AA review for WRE

[Wannaretireearly]

I’m getting more and more familiar with my AA and appetite for risk. Closing in on age 50 in a few short years.
Dont expect to be employed in 5 years. Voluntarily or not.

Current AA: 70/30 & around $4M saved (20% taxable, 20% Roth, 60% 401k pre tax). This conservatively represents 20X incl taxes, healthcare etc. stock roughly 50/50 (US/Intl).

On up days I wish my AA was more aggressive.
On down days I generally feel ok with my AA.

I expect the following in the 3-5 year timeframe before I retire:
- higher unemployment
- higher inflation
- higher interest rates

What would you recommend my AA to be now and assume the above plays out?

I’m looking for a broad set of responses and discussion to aid any decisions I make to fine tune my AA.

Thanks in advance!

WRE

[Naren123]

Looks good, but obviously depends on your future expenses.
Big ones - World cruise / paying off mortgage / ...
Recurring ones - the usual including insurances and taxes.
Family situation- inheritance or conversely, paying for elderly relatives.

Do some asset-liability matching if needed.

It is impossible to say if in the next 25 years US stocks will beat international stocks or vice versa. 50/50 is good enough.

For bonds, maybe overweight 0-ish duration or inflation protected bonds since you expect higher inflation.

[Wannaretireearly]

Looks good, but obviously depends on your future expenses.
Big ones - World cruise / paying off mortgage / ...
Recurring ones - the usual including insurances and taxes.
Family situation- inheritance or conversely, paying for elderly relatives.

Do some asset-liability matching if needed.

It is impossible to say if in the next 25 years US stocks will beat international stocks or vice versa. 50/50 is good enough.

For bonds, maybe overweight 0-ish duration or inflation protected bonds since you expect higher inflation.

Thanks. Little debt at 0%. Mortgage is paid off. Yes, world cruise etc could push expenses easily to from 2 to 300k for a few years. Not forever.

I’m factoring the recurring expenses I hope. Thank the lord, I didn’t move to a different house and double/triple my CA property tax like some friends. Still $13k a year for my house taxes.

Family situation is good in that both sides are comfortable, frugal and independent financially. Small inheritance is on the cards, but not something I want to factor at all. Likely will skip a generation and give directly to our kids if appropriate at that time.

How would I asset liability match? Can you give me the cliff notes to think about?

On the bonds, I use CA long term muni in my taxable (only $100k) and whatever my vanguard 2030 fund uses in retirement accounts. Would you change those? If so, to what?

[Hacksawdave]

I’m getting more and more familiar with my AA and appetite for risk. Closing in on age 50 in a few short years.
Dont expect to be employed in 5 years. Voluntarily or not.

Current AA: 70/30 & around $4M saved (20% taxable, 20% Roth, 60% 401k pre tax). This conservatively represents 20X incl taxes, healthcare etc. stock roughly 50/50 (US/Intl).

On up days I wish my AA was more aggressive.
On down days I generally feel ok with my AA.

I expect the following in the 3-5 year timeframe before I retire:
- higher unemployment
- higher inflation
- higher interest rates

What would you recommend my AA to be now and assume the above plays out?

I’m looking for a broad set of responses and discussion to aid any decisions I make to fine tune my AA.

Thanks in advance!

WRE

I do not see AA as being the main issue, but the two items that come to mind are the ability to support a $200K-$300K annual spend and a pre-55 retirement with most assets being in qualified plans.

If I use a figure of $240K for an annual spend, it makes math easy. We must have $20K on average per month to support expenses. The $100K of CA longs VCLAX is producing around $285 a month, so we will have to figure out where the remaining amount will come from to support the spending. 80% of your portfolio is unavailable without substantial penalties (12.5% for both fed and CA) or restrictive SEPPs.

I recall we touched upon this last July. How did the exercise work out?

viewtopic.php?p=7962845#p7962845

Has the income gap between available accounts and spending been determined? This might result in receiving more responses. I would be looking to bolster your amount of CA municipal funds as my taxable account is producing around $2,600 monthly to help cover the $72K in annual expenses.

