Getting comfortable with AA heading into retirement

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Topic Author
Tjb
Posts: 16
Joined: Mon Jul 20, 2015 4:17 pm

Getting comfortable with AA heading into retirement

Post by Tjb » Tue Nov 12, 2019 8:27 pm

I'm about 1.5 to 2 years from retirement, in the process of transferring money from company ESOP into Vanguard IRA. I have most of what I have transferred still in the Vanguard Federal Money Market account and have been reading the Bogleheads wiki's and am looking at the 3 fund portfolio. I have also given some consideration to a SPIA but maybe when I get older maybe around 70. I am 60 now, plan to retire at 62.

I had previously put some money in the IRA in Vanguard Balanced Index Fund, but that is 60/40 which I feel may be too aggressive for our retirement, my wife is 5 years younger and we want be a little more conservative. I feel I have taken a lot of risk by leaving money in the ESOP which has done well, but now I realize it needs to be diversified, and I need to set up the AA for retirement. I also have some IRA money in Vanguard Intermediate Bond Fund and Vanguard Total Bond Fund. All Tolled, I have over 5 mil, of which half is still in the ESOP and half in the Vanguard Money Market and between the Funds I mentioned, I have 100K divided up 40 K in each bond fund, and 20 K in The balanced Index fund. Eventually I will move the remainder of the ESOP as permitted, with my last withdrawal as an NUA to have a taxable account as well.

I have been watching the funds I have the past few months and have followed a few threads asking questions about bond funds, how they move and trying to learn how they work. One comment from a prior thread mentioned that having bonds in a mixed fund like Life Strategy, or Balanced Index, you don't see the movement of the bond component, or the stock component, so it's seems less volatile than seeing separate bond and stock funds go up and down.

Of course, this is Psychological, but I can see how a mixed fund like that can be less worrisome to someone who does not like seeing the ups and downs.

So, my question is, suppose I wanted to have an AA of 30/70, and did not desire to have separate bond and stock funds for the psychological aspect of ups and downs, and used something like 25% in Vanguard Balanced Index (60/40) and 75% in Life Strategy Income (20/80) At which point I would have 30% in stock and 70% in bonds ? I know the Expanse Ratio for the Life Strategy Fund is Higher (.11%) but I figure that's what you pay for it to remain balanced.

Would this be a reasonable approach for a set it and forget it AA of 30/70 ?

Thanks

MotoTrojan
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Re: Getting comfortable with AA heading into retirement

Post by MotoTrojan » Tue Nov 12, 2019 8:41 pm

30% equity seems low at your age. What withdrawal rate will you be using from that $5M?

Biggest risk is your exposure to single stock. Get that out and reinvested ASAP.

Topic Author
Tjb
Posts: 16
Joined: Mon Jul 20, 2015 4:17 pm

Re: Getting comfortable with AA heading into retirement

Post by Tjb » Wed Nov 13, 2019 10:46 am

I am aiming for 3% withdraw rate and adjusting for inflation each year. I have moved as much from the ESOP as allowed at this point and will continue to do so as allowed until final retirement.

I suppose I could live with a higher equity allocation but I don’t see that I have to based in the withdrawal rate.

But, I do need to set this up and decide on an AA to move the current money market transfer into funds and keeping it simple

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Wiggums
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Re: Getting comfortable with AA heading into retirement

Post by Wiggums » Wed Nov 13, 2019 11:36 am

I’m following the 3 fund portfolio and I’m happy with it.

I think anywhere from 40/60 to 60/40 is fine. But you need to get the cash invested in the market soon.

I’m glad that the ESOP has treated you well. As you stated, it’s time to get out as the plan rules allow.

Good luck to you...

retiredjg
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Re: Getting comfortable with AA heading into retirement

Post by retiredjg » Wed Nov 13, 2019 11:40 am

Tjb wrote:
Tue Nov 12, 2019 8:27 pm
Would this be a reasonable approach for a set it and forget it AA of 30/70 ?
That's one way to do it. You would occasionally need to sell one and buy the other if/when the ratios get off.

Have you considered just using 1 fund - Vanguard's Target Income fund? It's 30% stocks and 70% bonds and will stay there.

