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02-23-2015, 09:04 AM
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#1
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 317
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AA adjustment question.
Hello, I have RE'd with no current intentions of going back into the rat race. I have approx. 25 times expenses in a mix of taxable, 401K and Roths. My current AA is close to 90/10. The majority is with Vanguard, a small amount with a FA that I will be drawing down first. This account should provide 4 to 5 yrs of expenses.
I need to move to a much more conservative AA, probably around 60/40, I think. My questions, How would you go about the adjustment? My stock allocation has done well but bonds seem fairly high priced, to me. Should I just make the move or maybe take some of my gains and park in a MM waiting for bonds to become more attractive?
I assume the increased bond allocation would be best done in an IRA and not in my taxable accounts. I'm sure, I've muddled up this post. Please ask any questions you'd like & let me know your thoughts.
Thanks for looking!
Murf
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02-23-2015, 10:39 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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The only time I would abruptly change the AA is when your circumstances abruptly change. Retiring is a good reason to do a quick AA change. I'd go ahead and shift to 60/40 now, if that is where you want to be. You can fudge the bonds by using an online savings account or CD's or very short bonds if you really don't want them, but get the equities on target.
Look at how your taxes would run if you had bonds in taxable or tax deferred/free, including taxes for whatever would be in their place. There is a balance between growth/inflation (capital gains) and income (dividends, interest) that you need to hit. You don't want to short-change growth in your tax deferred accounts. But depending on your income level, capital gains may not be taxed, or dividends may be lightly taxed. Most likely this is a secondary concern.
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02-23-2015, 12:11 PM
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#3
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 317
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Thanks Animorph! I should have mentioned that we will be in the 15% tax bracket through out retirement.
Sent from my SCH-S968C using Tapatalk
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02-23-2015, 02:51 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,373
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I think that 60/40 is more appropriate for a retiree than 90/10. In fact, 60/40 is what I target.
Given that the market is at new highs, it probably isn't a bad tome to pare back your equity exposure. If your tax-deferred accounts exceed 30% of your total, then you can just make the 30% adjustment in your tax deferred accounts by selling equities and buying fixed income without triggering any capital gains.
A second order issue is what to go into. Many of us are concerned about interest rate risk associated with conventional bond funds, that will tend to decline in value as interest rates increase. That said, there has been an expectation of higher interest rates for a number of years now.
So as you go from 10 to 40, try to stay with less interest rate sensitive products.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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02-23-2015, 04:28 PM
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#5
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Recycles dryer sheets
Join Date: Jul 2013
Posts: 317
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Thanks pb4uski! Would you consider VBILX as an appropriate place for the near future?
Murf
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02-23-2015, 07:12 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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The Risk Of Short-Term Bond Funds
That may be a little after the fact - looking in the rear view mirror. But I keep the bulk of my fixed income in intermediate term diversified bond funds. I do have 5% in cash, and 5% in short-term bond funds, but most of it (37%) is in intermediate bond funds. They did fine in 2013, they also did fine in 2004-2006 which had a lot of interest rate increases.
When the Fed raises rates, sometimes it affects short-term rates but causes long rates to drop. That could happen again, especially if the economy slows as a result. The yield curve is quite steep. To me that means it's "crowded at the short end" - i.e. a lot of investors have piled into short-term bonds seeking safety, and thus driving short-term rates down, and making them expensive relative to intermediate bonds.
I know that I'll be holding those intermediate bond funds for decades, so the 4 to 6 year duration is well under my holding period. Even if they fall behind at some point (which is often quite temporary), the funds will eventually "catch up" and in the mean time I'll be rebalancing in from other asset classes.
Also I believe that any long term rise in interest rates will be very, very, very gradual.
At these levels I think it's hard to argue that bonds are more overvalued than stocks.
__________________
Retired since summer 1999.
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02-23-2015, 07:32 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,373
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Quote:
Originally Posted by Murf2
Thanks pb4uski! Would you consider VBILX as an appropriate place for the near future?
Murf
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The duration of VBILX is 6.4 years, much longer than I would like. VBTLX (Total Bond) has a duration of 6 years and that is long for me. Not a lot of good choices out there.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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02-24-2015, 11:09 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Jul 2013
Posts: 1,884
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Quote:
Originally Posted by Murf2
I need to move to a much more conservative AA, probably around 60/40, I think. My questions, How would you go about the adjustment? My stock allocation has done well but bonds seem fairly high priced, to me. Should I just make the move or maybe take some of my gains and park in a MM waiting for bonds to become more attractive?
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Don't try to time the market or interest rates. Choose an AA that is appropriate for your risk tolerance and be done with it.
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02-24-2015, 11:28 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2006
Location: Houston
Posts: 4,337
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I have 45% in equities. I have 55% primarily in laddered CDs.
I'll be repositioning assets as my deferred compensation and 401k get rearranged with my retirement in 2 days.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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02-24-2015, 04:53 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
Location: west coast, hi there!
Posts: 8,809
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At 90/10 you've had a good ride in recent years. AA answer depends on your income sources, your intended spending rate, etc. Assuming you are kind of like the average retiree here, best to get the AA into the 60/40 range ASAP. Financial assets are not bargains like in 2009 so not obvious decision but when is it obvious?
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02-24-2015, 05:44 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Texas
Posts: 3,024
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You mentioned a 401K. If you have a stable value fund available (low interest rate sensitivity), that might be a good place to park your proceeds from equity sales and wait for a more attractive entrance point on bonds, probably late this year. I would have some reservations about moving 30% of my portfolio into bonds right now, especially all at once. If no stable value, I'd probably move in small increments, trying to be opportunistic when stocks are up and bonds are down. Others say don't try to time the market, and that's sound advice. But I've been in a situation like yours before, and I always felt more comfortable moving slowly rather than making abrupt changes in the portfolio.
__________________
Retired at 52 in July 2013. On to better things...
AA: 85/15 WR: 2.7% SI: 2 pensions, SS later
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