the market' black hole.
I agree with others who recommended you keep the TDF in taxable to avoid paying taxes on gains — BUT: go ahead and turn off dividend reinvestment. Instead, invest dividends and capital gains payments into a 100% equities fund like VT or VTI. Over time, the percentage of the taxable account in the TDF will shrink.
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David Jay
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Re: Advice on Selling Out of Target Retirement Date Funds

Post by David Jay »

DIYtrixie wrote: Sat May 18, 2024 1:56 pm I agree with others who recommended you keep the TDF in taxable to avoid paying taxes on gains — BUT: go ahead and turn off dividend reinvestment. Instead, invest dividends and capital gains payments into a 100% equities fund like VT or VTI. Over time, the percentage of the taxable account in the TDF will shrink.
+1
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