Topic Author
Tjb
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Joined: Mon Jul 20, 2015 4:17 pm

Re: Getting comfortable with AA heading into retirement

Post by Tjb » Wed Nov 13, 2019 4:31 pm

I was not aware of the target retirement income fund. Thanks for pointing that out. Does anyone use this fund and care to comment on it? It’s a different mix than what I was proposing but seems safe and could also workout

Thanks

retiredjg
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Re: Getting comfortable with AA heading into retirement

Post by retiredjg » Wed Nov 13, 2019 5:27 pm

If you really like the mix that is in Wellington and Wellesley, you could have a combination of Target Retirement Income and Wellesley Income.

Vanguard's target funds (the whole series) are recommended a lot. They may have more international than some people want.

Mixing with Wellesley Income (about 33% stocks with a little bit of a value tilt and a low allocation to international) might alleviate that concern for those who have it.

dbr
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Re: Getting comfortable with AA heading into retirement

Post by dbr » Wed Nov 13, 2019 6:07 pm

Tjb wrote:
Wed Nov 13, 2019 4:31 pm
I was not aware of the target retirement income fund. Thanks for pointing that out. Does anyone use this fund and care to comment on it? It’s a different mix than what I was proposing but seems safe and could also workout

Thanks
I don't own that fund because my asset allocation is not 30/70 and because I have significant fractions of holdings in both tax deferred and taxable accounts. For one single fund at that allocation TR income would be a very good choice. But, you also mention distributing some company stock into taxable, so now you will have a separate holding that will be volatile on its own. Nothing at all wrong with that, but I am not sure your idea of hiding all the gaining and losing inside one fund is ever going to really work. You could hold TR income in taxable also, but it is a little tax inefficient to do that.

Topic Author
Tjb
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Joined: Mon Jul 20, 2015 4:17 pm

Re: Getting comfortable with AA heading into retirement

Post by Tjb » Wed Nov 13, 2019 9:11 pm

Thanks for the feedback. I will look at the Wellington and Wellesley funds and think about this a bit more. Again, I think my issue is psychological. My past investments outside of ESOP in a regular taxable account and and the few funds I have, It wasn't a big chunk of money and when it went up and down I was not phased. The ESOP has spoiled me in that it stays stagnant all year, then adjusts once and it has always gone up. although it's done well, it was very risky, but I never experienced the downside of the risk, now, when I am setting up the Real Deal AA, I realize the movement and feel very risk averse, when all along I was taking the riskiest path.

This Forum is great and hearing others plans and how others manage their funds offers great insight. I have talked with Vanguard PAS, but as I've read here, and my experience with them is the basic 3 fund format, which I can do on my own, however, there is some appeal toward funds that auto balance, and I have been exploring that.

I've taken the Risk questionnaire and I believe I could handle a 10 to 20% loss, but why risk it when I don't have to, so, but CD's don't pay enough yet, so I have to figure out an AA I can be comfortable with. Could be worried about nothing, but just trying to be prudent and doing some research.

Thanks

MarkVH0518
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Re: Getting comfortable with AA heading into retirement

Post by MarkVH0518 » Thu Nov 14, 2019 4:59 pm

Here are a few thoughts:
- 3% withdraws is very conservative. If you can live with this you are golden.
- 30% stock, as been stated above, is probably too conservative, but not way too conservative.
It's low enough that you might not be keeping up with inflation - do some research in this regard. I suggest 40% stock.
Alternatively, you can try out 30% stock allocation and change it in 5 years if you like how the market has treated you.
(Read about the 'bond tent' approach to retirement allocation)
- SPIA seems a waste of money for you. And most certainly will be after 10 years of retirement.
The reason to purchase an annuity is because you *might not* or *definitely don't* have enough for retirement.
If you are comfortable with 3% withdraw rate, then you are not at risk.
Moreover, unless there is the worst market disaster between ages 60 and 70 your assets will have grown even more,
which means the SPIA is even less valuable.
- Regarding asset allocations fund vs. holding individual components of 3fund portfolio the value is all in the eye of the market holder -YOU.
- I also agree with Wiggums you want to get a significant portion of that cash invested.
As an idea, how about investing 50% of your cash into your proposed 30% stocks using the funds you've already identified like Life Strategies and/or
Balanced Index. You can let this money ride forever. If you decide you want something else later, change your future contributions
but there's no need to change those initial investments.
- I concede that I'm not following the tax implications, so maybe I'm missing something.

I agree with your approach, 'if you've won the game why keep playing'. But you do need to consider inflation
which could cause one to increase stock holdings.

Congratulations and good luck,
Mark

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