[thenow]

I read your earlier and current post and kept trying to understand everything (my problem not yours). At first blush your current net worth was commendable. And, your world cruise sounded great. I wished my wife did this, but at our ages and health we must bypass this golden opportunity. You stated that your yearly expenses will be around 72k after your travels. Although you reside in CA and the high taxes, I wonder about achieving your goals with 100,000 dollars in CA munis. Plus, I wondered about maturities I.e. duration matching expense needs. Also, given your age I question the 2030 target fund that might become more conservative as your age. You have the Roth IRA for emergencies but that would be nice to grow tax free for many years. It appears you could sell some of you taxable holdings in emergencies but it would be less desirable in a bear market. I do think at your age you might need to be more aggressive….would a greater equity portion be wise in your qualified account? You hopefully would not withdraw any amount for a good while. For example, at least the Vanguard balance index fund that you could hold at least 10 to 15 years. Or a total stock market index or value index might be appropriate. And then shift to a balance index closer to a later age. I tried figuring out your amounts in my head for AA and qualified vs taxable account…big mistake on my part. Yet I do think you need to be more aggressive in your qualified investments while concentrating on cash flow and liquidity to meet your 72k goal after traveling. The CA Munis may be inadequate. Lastly, I can tell you from personal experience that health care issues personally or adult children sudden health problems can throw a big curve on your 72k assumption. Hopefully I helped a little.

[Wannaretireearly]

I’m getting more and more familiar with my AA and appetite for risk. Closing in on age 50 in a few short years.
Dont expect to be employed in 5 years. Voluntarily or not.

Current AA: 70/30 & around $4M saved (20% taxable, 20% Roth, 60% 401k pre tax). This conservatively represents 20X incl taxes, healthcare etc. stock roughly 50/50 (US/Intl).

On up days I wish my AA was more aggressive.
On down days I generally feel ok with my AA.

I expect the following in the 3-5 year timeframe before I retire:
- higher unemployment
- higher inflation
- higher interest rates

What would you recommend my AA to be now and assume the above plays out?

I’m looking for a broad set of responses and discussion to aid any decisions I make to fine tune my AA.

Thanks in advance!

WRE

I do not see AA as being the main issue, but the two items that come to mind are the ability to support a $200K-$300K annual spend and a pre-55 retirement with most assets being in qualified plans.

If I use a figure of $240K for an annual spend, it makes math easy. We must have $20K on average per month to support expenses. The $100K of CA longs VCLAX is producing around $285 a month, so we will have to figure out where the remaining amount will come from to support the spending. 80% of your portfolio is unavailable without substantial penalties (12.5% for both fed and CA) or restrictive SEPPs.

I recall we touched upon this last July. How did the exercise work out?

viewtopic.php?p=7962845#p7962845

Has the income gap between available accounts and spending been determined? This might result in receiving more responses. I would be looking to bolster your amount of CA municipal funds as my taxable account is producing around $2,600 monthly to help cover the $72K in annual expenses.

Hi Dave! Thanks for responding.
Ooof, when reality hits, it hits. I haven’t done much differently since July, except go more conservative (change from vanguard 2035 to 2030). I have put a bit more into CA longs. And I’ve been able to hang onto my job

I have not made much more progress on the income generation puzzle. I agree, I should continue to plow more into CA longs, but seems a long way from where I need to be income wise .

I have signed up for a couple of calculators (projection lab and pralana online) but need to spend more time on them.

It seems a weird in between phase right now. Not many years left, but enough where there is still some fuzziness in the whole planning. Apart from more CA longs, any other advice or tips?

[Wannaretireearly]

I read your earlier and current post and kept trying to understand everything (my problem not yours). At first blush your current net worth was commendable. And, your world cruise sounded great. I wished my wife did this, but at our ages and health we must bypass this golden opportunity. You stated that your yearly expenses will be around 72k after your travels. Although you reside in CA and the high taxes, I wonder about achieving your goals with 100,000 dollars in CA munis. Plus, I wondered about maturities I.e. duration matching expense needs. Also, given your age I question the 2030 target fund that might become more conservative as your age. You have the Roth IRA for emergencies but that would be nice to grow tax free for many years. It appears you could sell some of you taxable holdings in emergencies but it would be less desirable in a bear market. I do think at your age you might need to be more aggressive….would a greater equity portion be wise in your qualified account? You hopefully would not withdraw any amount for a good while. For example, at least the Vanguard balance index fund that you could hold at least 10 to 15 years. Or a total stock market index or value index might be appropriate. And then shift to a balance index closer to a later age. I tried figuring out your amounts in my head for AA and qualified vs taxable account…big mistake on my part. Yet I do think you need to be more aggressive in your qualified investments while concentrating on cash flow and liquidity to meet your 72k goal after traveling. The CA Munis may be inadequate. Lastly, I can tell you from personal experience that health care issues personally or adult children sudden health problems can throw a big curve on your 72k assumption. Hopefully I helped a little.

