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Asset allocation for a Lazy Portfolio
Old 03-04-2014, 10:42 PM   #1
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Asset allocation for a Lazy Portfolio

Hi all, newbie questions for you. I'm hoping you can help me out.

I'm considering firing my FA and creatiing a Lazy Portfolio with my IRA and Roth IRA. I also have a 401k that's in a 2020 target date fund with my former employer. I won't move that, I retired at 56 so I can currently withdraw $ from it penalty free. I am currently 58.

I'm collecting a non-cola'd pension annuity from my former employer. It seems I should be able to reduce the % of bonds in the lazy portfolio due to the pension income. How do I compute the value of the pension?

Would I use the same funds/same %'s in the Roth IRA that I put in the IRA?
The IRA has $394,000 and the Roth Ira $65,000.

Thanks, Trix55
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Old 03-05-2014, 05:34 AM   #2
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Welcome to ER.org.

Instead of mirroring your desired asset allocation in each account, most would recommend you view each account as part of the overall picture. For example if you decide you want a lazy portfolio to hold a domestic fund, an international fund and a bond fund - you could invest your 401k solely in a domestic fund, your IRA solely in an international fund and your Roth IRA solely in a bond fund. In practice, you'll have to factor in your desired asset class percentages (relative to account percentages), which accounts offer which funds, withdrawal sequence, tax planning, etc. Here's a primer:

Asset allocation in multiple accounts - Bogleheads

As for valuing your pension, I'd bring up an online annuity calculator like http://www.immediateannuities.com/im...uities/?sce=hc, enter your age, state, gender and monthly pension payment and calculate cost for an equivalent annuity. If the non COLA'd annuity would cost $500,000 for example, and your combined accounts (401k, IRAs) value at $1,000,000, your pension is 1/3rd your assets. FWIW, $500K would provide a 58 yo female a non-COLA'd lifetime monthly income of approx $2,425.

So putting it all together, for example:
  • If you want a lazy portfolio with 1/3rd Total Stock Market, 1/3rd Total International and 1/3rd Total Bond Market
  • And you have a 401k worth $541, a TIRA worth $394, a Roth IRA worth $65 and a pension valued at $500K - total $1,500,000
  • Your pension accounts for your Bond allocation (if you consider your pension equivalent to bonds as in your post above, pensions/annuities can be considered in other ways) - total $500K
  • Hold Total International in your TIRA (all $394K), your Roth IRA (all $65K) and $41K in your 401k - total $500K
  • The remaining $500K in your 401k in Total Stock Market - total $500K
This is NOT a recommendation at all, it's simply an example to show why there's no need to mirror your overall desired asset allocation in each account.
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Old 03-05-2014, 07:45 AM   #3
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I put the majority of my retirement, which I rolled into an IRA, in a Lazy Portfolio.

Bogleheads is a good source. Here are a couple other links with ideas on the subject.

http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf

and he gives recommendations for Vanguard, Fidelity and Schwab if you have your money with them for keeping costs down.

Paul's ETF Recommendations - Paul Merriman

And a good article from a Schwab Advisor if you choose to build your own.

3 Ways to Build an All-Index ETF Portfolio
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Old 03-05-2014, 12:17 PM   #4
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Does the former employer 401k offer any stable value funds? If they do and they pay a reasonable rate of interest, use that for your bond allocation.

I don't consider the imputed value of my pension in my AA, but I know some people do. I like Midpack's advice to look at the premium for a SPIA paying the same benefit.
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Old 03-05-2014, 12:42 PM   #5
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Their are lots of recommendations for this as each person seems to find their comfort zone. I went to all index funds many years ago, following a 40/60 split model, and then moved most of my assets to a managed fund, which is my core fund, which has been around for a long time and has a blend of all asset classes.

I have a few specialty funds, 5% or less of portfolio, to get additional exposure to classes that are not in my core holding.

One way to educate yourself and simplify you allocation is to look at the Life Style funds @ VG they are based on your risk tolerance and hold index funds.

Good luck
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Old 03-05-2014, 02:58 PM   #6
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Do you plan to withdraw from the Roth at all? It can be used to avoid rising into the next tax bracket, but otherwise may be best used last. If you don't plan any withdrawals from it, all equities would probably be best for maximum growth.
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Old 03-05-2014, 06:16 PM   #7
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Thanks for all the great suggestions. You all have given me a lot to think about.

Midpack, you said there are other ways to regard a pension/annuity, rather than as a bond. What else would you consider it? BTW, you were just about dead on with the valuation, it came in just under 500K, at 496,833.

Sadly, the 401k only has 184K in it.

So amounts are
401K - 184K
TIRA - 394k
Roth - 65K
pension annuity - 496K

total 1.139K

Thanks, Trix55
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Old 03-05-2014, 06:50 PM   #8
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Originally Posted by Trix55 View Post
Midpack, you said there are other ways to regard a pension/annuity, rather than as a bond. What else would you consider it?
Many people consider a pension/annuity (and/or Soc Sec) to be more like a bond than another asset (class). My point was simply that not everyone treats pensions/annuities that way Is a Pension a Bond? | Financial Planning. Your decision.
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 03-05-2014, 06:51 PM   #9
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Oh, and SS is 19K at age 62.
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Old 03-05-2014, 06:51 PM   #10
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Thank you Midpack, I'm going to look at that now.
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Old 03-05-2014, 08:31 PM   #11
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Midpack, you said there are other ways to regard a pension/annuity, rather than as a bond. What else would you consider it?
I treat an annuity or SS as a reduction in expenses. It doesn't match bond behavior very well in your portfolio. You can't rebalance with it. You can't sell it to raise cash.
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Old 03-06-2014, 10:03 AM   #12
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Thanks, I appreciate the help from all of you. Trix55
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