Hi, I'm Karen. Here's my story!

[kaudrey]

Hi,

My name is Karen. I just found this site a few days ago and love reading everyone's stories! They are so encouraging to me. My parents are my role models - they worked hard and retired at 57 (10 years ago), and are active and loving life! I will be 37 next month, single but in a committed relationship, and hope to retire at 52. I work for the gov't and will have a pension, but due to my relationship, there is a chance I will leave the gov't early for the private sector. So, I estimate on the low side of what my pension will be when doing calculations. At 52, if I stay with the goverment, I can get deferred pension until 57. So, no pension until 57, and don't plan on SS until 67.

I have $153K in TSP (the gov'ts 401 (K)); $123K in a rollover IRA due to a change in jobs, and about $100K in taxable accounts (mutual funds, stocks, and cash).

I max out my 401(K), throw $4K a year in the IRA (just started in 2005), and save about an additional $20K a year.

My allocation (in total) looks like this:

Domestic Large Caps: 40%
Domestic Mid Caps: 10%
Domestic Small Caps: 10%
Foreign Stocks: 15%
Specialty Funds: 10% (RE and a Tech Fund)
Bond Fund (in TSP): 10%
Cash and Individual Stocks: 10%

I also own a townhouse in the DC area that has about $300K in equity. My short to mid-term goals are to have a net worth of $1M by 40 (3yrs), and a net worth not counting the house of $1M by 43 (6 yrs).

Any thoughts on my allocations, goals, or anything else would be welcome. I know this board will be really helpful to me going forward.

 

[Howard]

Your weighting is very aggressive, IMO, and skewed to US Stocks, I personally would be more comfortable with at least a 30% Bond Weighting, some times it is not the Return ON the capital but the Return OF the Capital.

Emerging Markets like India or Latin America are also an opportunity, maybe a 5% weighting??

Just my opinion, not a Professional.

 

[JPatrick]

Welcome Karen.
Take care of that cola'd pension.  These days they are a thing of beauty.
Hard to say much about about your holdings without names, but I hope your 40% largecap  hasn't been in an S&P 500 Index given their 5 year performance.
I'd also say that your overseas funds could be at 30%.
As you seem to have a stomach for sector funds, I'd encourage you to look at the Fidelity energy funds.  The past month has been a little tough, but I suspect the need for energy out of the ground is here to stay.

 

[yakers]

Karen,
You don't have to change a thing. The only things that would be different for me would be I prefer more foreign (I do 20% in the TSP I Fund) and I do more of the TSP/G(bond) Fund but I am 55. I assume the bonds you refer to in your TSP account is the G rather than the F Fund? I currently avoid the F. I also like the Lifestyle funds and I am putting my new contributions into one. If you wanted to simplify you could transfer all your IRAs into the TSP and just pick a Lifestyle fund, I am headed that way. But I like your AA based on your age and it seems an appropriate risk level. Just remember to use the G Fund well for your bonds and carry on.

 

[Spanky]

Here is my calculations:

Present value: $376K
Annual Investment: 24K

1 Mil in 6 years would require a return rate of about 13%.

=RATE(6, -24000, -376000, 1000000)

Good luck

 

[HFWR]

Some thoughts:

Watch your fund expenses...

Maybe lower on US large cap, or at least take a value/dividend tilt;

Add to small cap, maybe small cap value, which has low correlation to large cap;

Add maybe 5% emerging markets, and a bit more int'l;

Dollar-cost average (DCA) into bonds or bond fund, possiby mixing US and foreign.

But I'm not an expert, and don't play one on television...  

 

[mb]

Hi Karen,

My prejudice would be to increase Int'l to 25-30% with 5-8% in Emerging Markets.

Also your allocation adds up to 105%.

MB

 

[kaudrey]

Hi,

Thanks everyone for the thoughts. I didn't know how detailed to go as far as listing individual funds I own, but here are some clarifications:

The $153K in TSP is mostly in the C Fund (which is S&P index), and the rest is in the F Fund. I also own, for large caps, Neuberger Partners and Janus Growth and Income.