Thanks for the analysis! I’ve thought perhaps I’ve become too conservative as well. I just don’t know. I guess it could be analysis/paralysis. Overall I’m good with anything from 80/20 to 60/40. I’m right in the middle right now. To your point, as I build out cash flow in my taxable (ca longs etc) I should balance this by being a bit more aggressive in the retirement accounts. That balance makes sense to me. Thanks again!

[Hacksawdave]

I have not made much more progress on the income generation puzzle. I agree, I should continue to plow more into CA longs, but seems a long way from where I need to be income wise .

I have signed up for a couple of calculators (projection lab and pralana online) but need to spend more time on them.

It seems a weird in between phase right now. Not many years left, but enough where there is still some fuzziness in the whole planning. Apart from more CA longs, any other advice or tips?

Unfortunately, I do not see an easy elixir to add to make this happen. With the implied spending of $200K (sorry, no cruses in early retirement), an $800K taxable account, plus the contribution portion of an $800K Roth IRA, there are not enough eligible sources (without action or penalty) to draw from to have $200K a year in spending sustainable. That would be a 17% drawdown in year one with the figures listed above. Additions in the taxable account to create extra cashflow will help, but what would that later figure be?

The numbers and cashflow requirements need to be run and created so several plans of action can be put into place. I would suggest finding some time to do this before it finds you, and make plans on several scenarios:

• Early retirement with a drastically reduced expense amount until reaching age 59.5 normal tax-deferred withdrawals.
• Hopefully maintain employment at current employer and that they allow rule of 55 partial withdrawals so early retirement in the year one turns 55 is available.
• If early departure before age 55 occurs, one or both seeks reemployment.
• If early departure before age 55 occurs, options of using a partial rollover SEPP plan until age 59.5.

The problem is not a shortage of investments or how their stock/bond are proportioned. The issue is the amount of expenses joined with age/length of an early retirement with limited choices of fund availability without invoking a substantial penalty.

[Wannaretireearly]

I have not made much more progress on the income generation puzzle. I agree, I should continue to plow more into CA longs, but seems a long way from where I need to be income wise .

I have signed up for a couple of calculators (projection lab and pralana online) but need to spend more time on them.

It seems a weird in between phase right now. Not many years left, but enough where there is still some fuzziness in the whole planning. Apart from more CA longs, any other advice or tips?

Unfortunately, I do not see an easy elixir to add to make this happen. With the implied spending of $200K (sorry, no cruses in early retirement), an $800K taxable account, plus the contribution portion of an $800K Roth IRA, there are not enough eligible sources (without action or penalty) to draw from to have $200K a year in spending sustainable. That would be a 17% drawdown in year one with the figures listed above. Additions in the taxable account to create extra cashflow will help, but what would that later figure be?

The numbers and cashflow requirements need to be run and created so several plans of action can be put into place. I would suggest finding some time to do this before it finds you, and make plans on several scenarios:

• Early retirement with a drastically reduced expense amount until reaching age 59.5 normal tax-deferred withdrawals.
• Hopefully maintain employment at current employer and that they allow rule of 55 partial withdrawals so early retirement in the year one turns 55 is available.
• If early departure before age 55 occurs, one or both seeks reemployment.
• If early departure before age 55 occurs, options of using a partial rollover SEPP plan until age 59.5.

The problem is not a shortage of investments or how their stock/bond are proportioned. The issue is the amount of expenses joined with age/length of an early retirement with limited choices of fund availability without invoking a substantial penalty.

