2 Year Glide Path - Moving Money Around in Prep

[Ed B]

So I am 24 months out from RE if markets are kind to me. I will be 59 and DW will be 58. About 74% of retirement revenue before my SS is from non-COLA pension. I am currently saving 22% of income in 401K counting company match. I will have access to company retiree health and I will need to draw from my assets to bridge from ER to starting my SS. My wife is on SSDI and will be medicare eligible March 2018, so my health insurance needs will be for me and DW's supplemental coverage(s).


But one of my nagging concerns with our 401K is the horrible investment choices. The only ones that are Morning Star 4-star or better are an S&P 500 Indexed Equity Fund and our company stock which has done VERY well, but is very risky. The Target Date Funds are ranked 1-star and 2-star by Morning Star. The Index Bond fund has dropped from 4-star to 3-star and has been getting murdered for over a year. The various International Funds are bad, and even the TIPS fund and other "safe" funds other than Stable Value are bleeding money. I need some growth to reach my target by June 2019 but I also don't want to be so exposed to risk that I get destroyed by a 2008 type event in 2018 or 2019 leading up to ER.


So I finally signed up for the Self-Directed Brokerage Account option in our 401K plan which uses TD Ameritrade. After studying the Vanguard W's for several months for my Mother, I decided to use one of them as a defensive position that will still make "something", and put the rest in mostly equities to reach a ~60/40 AA. Even after reading a lot here, reading many artciles, running FireCalc & i-ORP over and over I am still definitely experiencing that tension between regret over missed opportunity and "Putting it all on Red".

Before setting up the SDBA I had re-balanced my funds to this for several months and was investing in Stable Value with 4% going into LMT each week.

S&P 500 - 25%
TD 2030 - 25%
Stable Value - 25%
LMT - 25%

After setting up the SDBA my allocation looks like this:



I have already learned that I have to look at funds like Wellesley totally differently. Its big increases will come quarterly and end of year so I need to get distracted and stop looking at it. But even at that, it is doing more than the Stable value fund did. The thing that convinced me on Wellesely as a defensive position is had I invested in 2007, reinvesting all dividends and CGs, I will have lost %% and recovered with a few % to the good in two years. Wellington was pretty good but not that good defensively. I compared several other high dividend MFs and ETFs and came away with Wellesley as a good choice for this investment tactic.

As you can see I did decide to "put some on red and let it spin" by investing in VGT and FTEC. The latter was leftover cash. I could get hurt here but I feel good about that the IT sector. And since they are ETF's, if things go bad I can decide to let it ride or sell quickly if I feel the need.

I left some money in the 401K's native S&P 500 Indexed fund. It is the one fund that doesn't suck aside from company stock. I also put 13% in High Yield Bonds in the native 401K (represented by Vanguard's symbol) but I am not crazy about that. And as you see I also have 13% in LMT. I sold half of it and moved those funds to the SDBA, but keeping even 13% in an individual equity is risky leading up to ER. But it has done so well that it could drop $15/share and I would still be thousands ahead. I will be watching it closely and monitoring POTUS tweets and the impact that may have, but as of this moment I am playing with house money with LMT.

I don't suppose I have a defined question, but I invite comments, warnings, and suggestions.

[pb4uski]

What does your stable value fund pay for interest?

[Ed B]

Quote:

Originally Posted by pb4uski What does your stable value fund pay for interest?

The plan information doesn't specify a set amount but this is what it shows after they reshuffled the fund last month. They back-fill what it WOULD have earned based on the allocations. I don't know if that is common, but we noticed this a couple of years ago and talked to the plan administrators to confirm.

[pb4uski]

That looks like about 1.8%/year... not too bad given no interest rate risk or credit risk (other than counterparty risk of the insurer wrapping the fund). If I had access to something like that I think it woudl be the core of my fixed income holdings (my employer's 401k had no SV fund so I did a rollover to a tIRA.

[Osprey]

I am in a similar situation trying to figure out what my asset allocation should be in the red zone, potentially 2 yrs from retirement unless I end up doing OMY. I am struggling with whether I should let my risk capacity (portfolio could lose significant value and my withdrawal rate would still be less than 4%) or my psychological capacity to retire if my portfolio takes a significant hit lead. Right now I'm at 50/50 based on fear that a big loss might impact my mindset on retiring. But wonder if I should be closer to 60/40 to capture more gains since I can afford to have more at risk.

How did u select 60/40?

[Ed B]

Quote:

Originally Posted by Osprey ..... How did u select 60/40?

On paper 60/40 or 65/35 is how I plan to have my investments allocated in retirement. I am curious to see what the new normal with Bonds will be going forward, or are we already seeing the new normal with very low interest for high quality bonds?

I feel better about bonds in a fund like the two W's because they have a strong history of managing their respective funds. Once I actually do retire I feel like I can take a longer term approach. But being in the home stretch has me cautious while needing growth beyond what I contribute. Still, the markets may not cooperate.

I figure I need about 7% annual investment return over the next 24 months in addition to what I will contribute in order to reach my goal. I can RE if I fall a little short but would probably hang around a little longer if I fall short.

[Ed B]

Quote:

Originally Posted by pb4uski That looks like about 1.8%/year... not too bad given no interest rate risk or credit risk (other than counterparty risk of the insurer wrapping the fund). If I had access to something like that I think it woudl be the core of my fixed income holdings (my employer's 401k had no SV fund so I did a rollover to a tIRA.

That 1.8% is deceptive. Two months ago that same chart would have shown <1.0% across the board. It didn't lose money but the only movement was the weekly contribution. I am glad they reshuffled the fund so it would have made money and maybe will make a little going forward.