I plan to increase my foreign holdings up to 20-25% of holdings. Right now, I own Artisan International and TRP Emerging Market Stock. I'll probably continue buying into those over this year to rebalance.

Small Cap I own an index and Royce Value Plus Investors.

Spanky - thanks for the calculation, but I save more than $24K a year. $15K in 401K + $4K in IRA + $12K directly into brokerage = $31K, and that's just counting the things I do automatically. My savings are probably more like $35K a year. Granted the return I need is still pretty high based on that calculation, but that doesn't take into account the fact that I increase my savings each year by the amount of my pay raises. I know it might be a tough goal to reach, so I thank you for that.

As for my allocation added up to over 100% - oops! In my spreadsheets, I have the mutual funds and stocks separate, so really, the percentages for mutual funds are the percent of all my mutual fund holdings. The stocks are kind of "extra" - once in a while I let myself "play" a little. Although I do own a decent chunk of Pfizer stock right now.


Karen

Thank you all for your input. It gives me some more things to think about.

 

[Howard]

Hang on to your Pfziers, ignore the gyrations, buy on sell offs, hold for at least 25 years, it will make you rich.

I am betting they make a major acquistion, how does Merkpfizer sound.?

 

[Howard]

GLD/NYSE will allow you to hedge as this is a Pure gold holding, should be 10%.

Gold is not increasing in value, the $US is DECREASING, so it takes more $'s to buy an ounce of gold.

The US $ is heading down, spending is at 107% of income, Refinancing is at an alltime high, the only way for Interest rates to go is up, Real Estate will take a hit.

This correction has already started in Australia and in Europe and their economies are in better shape.

I wish i could link the article from the UK's Daily Telegraph on Bernanke, most insightful .

 

[obryanjf]

Howard,

Does a intl ETF hedge effectively against the US$ losing value against a particular currency BR$(Brasil is what I have in mind). I have ILF at 2% of assets and other intl mutual funds at 10% of assets. My expenses may be in BR$ in a year or 2 for about 2 to 4 years. Most of my assets are in US$ and am worried about lower US$ if and when my expenses are in BR$.

job

job

 

[Nords]

Does a intl ETF hedge effectively against the US$ losing value against a particular currency BR$(Brasil is what I have in mind).

No ETFs that I know of. The only mutual fund I'm aware of that hedges currency risk is Tweedy, Browne Global Value (TBGVX), which explains a big part of their 1.38% ER.

Anyone else know of an international ETF hedging its currency?

 

[cute fuzzy bunny]

Your allocations dont look too aggressive or too skewed to me either. At your age and with ~15 years to go towards retirement, about the only word you could use to refer to a higher bond allocation would be "anchor".

Seeing the names of some of the funds, maybe you might look for some with lower expense ratios? Not sure what total offerings you have available to you, but in my old 401k and my wifes current 403b, we had some decent cheaper choices that performed as well or better than some of the really expensive, big name funds...

 

[Spanky]

Your allocations dont look too aggressive or too skewed to me either. At your age and with ~15 years to go towards retirement, about the only word you could use to refer to a higher bond allocation would be "anchor".

She has 10% now. What is the right level of bond? Given the recent returns of bond the last two years and rising interest rates, it's hard to allocate more money into bonds.

 

[Howard]

A properly constructed Bond ladder will allow you to purchase higher rate bonds as others mature, and Yes indeed they are an anchor, something that can come in very handy in a storm.

10% if GLD/NYSE or similar gold Mutual fund, a hedge aaginst US Currency fluctuations and geopolitical storms.

 

[cute fuzzy bunny]

30-40% bonds make a lot of sense when you're already retired and need the income, or if you're well into your 60's.

More than 10-20% for someone in their thirties thats still working is absolutely silly. With a 15 year+ horizon, theres no need to trade high returns for low volatility.

 

[kaudrey]

Thanks everyone. I have been trying to balance expenses by buying more index funds and less managed funds. I generally have an index and a managed for each type (mid-cap, small cap etc), about 1/2 and 1/2 for each kind. Overall my expenses aren't too bad, but there is always room for improvement, so I will definitely keep an eye out.