Thanks. A quick question while I digest everything:
Instead of piling $100k plus into 401k + MBDR next year, would you advice changing this strategy to save more in taxable?

It goes against cardinal rules, but I’m really questioning whether it’s the right path for me, now, with a few short years of employment left?

My back of the envelope calculation for cash flow has me at about 35-40k a year from dividends and interest from my taxable account ($900k today).
So yes, I’ll need to sell a min of $100k from taxable asets and/or Roth contribution for at least 8-9 years!

[Hacksawdave]

Unfortunately, I do not see an easy elixir to add to make this happen. With the implied spending of $200K (sorry, no cruses in early retirement), an $800K taxable account, plus the contribution portion of an $800K Roth IRA, there are not enough eligible sources (without action or penalty) to draw from to have $200K a year in spending sustainable. That would be a 17% drawdown in year one with the figures listed above. Additions in the taxable account to create extra cashflow will help, but what would that later figure be?

The numbers and cashflow requirements need to be run and created so several plans of action can be put into place. I would suggest finding some time to do this before it finds you, and make plans on several scenarios:

• Early retirement with a drastically reduced expense amount until reaching age 59.5 normal tax-deferred withdrawals.
• Hopefully maintain employment at current employer and that they allow rule of 55 partial withdrawals so early retirement in the year one turns 55 is available.
• If early departure before age 55 occurs, one or both seeks reemployment.
• If early departure before age 55 occurs, options of using a partial rollover SEPP plan until age 59.5.

The problem is not a shortage of investments or how their stock/bond are proportioned. The issue is the amount of expenses joined with age/length of an early retirement with limited choices of fund availability without invoking a substantial penalty.

Thanks. A quick question while I digest everything:
Instead of piling $100k plus into 401k + MBDR next year, would you advice changing this strategy to save more in taxable?

It goes against cardinal rules, but I’m really questioning whether it’s the right path for me, now, with a few short years of employment left?

My back of the envelope calculation for cash flow has me at about 35-40k a year from dividends and interest from my taxable account ($900k today).
So yes, I’ll need to sell a min of $100k from taxable asets and/or Roth contribution for at least 8-9 years!

I was maxed on the 401k from 1993 to the end in 2019. I never reduced, paused, or stopped the maximum going in during my remaining tenure, even with plans of early retirement at 50 with a pension, rule of 55 after the pension was dissolved, and all the way to the end when layoffs were in sight two years prior to them happening.

I did not have the MBDR option, so I continued with 401k, Roth backdoor, and then taxable to the fullest I could. Since the MBDR funds are after tax, you are already paying the tax upfront, correct? This would be a personal decision based upon your planning to either place in taxable or MBDR.

One last footnote. The state of CA considers PTO/vacation as a defined benefit, meaning the company must pay you on the way out. I made sure to have the maximum amount of 68 days carried over when the final day arrived. This amounted to an additional $35K that went mostly to the VCLAX longs with a portion to the VCADX intermediate term as well.

A bunch of numbers to crunch and some tough decision for you to make.

[dogagility]

What would you recommend my AA to be now and assume the above plays out?

It's a fine asset allocation. I'd put all your fixed income in TIPS since you expect high inflation.

The bigger question for you will be can you adjust your spending if need be?

[Wannaretireearly]

Thanks. A quick question while I digest everything:
Instead of piling $100k plus into 401k + MBDR next year, would you advice changing this strategy to save more in taxable?

It goes against cardinal rules, but I’m really questioning whether it’s the right path for me, now, with a few short years of employment left?

My back of the envelope calculation for cash flow has me at about 35-40k a year from dividends and interest from my taxable account ($900k today).
So yes, I’ll need to sell a min of $100k from taxable asets and/or Roth contribution for at least 8-9 years!

I was maxed on the 401k from 1993 to the end in 2019. I never reduced, paused, or stopped the maximum going in during my remaining tenure, even with plans of early retirement at 50 with a pension, rule of 55 after the pension was dissolved, and all the way to the end when layoffs were in sight two years prior to them happening.

I did not have the MBDR option, so I continued with 401k, Roth backdoor, and then taxable to the fullest I could. Since the MBDR funds are after tax, you are already paying the tax upfront, correct? This would be a personal decision based upon your planning to either place in taxable or MBDR.

