Is this too simple

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Laker1
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Is this too simple

Post by Laker1 » Tue Nov 12, 2019 8:05 pm

I am going to retire next year and I am thinking of setting up a ladder of CDs for 5 years worth of my normal withdraw amounts ( thinking 3.5% of my total investment nest egg) and then just dropping the balance into VWENX. Is this way too easy? I have compared a lot of other mixes and honestly this seems to work? We also have our pensions and SS so the 65/35 ish balance of the fund plus the 5 year ladder of CDs seems to make sense. VERY new to all of this so any advise will be greatly appreciated.

lakpr
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Re: Is this too simple

Post by lakpr » Tue Nov 12, 2019 8:49 pm

Wellington fund is indeed an excellent fund, but do not be blind to its potential drawbacks too. It is an actively managed fund, with a Small Cap Value tilt a bit, and has only 95 stocks in it. That is it.

The total market index fund instead has 3300+ stocks.

If you want simplicity, I recommend Vanguard Balanced Index fund instead, which maintains a 60:40 allocation, not quite 65:35 as Wellington. Slightly more conservative, but it could perhaps negate the need for your CD ladder. It invests in Total Stock Market index and Total Bond Market index, so unless the economy tanks in both stocks and bonds (another 2008), you should be able to sleep well.

MotoTrojan
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Re: Is this too simple

Post by MotoTrojan » Tue Nov 12, 2019 8:58 pm

lakpr wrote:
Tue Nov 12, 2019 8:49 pm
Wellington fund is indeed an excellent fund, but do not be blind to its potential drawbacks too. It is an actively managed fund, with a Small Cap Value tilt a bit, and has only 95 stocks in it. That is it.

The total market index fund instead has 3300+ stocks.

If you want simplicity, I recommend Vanguard Balanced Index fund instead, which maintains a 60:40 allocation, not quite 65:35 as Wellington. Slightly more conservative, but it could perhaps negate the need for your CD ladder. It invests in Total Stock Market index and Total Bond Market index, so unless the economy tanks in both stocks and bonds (another 2008), you should be able to sleep well.
It is also not a very tax-efficient fund, and it sounds like these funds may be taxable. Balanced fund is an okay option but it has no International exposure. Lifestrategy has a 60/40 offering as well which does.

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arcticpineapplecorp.
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Re: Is this too simple

Post by arcticpineapplecorp. » Tue Nov 12, 2019 9:04 pm

if the 3.5% will be in CDs, how is the other 96.5% invested right now (what allocation of stocks to bonds)?

Is it in a balanced fund now (60/40)? If it's balanced now, why change to Wellington?

We know what you want to change it to, but not what from.
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Laker1
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Re: Is this too simple

Post by Laker1 » Wed Nov 13, 2019 7:05 am

arcticpineapplecorp. wrote:
Tue Nov 12, 2019 9:04 pm
if the 3.5% will be in CDs, how is the other 96.5% invested right now (what allocation of stocks to bonds)?

Is it in a balanced fund now (60/40)? If it's balanced now, why change to Wellington?

We know what you want to change it to, but not what from.
Thank you...right now we are in 403B with T rowe Price capital appreciation fund for about 40% of our money, 50% in Schwab Intelligent Port for our Roth and Traditional IRAs and 10% in a non tax advantaged account at Schwab. In the Intell ports we are about 50% stocks, 38% Bonds and 12% cash. My one complaint with Schwab is I dont make hardly anything at all on the cash.

I also made an error in that we want to withdraw 3.5% a year and that we will have 5 years in cash at the start saved ahead so if the market tanks or something we dont have to take money out hence giving it time to recover. Thats where the laddered CDs would come in. Thanks again for all your help, I am very new at this, just having read a book by Mr Bogle and finding this forum.

dbr
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Re: Is this too simple

Post by dbr » Wed Nov 13, 2019 8:52 am

Well, there is the problem that as the five years progress you have less and less in the CD ladder and end up with everything in Wellington for the rest of your life. If that is what you are going to do, why not just put everything in Wellington today?

