Roth/Traditional Asset Allocation Mix

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Roth/Traditional Asset Allocation Mix

Post by mongoose12 » Fri Feb 14, 2020 3:09 pm

I'm 28 years old and have a Roth IRA & Traditional 401k for my retirement savings, each 100% stocks with about equal amount of shares of Fidelity 500 Index (FXAIX). I've been trying to figure out a proper asset allocation strategy to stick with for the next 30+ years, but I genuinely don't know what my risk tolerance is. The worst market I've been in was Dec. 2018, so I haven't really had to "stomach" much volatility.

Does that justify just settling on Mr. Bogle's favorite rule of thumb that he's frequently mentioned? Specifically, in the Little Book of Common Sense Investing, he says "My favorite rule of thumb is (roughly) to hold a bond position equal to your age—20 percent when you are 20, 70 percent when you’re 70, and so on—or maybe even your age minus 10 percent". *For what it's worth, I'd probably lean toward the age minus 10 rule.

Using simple numbers...if I'm 60 years old and stick with 50/50, and my total portfolio is $1,000,000 in stocks in a roth account, and $1,000,000 in bonds in a traditional account, is my asset allocation really 50/50? If I owe Uncle Sam 25% of my traditional account value, I'm left with $750,000 instead of $1,000,000 in bonds. So wouldn't my realistic asset allocation be ~57/43? Do I have this right?

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Re: Roth/Traditional Asset Allocation Mix

Post by lakpr » Fri Feb 14, 2020 3:45 pm

Your last paragraph ... both answers are correct. Some view the "Tax Adjusted Portfolio Balance" to determine the asset allocation, some ignore the tax effects which are unknown since you aren't withdrawing from either account yet ... both perspectives have validity.

The best thing you can do at this point is to take that "Age-10 in Bonds" thumb rule (I find that conservative, I veer towards Age-20 rule myself), and max out all your tax-advantaged space for now. That includes both Roth and 401k space.

For what it's worth, I am turning 50 this year, and I max out $26k in 401k and $7k in Roth IRA, ditto for my wife, and am left with barely $3k to $4k per year for taxable investing. My allocation is 70:30 (Age-20 in bonds)

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