One last footnote. The state of CA considers PTO/vacation as a defined benefit, meaning the company must pay you on the way out. I made sure to have the maximum amount of 68 days carried over when the final day arrived. This amounted to an additional $35K that went mostly to the VCLAX longs with a portion to the VCADX intermediate term as well.

A bunch of numbers to crunch and some tough decision for you to make.

Thanks Dave! I’ve maxed pretty much every year since 2001.
It’s put me in a good situation, but like you said I need to do some number crunching. Folks here talk about a pivot point when it’s better to save in taxable. I wish I could plug in my scenario into a calculator and have it spit out: continue or reduce 401k/Roth as some guidance.

Yep the MBDR is after tax. Converts to a Roth account.
I’m gonna be so set after age 60, if I make it that far and I’m still healthy….smh.

[Wannaretireearly]

What would you recommend my AA to be now and assume the above plays out?

It's a fine asset allocation. I'd put all your fixed income in TIPS since you expect high inflation.

The bigger question for you will be can you adjust your spending if need be?

Thank you. My Target date fund will eventually introduce TIPs in a few years I think (vanguard 2030 fund). I’m leery (and lazy) to dismantle that and DIY. But, perhaps I should consider this.

There is significant flex in the spend. Actual fixed costs likely in 80-100k range. There is a lot of fun we plan for (and to be honest have been doing!). Planning for age 50-60 just gives me a headache

[player2012]

OP

We are in a similar situation as you are. Looking to call it quits sometime in the next 2-5 years. I am gliding towards a 60/40 AA as I don't see any need to take more risk.

[Wannaretireearly]

OP

We are in a similar situation as you are. Looking to call it quits sometime in the next 2-5 years. I am gliding towards a 60/40 AA as I don't see any need to take more risk.

Thanks. I used to be comfortable at around 80/20 +- 10
I need to get comfortable at 70/30 +- 10.

Can I ask, how are you planning to fund retirement years before 60? 100% taxable?

[shm317]

I’m a little bit younger but also plan to be out in the near term - 1-3 years. My wife will probably go for awhile as she just started back but at a much lower income. I’m AA I’ve settled on 75/25 for life. I tried out 80/20 for the past year (wasn’t trying to time, just luck) thinking I needed more risk. I never felt great about it and have managed to walk it back down to around 77. It’s hard selling when market is ripping tho

[player2012]

100% from taxable. Almost 60% of our portfolio is in taxable, so I am hoping it would be good for 8-10 years at least.

OP

We are in a similar situation as you are. Looking to call it quits sometime in the next 2-5 years. I am gliding towards a 60/40 AA as I don't see any need to take more risk.

Thanks. I used to be comfortable at around 80/20 +- 10
I need to get comfortable at 70/30 +- 10.

Can I ask, how are you planning to fund retirement years before 60? 100% taxable?

[Wannaretireearly]

100% from taxable. Almost 60% of our portfolio is in taxable, so I am hoping it would be good for 8-10 years at least.

Thanks. I used to be comfortable at around 80/20 +- 10
I need to get comfortable at 70/30 +- 10.

Can I ask, how are you planning to fund retirement years before 60? 100% taxable?

Nice. Well done! The most swan plan is to have ER funded 100% by taxable.

[jarjarM]

We’re the same age and I just took the dive into retirement unknowns. I basically kept 10 years worth of expenses in FI and let the rest ride. Doing some option trades on the side to generate income/hedge on the main position and also provide some mental exercise/structure. Of course my risk tolerance is probably different than yours so YMMV.

[DIYtrixie]

I was maxed on the 401k from 1993 to the end in 2019. I never reduced, paused, or stopped the maximum going in during my remaining tenure, even with plans of early retirement at 50 with a pension, rule of 55 after the pension was dissolved, and all the way to the end when layoffs were in sight two years prior to them happening.

I did not have the MBDR option, so I continued with 401k, Roth backdoor, and then taxable to the fullest I could. Since the MBDR funds are after tax, you are already paying the tax upfront, correct? This would be a personal decision based upon your planning to either place in taxable or MBDR.