If you are invested in any mixture of stocks and bonds then when stocks decline you sell bonds to both rebalance into stocks and support withdrawals. When stocks gain you do the opposite.* I personally would prefer a more diversified investment in total stock markets and total bond markets, but a specialized, actively managed, concentrated holding such as Wellington still seems to be a credible investment for a retiree. I worry about manager risk with that sort of fund, and that has happened in the past to those "W" funds at Vanguard.

*If you hold only stocks then you do have to sell stocks only in a downturn, but that cost is offset by the higher return on average. If one looks at studies of the effect of asset allocation under withdrawing portfolios the effect is weak. There is a mild optimum at about 60:40, somewhat worse at 100/0, and the only serious failure is trying to support moderate withdrawal rates with only bonds. High stock portfolios do end up the investor having more outcomes with really a lot of money when they die without adding too much to the outcomes that fail prematurely.

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Wiggums
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Re: Is this too simple

Post by Wiggums » Wed Nov 13, 2019 9:19 am

As a general rule, I think you’re better off with two separate funds— an index fund and a bond fund.

If you want an all in one fund, I do like the Vanguard balanced fund. Life strategy funds are fine too.

I do like that you are making sure that you have adequate fixed income. Without additional information, I am not sure how quickly you will burn through the cash, given that you have a pension and SS. Can you collect both when you retire? Does pension and SS Cover a lot of your ecpenses?

retiredjg
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Re: Is this too simple

Post by retiredjg » Wed Nov 13, 2019 9:41 am

Laker1 wrote:
Tue Nov 12, 2019 8:05 pm
I am going to retire next year and I am thinking of setting up a ladder of CDs for 5 years worth of my normal withdraw amounts ( thinking 3.5% of my total investment nest egg) and then just dropping the balance into VWENX. Is this way too easy? I have compared a lot of other mixes and honestly this seems to work? We also have our pensions and SS so the 65/35 ish balance of the fund plus the 5 year ladder of CDs seems to make sense. VERY new to all of this so any advise will be greatly appreciated.
I don't think this is enough information to give you a good answer.

What kind of account(s) will this money be in? What is your likely tax bracket? Do you mean to roll into a new CD each year or use the money?

Simple is good but I'm not sure I'd want essentially my entire portfolio in Wellington, as lovely as it is. Maybe half and half with a LifeSTrategy fund though? Or if this is a taxable account, something more tax-efficient may be a better choice.

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Watty
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Re: Is this too simple

Post by Watty » Wed Nov 13, 2019 9:51 am

Laker1 wrote:
Wed Nov 13, 2019 7:05 am
right now we are in 403B with T rowe Price capital appreciation fund for about 40% of our money, 50% in Schwab Intelligent Port for our Roth and Traditional IRAs and 10% in a non tax advantaged account at Schwab.

Is this too simple?
More likely it is too complex since you will need to figure out what to do with your asset allocation as you age.

Wellington only has a small amount of international stocks so that could also be a diversification problem.

For comparison I retired in 2015 and my split between retirement accounts and taxable accounts was similar but most of my taxable money was in old iBonds that have a really good rate.

I just moved my retirement accounts to Vanguard and put it most of it into their Target Date 2015 fund. That gives me good diversification between stocks and bonds as well as domestic and international investments.

Part of the reason that I used the Target Date 2015 fund is to make it easier to manage as I age or if my wife who knows less about investing has to manage it some day. I really wanted to get my portfolio on autopilot as much as possible.

People sometimes think of target date funds as being some sort of dumbed down "Investing for Dummies" choice that needs to be improved on but in the right situation they are an excellent choice.

The percent of stocks in the Target Date 2015 fun will gradually be reduced until it matches their Target Date Retirement Income fund and it will be converted to that in around 2023(??).

I was 59 so my expenses for the first few years were going to be higher than later on after got on Medicare and Started Social security. Because of that somewhat like you I put about two years expenses in a money market fund that are paying about the same as a CD. Frankly part of the reason for that is also so I can "sleep well at night" if there is a big market drop. Nothing wrong with that.

That is a bit oversimplified because of a few things like a small old cash balance pension plan that I will eventually convert to a lump sum but the gist of it was that simple.

Anyway instead of using Wellington I would suggest that you just use;

1) A Target Date 2020 fund for all your money in the retirement accounts.