[rayinpenn]

Quote:

Originally Posted by Ed B I figure I need about 7% annual investment return over the next 24 months in addition to what I will contribute in order to reach my goal. I can RE if I fall a little short but would probably hang around a little longer if I fall short.

No one can say what the next 2 years will bring but when I read your story that "70% of my income comes from a non cola pension". I'd be very concerned about inflation. How much of your expenses have you fixed .. like owning a home -- new cars etc.

[DrRoy]

After 30 or so years of trying to beat the market in various ways, I have gone nearly total indexing. I personally would put the VGT, LMT, and FTEC into the 500 index. Did you know that tech is the largest sector in the 500 at 22.5%? You will still have plenty of tech. I also recommend reading "Your Money and Your Brain" by Jason Zweig.

[MooreBonds]

Quote:

Originally Posted by pb4uski That looks like about 1.8%/year... not too bad given no interest rate risk or credit risk (other than counterparty risk of the insurer wrapping the fund). If I had access to something like that I think it woudl be the core of my fixed income holdings (my employer's 401k had no SV fund so I did a rollover to a tIRA.

Or even if you want to roll it out, I would suggest reading the plan literature and see if you can leave just a little in there ($1,000 or so), so that when interest rates finally return to "normal" (which has been forecasted to happen every year for the past 7 years), you might transfer funds back in there as a fixed income holding if the stable value fund pays a bit more in interest at that later date.

But check your plan literature to see if you can transfer funds into the account after you leave your employer - some plans allow that, some don't. And also remember that companies do change plan providers. What is a good/bad stable value fund today with provider X could be a different good/bad yield fund with provider Y down the road.

And also check plan costs - more and more companies are sharing the costs of the 401k plans with the participants. There might be flat rates, or as a % of assets, or a tiered charge for the fund and/or the 401k plan account based on your balance.

[Ed B]

Quote:

Originally Posted by rayinpenn No one can say what the next 2 years will bring but when I read your story that "70% of my income comes from a non cola pension". I'd be very concerned about inflation. How much of your expenses have you fixed .. like owning a home -- new cars etc.

Thanks for the response.

I agree that inflation has to be accounted for. Once I start SoSec about 90% of income will be covered by pension and SoSec. At that point I intended ease up on my assets as a revenue stream but it will be used to provide cost of living increase to keep up with inflation where it hits us.

I have accounted for house P&I and tax/insurance, car, and every expense we can find along with an emergency fund for big break/fixes.

[Ed B]

Quote:

Originally Posted by DrRoy After 30 or so years of trying to beat the market in various ways, I have gone nearly total indexing. I personally would put the VGT, LMT, and FTEC into the 500 index. Did you know that tech is the largest sector in the 500 at 22.5%? You will still have plenty of tech. I also recommend reading "Your Money and Your Brain" by Jason Zweig.

Thanks for the response. I may do that. I plan to take a more passive approach once I retire, and especially once I start SoSec. I would use one of the W's for dividends and probably put the most of the rest in an Index Fund. I know I am terrible at timing the market and I have lost a lot by being over cautious in the past.

Right now I am at the point where I can see the finish line, I know what I need to reach it and I am hoping I don't trip over something causing me to delay reaching as soon as I would like. Honestly, even if the markets turned flat for the next two years it really just means I would need to w*rk one extra year. That gets me closer to SoSec, which means I don't have to pull out as much from assets to bridge until SoSec, and I figure the $$$ would net out OK. But I would miss one more year of retirement.

[Ed B]

Quote:

Originally Posted by MooreBonds Or even if you want to roll it out, I would suggest reading the plan literature and see if you can leave just a little in there ($1,000 or so), so that when interest rates finally return to "normal" (which has been forecasted to happen every year for the past 7 years), you might transfer funds back in there as a fixed income holding if the stable value fund pays a bit more in interest at that later date. But check your plan literature to see if you can transfer funds into the account after you leave your employer - some plans allow that, some don't. And also remember that companies do change plan providers. What is a good/bad stable value fund today with provider X could be a different good/bad yield fund with provider Y down the road. And also check plan costs - more and more companies are sharing the costs of the 401k plans with the participants. There might be flat rates, or as a % of assets, or a tiered charge for the fund and/or the 401k plan account based on your balance.

Thanks for the suggestion. I can leave money in Stable Value when I retire. >90 days before I retire I can move money to Stable Value and take distributions. If I move money to SV... say... 30 days before I retire I would have to wait 60 more days before I could take a distribution. I don't know if I will use the SV fund that way but I have checked on it and know that it is an option. I can choose to leave all, some or none of my money in the 401K and its various funds including the SDBA when I retire. And I can move the money around between the funds with some timing restrictions for SV and TIPS.

Before I opened the SDBA this late in the game, I read up on our plan literature and spoke with a Voya rep that handles our accounts. What I cannot do is take distributions or roll out funds directly from my SDBA. If I want to take out money from funds in the SBDA I must sell those shares, move them to a 401K core plan and then I can take distributions and/or roll them over. But if I like what a fund is doing in the SDBA I can leave it alone after retirement. That was one of my biggest concerns when I looked into going this route. If I retired at a time when selling would be bad either because of a major drop or it was doing so well I wanted to leave it alone, I wanted to make sure i had the option to leave those funds in place after retirement.

About plan costs, my megacorp was sued over the high fees and hidden costs in our 401K several years ago. They lost or settled the suit. We all got a nice bump as part of the settlement. They changed up fund choices and for the most part our funds are very low fee now even if they are poor performers.