One last footnote. The state of CA considers PTO/vacation as a defined benefit, meaning the company must pay you on the way out. I made sure to have the maximum amount of 68 days carried over when the final day arrived. This amounted to an additional $35K that went mostly to the VCLAX longs with a portion to the VCADX intermediate term as well.

A bunch of numbers to crunch and some tough decision for you to make.

Thanks Dave! I’ve maxed pretty much every year since 2001.
It’s put me in a good situation, but like you said I need to do some number crunching. Folks here talk about a pivot point when it’s better to save in taxable. I wish I could plug in my scenario into a calculator and have it spit out: continue or reduce 401k/Roth as some guidance.

Yep the MBDR is after tax. Converts to a Roth account.
I’m gonna be so set after age 60, if I make it that far and I’m still healthy….smh.

If you need access to money to spend in the ER years, then it seems like an easy decision to divert MBDR money to taxable. That money has already been taxed, and you’re planning to spend it before it’ll have a chance to benefit from its placement in Roth.

That being said, I agree with others that you need to do some more detailed number-crunching. Because if you spend soon the MBDR-bound money that you’d otherwise spend at ages 60+, then that money obviously won’t be there for you when you’re older. That may mean you need to work longer (and keep MBDR going) and/or significantly reduce expenses.

[Wannaretireearly]

We’re the same age and I just took the dive into retirement unknowns. I basically kept 10 years worth of expenses in FI and let the rest ride. Doing some option trades on the side to generate income/hedge on the main position and also provide some mental exercise/structure. Of course my risk tolerance is probably different than yours so YMMV.

Congrats!! Thanks for sharing your plan.
10 years expenses across various accounts? Or all in taxable to draw from in early retirement years?

[Wannaretireearly]

Thanks Dave! I’ve maxed pretty much every year since 2001.
It’s put me in a good situation, but like you said I need to do some number crunching. Folks here talk about a pivot point when it’s better to save in taxable. I wish I could plug in my scenario into a calculator and have it spit out: continue or reduce 401k/Roth as some guidance.

Yep the MBDR is after tax. Converts to a Roth account.
I’m gonna be so set after age 60, if I make it that far and I’m still healthy….smh.

If you need access to money to spend in the ER years, then it seems like an easy decision to divert MBDR money to taxable. That money has already been taxed, and you’re planning to spend it before it’ll have a chance to benefit from its placement in Roth.

That being said, I agree with others that you need to do some more detailed number-crunching. Because if you spend soon the MBDR-bound money that you’d otherwise spend at ages 60+, then that money obviously won’t be there for you when you’re older. That may mean you need to work longer (and keep MBDR going) and/or significantly reduce expenses.

Thanks DIYtrixie. I’m at analysis paralysis on this topic re: number crunching.
Let me explain my thinking so far:
One of us will be able to access 401k money within say 8 years of our target retirement. So the amount needed prior to 401k access is roughly $1.5M. Today, I have roughly $900k in taxable. So I have a $600k problem to solve for.

In the next 4 years I see two options:
1. Continue as is with MBDR. Means I’ll only save a max of 50k a year in taxable, plus growth at 5% a year. So a total expected amount of $1.2M to $1.3M?

2. Completely stop MBDR and plough $150k total into taxable for four years, plus 5% growth = $1.5 to $1.6M?

Is this the right way to think about this re: number crunching?

Perhaps the best/easiest answer for me is to split the difference and reduce MBDR by 50%/50K and save this in taxable. Hmm
-

[Wannaretireearly]

Perhaps the turkey helped. I’m now convinced to make a change next year. Reduce or eliminate my MBDR contribution's.
I’ll keep the trad 401k contributions, especially to match level.

Perhaps I should have done this earlier. Better late than never I guess. This is one of the ‘hard’ decisions based on personal circumstance. Reading thru other forums (eg early retirement. Org)
and seeing others regret not saving more in taxable has me convinced this is a better path for me, now.

Plenty in 401k and Roths already, combined, at around $3M.
The third, taxable bucket, needs help. Gotta make the change now imo if I’m realistically going to be comfortable retiring at age 50/52 without scrimping/not enjoying those ER years cos cash flow from taxable is ‘lacking’.

Wish me luck!