Cute Fuzzy Bunny (love the name, BTW), I agree with you on the bonds. I actually just increased my stake in bonds last year to get to the 10%, after being less than 5% before that. I am willing to ride the stock market ups and downs, since my focus is long term.

I will be upping my foreign holdings this year to help further diversify.

Thanks for all of your suggestions/reviews. I don't claim to be an expert; and even if my views differ from yours, all responses give me things to think about!

Karen

 

[justin]

Does a intl ETF hedge effectively against the US$ losing value against a particular currency BR$(Brasil is what I have in mind). I have ILF at 2% of assets and other intl mutual funds at 10% of assets. My expenses may be in BR$ in a year or 2 for about 2 to 4 years. Most of my assets are in US$ and am worried about lower US$ if and when my expenses are in BR$.

No ETFs that I know of. The only mutual fund I'm aware of that hedges currency risk is Tweedy, Browne Global Value (TBGVX), which explains a big part of their 1.38% ER.
Anyone else know of an international ETF hedging its currency?

Obryan,

I believe most foreign ETF's hold stocks with values denominated in foreign currencies. Ie - my Pacific index fund holds stocks denominated primarily in Yen (also Aussie $, NZ $, Hong Kong $, a couple others). If the Dollar loses value against the Yen, my Pacific index fund gets more valuable. Each share of stock with a certain value in yen would be worth more, in US dollar terms.

So I'd say, yes, int'l etfs in general act as a hedge in your portfolio against a falling dollar. Foreign currency denominated assets will do well with a falling dollar. As to country-specific hedging, there may be a Brazil fund somewhere that will let you buy Brazil reales-denominated stocks. Or maybe a broader latin america fund with a big concentration in Brazil (they have all had huge run-ups recently, though).

I checked VWO, Vanguard's emerging mkts ETF, and it only has 11% Brazilian holdings.

Another option would be to buy Brazilian currency futures for the time when you need them. Don't know much about the feasibility of that option. Do you Due diligence.

 

[azanon]

I would take the 10% bond and put that into more international stock. You're saving for retirement; make your money work as hard as you do. Why water down your return/address volatility when volatility should be of no concern to you now?

Stocks make your money work the hardest. With a bond, people just take your money and do with it what you should be doing yourself; investing it in a company.

Azanon

 

[kaudrey]

The next question: How much money will I need each year, and how big a nest egg to get there?

I'm estimating what I need based on what I spend. However, I don't really budget, so I'm starting from income, estimating what I save, and assuming I spend the rest. Does this make sense?

$74K Net Income (after 401K max, taxes etc - basically my paycheck X 26):
(16K) Minimum add'l savings in 2006 (4K in IRA, rest is taxable)
=58K "not saved", assume spent.

In reality, I end up saving more, so this is hopefully somewhat conservative. So, based on $58K spending, 3% inflation for 15 years (planned retirement date)would be income need of $90K in the first year.

Nest egg: 90K x 25 = $2.26M.

However, I will get a FERS gov't pension. I'd take deferred retirement at 52 and not start pension until 57 (52 will give me 31 years of service; 56 years 10 months is my MRA). At 57, pension will be about 1/2 my income needs, assuming 3% raises (again, trying to be conservative) until I retire and 3% inflation for the next 20 years.

I did all of that and now I'm not sure where to go from here. Basically I'll need $90K adjusted for inflation in Years 1-5. Starting in year 5, when income need will be about $105K, roughly $55K of that will be a pension (inflation adjusted), so income need = $60K from there until death. How do I adjust the $2.26M to reflect the pension?

And I know I am completely ignoring SS. That's OK. Don't want to have to count on it.

Thanks for any thoughts!

Karen

 

[ats5g]

Hi Karen,

There are a couple of ways to take the pension into account.

1. One is to get find out what amount of $$ will allow one to buy an inflation adjusted pension at 57. You can use Vanguard's Lifetime Income Program for an estimate. Just click on "learn more".