2) In the taxable account put 3.5% into a CD ladder like you wanted. This could make a lot of sense if you expect to have higher early retirement expenses like travel or pre-Medicare healthcare costs. In essence it just increases your bond(AKA fixed income) asset allocation by 3.5% which is not really significant.

3) That would leave you with another 6.5% more in your taxable account. You could just put this in a Total Stock Market Index fund because it is tax efficient. This would make your overall asset allocation a bit more aggressive but that makes sense because you also have pensions. You would usually not want to use a target date fund in your taxable account because it is not tax efficient.

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Laker1
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Re: Is this too simple

Post by Laker1 » Wed Nov 13, 2019 12:06 pm

I can see I have some work to do research wise, thanks to all...my simple thinking was basic put 5 years worth of normal withdrawl amouts into a CD ladder...we are assuming 3.5% with draw each year of our total balance, so keep 17% in the ladder and the rest in our Roths, IRAs and 403Bs which we will convert at some point. We also both have SS and pensions that will cover about 75-80 % ish of our expected spending which by the way we figure we WILL spend as much in retirement as we do now, people tell me otherwise but..better safe than sorry. My thinking was that with the Wellington we would be about 65/35 split and that the pensions and CDs would balance it all out to be about a 45/55 mix ish. We have no debt and usually save 2-3K per month. I looked at the ten year returns on VWELX as well as some 2020 type funds and also the lifestyle funds and in the last ten years its a no brainer...but I also know that the NEXT 10 years could be a different deal so I will do some more research on all of your suggestions. VERY much apprreciate your thoughts. I am new to all of this forum and you all are AWESOME!

billfromct
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Re: Is this too simple

Post by billfromct » Wed Nov 13, 2019 1:00 pm

Maybe my retirement asset allocation strategy may help someone set up their retirement funds.

I retired last year & used the strategy below for my rollover IRA:

*I wanted about 10 years of my last working year's salary in fixed income; that came out to a 65%/35% AA; so I keep the AA at about 60%/40%
*my IRA fixed income (the 40% above) is 35% ST Corporate Bond Index/65% IT Corporate Bond Index
*I take my RMD from the ST Corporate Bond Index each January & rebalance within the fixed income portion of my IRA
*I rebalance my total IRA
-if my stock allocation moves up to 65%, I move 5% from stocks into fixed income to get back to 60% stocks
-if my stock allocation moves down to 50%, I move 10% from fixed income into stocks to get back to 60% stocks
-the bandwidth above gives my a little room to keep my AA within a conservative boundary

This also prevents me from selling stocks during a market downturn. My fixed income allocation is 8-10 years of estimated RMDs.

All this is outlined in my investment policy statement (IPS).

bill

radiowave
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Re: Is this too simple

Post by radiowave » Wed Nov 13, 2019 1:06 pm

Watty wrote:
Wed Nov 13, 2019 9:51 am
. . .
Anyway instead of using Wellington I would suggest that you just use;

1) A Target Date 2020 fund for all your money in the retirement accounts.

2) In the taxable account put 3.5% into a CD ladder like you wanted. This could make a lot of sense if you expect to have higher early retirement expenses like travel or pre-Medicare healthcare costs. In essence it just increases your bond(AKA fixed income) asset allocation by 3.5% which is not really significant.

3) That would leave you with another 6.5% more in your taxable account. You could just put this in a Total Stock Market Index fund because it is tax efficient. This would make your overall asset allocation a bit more aggressive but that makes sense because you also have pensions. You would usually not want to use a target date fund in your taxable account because it is not tax efficient.
+1, this is a nice simple, tax efficient strategy. Only thing I'll add is that if the CDs have an early withdrawal penalty (e.g. you need to cash in a CD ahead of time due to unforeseen expenses), you'll take a hit on the interest. An alternative may be a Vanguard money market fund like VMMXX for liquidity purposes (in taxable account). Also compare the Vanguard balanced 60:40 (VBIAX) with the lifecycle moderate growth and target date funds. There are some differences that may be meaningful, e.g. international bonds are absent in VBIAX but included in the other VG funds.
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soccerrules
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Re: Is this too simple

