Hi everyone,
I just joined boggleheads. I have a question about allocation strategy for my taxable and tax deferred accounts.
I am 72 years old and already taking RMD as of this year. Currently my taxable and tax deferred portfolios are separately allocated roughly 50 - 50 stock etfs-bond etfs. As such each portfolio generates income. My RMD is more than enough for the amount of investment income that I need from the portfolio. As such I was thinking of allocating my taxable portfolio 80 - 20 stock(etf) - short term bonds. This would reduce taxable income from this portfolio. The 20% bond would allow me to rebalance the taxable portfolio as required. I intend to keep my tax deferred portfolio more income oriented, still using 50-50 allocation but tilting the stocks towards dividend etfs and reits. That way most of my taxable income will come from the mandatory RMD distributions.
Does this make sense?
Appreciate any insights you can provide.
Thank you.
SN
Portfolio allocations - taxable and tax deferred
-
- Posts: 329
- Joined: Sat Jun 21, 2008 10:51 am
Re: Portfolio allocations - taxable and tax deferred
Hi OP,
That is a personal decision only you can decide for yourself knowing your risk tolerance. My suggestion would be to recognize you are increasing the overall portfolio stock allocation with such a change so the possible max drawdown you can experience will be higher. Therefore, be sure you can handle the increased volatility. For instance, below is a chart that is often shared on posts that I like to use to level-set my own expectations for my chosen asset allocation (this is from the Great Recession 2007-2009 period but similar results to other really bad periods in post-WWII USA history):
Arcticpineapplecorp's updated table...
viewtopic.php?p=6861189#p6861189
The Bogleheads wiki on asset allocation is an excellent reference to check out too: https://www.bogleheads.org/wiki/Asset_allocation
I noticed you did not mention the percentage of your portfolio that is in tax deferred vs taxable accounts. Depending upon the split the change in stock allocation and possible max drawdown could be small or large. For example, if the split was 70% tax deferred and 30% taxable then your new stock allocation would be around 70% * 50% stock + 30% * 80% stock = 59% stock overall. An increase from 50% stock today to 59% stock in the future may be an acceptable increase in risk/reward in your view. However, if the portfolio percentages were reversed then it would be a much larger change (30% * 50% stock + 70% * 80% stock = 71% stock overall). Do the math for your situation and then consider the table and above links to help you decide.
Please also be aware that if you decide to make such a change that as you take your RMDs from the tax deferred accounts your overall stock allocation will naturally increase over time (as you are spending down the smaller stock allocation account leaving you with more of the higher stock allocation account). This is often referred to as a rising equity glide path. There are lots of good posts about that too on the forum you can search for.
Best wishes.
That is a personal decision only you can decide for yourself knowing your risk tolerance. My suggestion would be to recognize you are increasing the overall portfolio stock allocation with such a change so the possible max drawdown you can experience will be higher. Therefore, be sure you can handle the increased volatility. For instance, below is a chart that is often shared on posts that I like to use to level-set my own expectations for my chosen asset allocation (this is from the Great Recession 2007-2009 period but similar results to other really bad periods in post-WWII USA history):
Arcticpineapplecorp's updated table...
viewtopic.php?p=6861189#p6861189
The Bogleheads wiki on asset allocation is an excellent reference to check out too: https://www.bogleheads.org/wiki/Asset_allocation
I noticed you did not mention the percentage of your portfolio that is in tax deferred vs taxable accounts. Depending upon the split the change in stock allocation and possible max drawdown could be small or large. For example, if the split was 70% tax deferred and 30% taxable then your new stock allocation would be around 70% * 50% stock + 30% * 80% stock = 59% stock overall. An increase from 50% stock today to 59% stock in the future may be an acceptable increase in risk/reward in your view. However, if the portfolio percentages were reversed then it would be a much larger change (30% * 50% stock + 70% * 80% stock = 71% stock overall). Do the math for your situation and then consider the table and above links to help you decide.
Please also be aware that if you decide to make such a change that as you take your RMDs from the tax deferred accounts your overall stock allocation will naturally increase over time (as you are spending down the smaller stock allocation account leaving you with more of the higher stock allocation account). This is often referred to as a rising equity glide path. There are lots of good posts about that too on the forum you can search for.
Best wishes.
Last edited by southernlucky on Thu Oct 06, 2022 10:22 pm, edited 1 time in total.
"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
-
- Posts: 3035
- Joined: Mon Jan 22, 2018 2:55 am
Re: Portfolio allocations - taxable and tax deferred
Welcome to the forum.
There are two separate issues raised by your post.
1. Asset allocation (how much stock vs bond)
2. Asset placement (best place for stocks versus bonds, mainly to minimize taxes)
Regarding #1: While you’re 50-50 right now, you didn’t say what portion of your wealth is in retirement accounts versus taxable. Therefore, we don’t know how changing the allocation in one of those will affect your overall portfolio. Post back with this information if this is something you want advice about.
Regarding #2: it sounds like you understand the main concerns. For most people, keeping bonds in tax-deferred accounts makes sense. They grow more slowly than stocks, so you will minimize RMDs which are taxed as regular income. Stocks should be preferentially placed in taxable accounts, where the tax rate on capital gains is lower. Note that you don’t need to keep bonds in taxable to “rebalance the taxable portfolio”. If you need to rebalance by buying more stocks, you can do so by selling bonds and buying stock in your retirement accounts. Whether you want to slice up your stocks into growth and value/income and separate those into different account types is up to you. It’s a level of complexity that I personally don’t want to deal with.
There are two separate issues raised by your post.
1. Asset allocation (how much stock vs bond)
2. Asset placement (best place for stocks versus bonds, mainly to minimize taxes)
Regarding #1: While you’re 50-50 right now, you didn’t say what portion of your wealth is in retirement accounts versus taxable. Therefore, we don’t know how changing the allocation in one of those will affect your overall portfolio. Post back with this information if this is something you want advice about.
Regarding #2: it sounds like you understand the main concerns. For most people, keeping bonds in tax-deferred accounts makes sense. They grow more slowly than stocks, so you will minimize RMDs which are taxed as regular income. Stocks should be preferentially placed in taxable accounts, where the tax rate on capital gains is lower. Note that you don’t need to keep bonds in taxable to “rebalance the taxable portfolio”. If you need to rebalance by buying more stocks, you can do so by selling bonds and buying stock in your retirement accounts. Whether you want to slice up your stocks into growth and value/income and separate those into different account types is up to you. It’s a level of complexity that I personally don’t want to deal with.