2. You can the TSP's annuity calculator to back into the $$ amount through trial and error. Looks like the $$ amount is around $1,100,000 for a $55,000 infl adjusted pension starting @ 57.

3. Use FIREcalc and enter the pension as a negative number in Withdrawal change 1 starting in year 5.

I'd vote for using #3 because you really want to offset your yearly income needs by the pension first and then do the whole $$ x 25 to get the target portfolio $$ amount needed.

- Alec

 

[grumpy]

Karen,

I'm not sure your current spending is the best starting point for the calculation you are trying to do. It has been my experience that spending in retirement is lower than it was while working. Using Quicken, I found that our spending two years prior to retirement was about $90K and so I planned for our retirement spending to be the same. In fact, other than the one-time costs of furnishing our new house, our spending in the past year was only around $75K. I can't specifically identify which expenses are lower but my guess is that the reduction is attributable to: commuting costs down to almost zero, clothing costs way down, car insurance is lower due to being retired, have time to shop more carefully for best prices, etc.

Using current expenses is probably too conservative and leads to thinking you need a bigger nestegg than you really do.

Grumpy

 

[Helen]

Karen,

I'm curious as to why you would chose the F fund over the G fund ? The rate of returns is not that much different, but the G fund offers much more stability.

I currently have all my TSP money in the G fund as I think the markets are going to tank big time over the next couple of years. That yield curve is very much inverted and there are a lot of other indicators of a market downturn (plus the corn on my little toe always throbs before a crash).

You have a lot of savings for your age - good going !!!

Best of luck,

-helen

 

[kaudrey]

Thanks everyone for you continued suggestions.

atsg5 - Thanks for the calculation tips. I did as you suggested and came up with the same idea - about $1.1M, or 1/2 of what I'd need without the pension. Being conservative, I'd overshoot that anyway before I retired!

Grumpy - thanks. I know you are right - I live in an expensive area (DC) and have a big mortgage, high commuting costs etc, but I have several reasons for doing this: although I am aggressive in my investments, I am conservative in my thinking about retirement. I got this from my Dad. They didn't retire until he was convinced they would never run out of money (and did it at 57). I want to be able to sleep at night, and not worry about money. Also, I plan to travel alot when I retire. I travel quite a bit now, but with more time on my hands, I expect my travel budget to increase.

Helen - you are the second person who has asked me about the F fund, and suggested I use the G fund instead. Honestly, I don't have a good answer. It is a small portion of my portfolio, and actually will be decreasing in % of total because I am no longer contributing to it - I am allocating more money to the I fund as I an increasing my overall International holdings.

Other note: someone asked me about expenses - my weighted average expense ratio is .37%. I am 75% in index funds and 25% in managed funds. Since TSP makes up 40% of my portfolio, the expense ratio stays low. All of my managed funds have expense ratios lower than the average for their category.

The 1 fund with an expense ratio I don't like it FBRTX (FBR Large Cap Fund), but it only makes up 1% of my portfolio anyway. I'm thinking of just ditching it. It's made me a little money, but I don't really need the fund.

 

[kaudrey]

Hi everyone,

Well, I've made some adjustments and I have more specific questions. I have about 3% of my portfolio in T Rowe Price's Emerging Market Stock Fund (PRMSX). It is in an IRA. I want to up my allocation to emerging markets to 5%, and I have the cash to do that, but then I was thinking that I should put the entire 5% in an Emerging Markets ETF instead.

PRMSX has an expense ratio of 1.27%, and with Schwab I pay a small commission on it when I trade.

I didn't originally go the ETF route because I thought I'd buy in small increments, but now I believe I'll just buy a bunch and then rebalance once a year.

So, do you think I should sell PRMSX and buy an ETF instead?

My choices seem to be: Vanguard Emerging Market VIPERS, iSHAREs MSCI Emerging Market Index, and BLDRS Emerging Mkt 50 ADR Index. Is there much of a difference between these?

I don't currently own any ETFs but feel like I should be researching them more...

Thanks,
Karen