Post by soccerrules » Wed Nov 13, 2019 1:35 pm

Laker1 wrote:
Wed Nov 13, 2019 12:06 pm
I can see I have some work to do research wise, thanks to all...my simple thinking was basic put 5 years worth of normal withdrawl amouts into a CD ladder...we are assuming 3.5% with draw each year of our total balance, so keep 17% in the ladder and the rest in our Roths, IRAs and 403Bs which we will convert at some point. We also both have SS and pensions that will cover about 75-80 % ish of our expected spending which by the way we figure we WILL spend as much in retirement as we do now, people tell me otherwise but..better safe than sorry. My thinking was that with the Wellington we would be about 65/35 split and that the pensions and CDs would balance it all out to be about a 45/55 mix ish. We have no debt and usually save 2-3K per month. I looked at the ten year returns on VWELX as well as some 2020 type funds and also the lifestyle funds and in the last ten years its a no brainer...but I also know that the NEXT 10 years could be a different deal so I will do some more research on all of your suggestions. VERY much apprreciate your thoughts. I am new to all of this forum and you all are AWESOME!
Keep in mind as you spend out of your CD ladder your AA will change as well as any market impact to your portfolio.
I am still 5-6 years away from FI, however my plan is to have 2 years of expenses in a safe place and will spend out of my portfolio as the market goes along. If/when we see a larger correction then I have the "safe" money to pull from as to not be impacted by a sequence of returns withdrawal. After the correction recovers (typically less than 18 months) then I can backfill my safe accounts and keep moving.
Don't let your outflow exceed your income or your upkeep will be your downfall.

KlangFool
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Re: Is this too simple

Post by KlangFool » Wed Nov 13, 2019 1:43 pm

OP,

I do not like putting all my eggs in one basket. I like the Wellington Fund. But, I would not put 100% of my portfolio into the Wellington Fund. I have 40% of my portfolio in the Wellington fund.

My targeted retirement AA is 60/40.

So, my recommendation is

A) Put a few years of expense in cash.

B) 100% stock index fund in the taxable account.

C) Put the rest of the portfolio split 50/50 to the Wellington fund and one of Vanguard Life Strategy Funds in your tax-advantaged accounts.

Then, you are done.

KlangFool

deikel
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Re: Is this too simple

Post by deikel » Wed Nov 13, 2019 4:12 pm

having five years worth effectively in cash (a CD ladder that becomes available) and then refueling it every good year with the portfolio makes sense. Presumably in bad years you would skip and wait out any crisis until ii recovers and then refill and work on a new ladder.

However, the problem might persist beyond 5 years and being stuck in a mixed fund like wellington or a target date fund would require you to sell it then in a ratio of that fund (few crisis have been that long, but Japan stagnation over 10 years has happened).

Its actually almost as easy (and cheaper fee wise) to make your own mix by buying into total market, total bond (and maybe international if you are so inclined) - this would allow you to sell from the leg that is still OK during a crisis.

I would prefer the latter and its marginally more complicated at some savings.
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Watty
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Re: Is this too simple

Post by Watty » Wed Nov 13, 2019 4:33 pm

Laker1 wrote:
Wed Nov 13, 2019 12:06 pm
my simple thinking was basic put 5 years worth of normal withdrawl amouts into a CD ladder...we are assuming 3.5% with draw each year of our total balance, so keep 17% in the ladder and the rest in our Roths, IRAs and 403Bs which we will convert at some point.
One thing that you are missing is that the stocks and bonds will pay around 2% in interest and dividends each year.

You can set those to not be automatically reinvested so that is 2% of the 3.5% that you want each year.

To use a CD ladder you would only need about 1.5% in CD to mature each year.

For a five year CD ladder you would only need 5 x 1.5 = 7% of your nestegg to be in the CD ladder.

The CDs would count in the bond or fixed income part of your overall asset allocation and increasing that by 7% would be a tad conservative but still within a very reasonable range.

Gatto Bialetti
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Re: Is this too simple

Post by Gatto Bialetti » Thu Nov 14, 2019 5:38 pm

I just moved my retirement accounts to Vanguard and put it most of it into their Target Date 2015 fund. That gives me good diversification between stocks and bonds as well as domestic and international investments
Why pay higher expenses in that way, when you could put the same monies in less expensive total stock\bond\intl funds? And do your own rebalancing.

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