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Asset allocation in taxable accounts
Old 04-27-2014, 01:24 PM   #1
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Asset allocation in taxable accounts

Looking for some opinions regarding rebalancing a portion of the portfolio. Spouse and I will RE this year at age 61. Have pension income of about $75 K (with a 2% fixed cola) between the two of us, and want to pull another $40 K annually from investments for 5 years or so until we take social security at FRA.

Portfolio as a whole is 65% equities and 35% fixed income. I sleep just fine with that allocation. However the taxable account portion of that is at about 85% equities/15% fixed. (Tax deferred is like 57/43.)

Here's the question; Since we would prefer to take money for the next few years from the taxable accounts, should I be making the allocation of the taxable accounts quite a bit more conservative? Financial guy (who I assume would make some dollars if I jumped into doing a bunch of reallocation now) doesn't seem to think so. I guess we have a number of alternatives if the market tanks immediately when we retire...everything from cutting expenses to taking money from deferred accounts, to taking SS early, to going back to .....

I don't generally worry much about investments... But I keep coming back to this question. Would appreciate thoughts and ideas from the smart folks here.

Thanks in advance.

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Old 04-27-2014, 01:42 PM   #2
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How do you plan on taking money from the taxable 85/15 account? And how much?

If you need to withdraw enough that you'll be doing significant selling of equities, I'd start rebalancing to a more conservative position now.

If you only need to withdraw the dividends from the 85% equity portion and the composition is comprised of relatively stable, blue chip firms and funds, I'd say you're fine.

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Old 04-27-2014, 02:17 PM   #3
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What percentage of your portfolio is the $40k? If it's 20%, move it all to fixed income now or you may fall short if the market goes down. If it's 2%, I see no particular problem.

You have access to all your accounts at age 61, so the AA in the taxable account is not critical. If you don't want to draw from the tax deferred account, you can sell an equity in your taxable account, sell some fixed income in your tax deferred account, and use that tax deferred cash to buy the same equity in your tax deferred account. The result is that you sold some fixed income for living expenses and didn't touch your equities. So AA in either account separately is not a big concern. Do be careful about wash sale rules if you sell shares for a loss in your taxable account.

You may also want to sneak a little bit out of your tax deferred account at a low marginal tax rate before SS kicks in and you have to start taking RMD's. Maybe filling up the 15% tax bracket.

If you will be close to using all of your taxable accounts and withdrawing from tax deferred must be avoided for some reason, then you might go to a more conservative AA in taxable accounts just to make sure the total amount you need will be available.
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Old 04-27-2014, 02:45 PM   #4
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Currently we are drawing down from our taxable accounts, ~4%, and I have it at 35% equities, 50% bonds and 15% I-Bonds. Over the next 3 - 4 years I expect that will move to 50% equities before SS and a pension become available.
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Old 04-27-2014, 09:45 PM   #5
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We draw from our taxable accounts which are all equities. I look at AA across all accounts (taxable, tax-deferred and tax-free).

When we need cash I sell stocks in the taxable account to generate cash and then sell bonds and buy stocks in the tax-deferred accounts as needed to rebalance back to our target AA. Since we keep out taxable income just under the 15% tax bracket, any capital gains on the taxable account stick sales are tax-free for federal purposes.

I don't care what the AA within taxable, tax-deferred or tax-free is other than positioning for tax efficiency.
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Old 04-28-2014, 04:13 AM   #6
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I would be invested tax efficiently in taxable. That would mean 100% equities for me, but for you you could have some mix. What is important is your overall asset allocation across all accounts and asset location in order to reduce your income taxes. Furthermore, what you sell in order to withdraw cash is also important.

Here are some things to read from the bogleheads wiki:
Placing cash needs in a tax-advantaged account - Bogleheads one can sell equities whether high or low in taxable and rebalance in tax-advantaged if needed

Principles of tax-efficient fund placement - Bogleheads

What about conversion to Roth IRA?

How about using something like Retirement Calculator - Parameter Form to help decide which accounts to withdraw from in which order and what Roth conversions amounts to make? Confirm with tax software such as TurboTax.

And one more from Rick Ferri: Bogleheads • View topic - Asset location strategies for taxes are OK; but not great
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Old 04-28-2014, 06:48 PM   #7
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Thanks. I haven't thrown a lot of questions out on this forum since I started lurking...but the few times i've done so have been great this one, for example.

To answer a few of the questions - the 40 K is around 5-6% of portfolio. So a fairly stiff withdrawal for the next few years, but we think it will be ok. Withdrawals pretty much go to nothing once SS kicks in. I think I'm hearing that paying attention to my overall allocation is the important metric...and depending on market, I may need to do some adjustments in the deferred accounts to keep that allocation where I want it over the next few years as we draw some funds out of taxable. I can figure out how to do that!

Thanks all...very helpful.

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