Asset Allocation Strategies in Retirement

[RoadRunner7]

Another Newbie Question:

As I plan on retirement I would like your feedback on what I read about dealing with asset allocation and spending in retirement. I read this in a book and how to best utilize my investments and yearly spending.

Does this sound reasonable? On the surface it made sense to me but I'm asking here for your thoughts

Have a Stock Fund and a Bond Fund. (say around 50/50)
Have a Short Term Bond fund with 2 year’s worth of spending.
Have a standard Savings/Checking account with 2 year’s worth of spending.

Theory is that if the Stock Fund or Bond fund go down, you take more from the Saving or the Short Term Bond fund while hopefully the Stock and Bond fund recover and come back. If the Stock and Bond Funds have good years, then take from those funds and rebalance.


Thanks for your time and your feedback

 

[pb4uski]

This is what is commonly referred to as a bucket strategy.

I considered it, but it ultimately came back to my 60/35/5 AA anyway... besides, I'm not keen on making the judgement as to when a decline in bonds or stocks is sufficient to tap the buckets vs not.

For me, it is a lot easier to just have a 60/35/5 AA and rebalance as needed. Also, rebalancing will prompt me to buy equities when they are low and sell when they are high and there is nothing wrong with buy low, sell high.

 

[OldShooter]

Rules of thumb are often one size that fits none.

Consider two identical widows, 70 YO, whose mothers lived to 95. Both are living on social security supplemented with savings. There are plenty of rules of thumb that will tell them what their AA should be simply based on age.

Now add this: One widow has $200k in investable assets. The other has $10M. Should they have the same AA? Of course not. The poor widow needs to be very conservative, maybe even 0/100. The rich widow has far more than she will ever need, so is really investing for her heirs and charity beneficiaries. For her, maybe 90/10 is more appropriate.

The strategy you describe is often called a "bucket" strategy and IMO it's a good one. But the size of the buckets will lead to an AA number. You don't start with an AA when you do buckets. Further, the resulting AA number is an item of curiosity and not a guide.

Bucket strategies might be a good way for the widows to approach their planning. A fixed AA based on age certainly isn't.

 

[flintnational]

OP, not a bad strategy, but as others have mentioned it may be to generic and not account for your personal situation and risk tolerance. I would suggest Bill Bernstein's book, The Four Pillars of investing: Lessons for building a winning portfolio.. In the book the author discusses a range of asset allocations based on various circumstances.

 

[VanWinkle]

Your plan is very much the one I am currently using. It is not a bucket strategy, but a 50/47/3 allocation. I have 50% stocks, 43% intermediate bonds, 4% short term bonds for living expenses, and 3% cash in a 2% rewards checking that I replenish with the short term bond fund.

This is not bucketing, but just a method of transferring money from a balanced portfolio to living expenses. It happens to give my a 2 year cushion of living expenses in case I need to leave the rest of the portfolio alone.

The bucket method takes a portfolio and uses a step-down to replenish each bucket as the money is spent.

My 2 year cushion is to get to my FRA for SS which will eliminate the need for portfolio withdrawals for living expenses.

VW

 

[RoadRunner7]

Thanks for the feedback...I ordered the Book flintnational recommended and also the Boglehead's book on investing.

One more question, kind of off the direct topic...

I was told that the inheritance I will be receiving, the estate will be liquidated and taxes will be paid off the top and the beneficiaries will each be cut a check to do what they want with it. I was told because taxes are paid off the top, so to speak, I can do what I want and not worry about taxes at that point...But what about if I invest in a IRA and then start withdraws in a few years, won't those withdraws be taxed again? (or just capital gains?)

Still learning...Thanks

 

[ncbill]

Thanks for the feedback...I ordered the Book flintnational recommended and also the Boglehead's book on investing.

One more question, kind of off the direct topic...

I was told that the inheritance I will be receiving, the estate will be liquidated and taxes will be paid off the top and the beneficiaries will each be cut a check to do what they want with it. I was told because taxes are paid off the top, so to speak, I can do what I want and not worry about taxes at that point...But what about if I invest in a IRA and then start withdraws in a few years, won't those withdraws be taxed again? (or just capital gains?)

Still learning...Thanks

You need earned income to contribute to an IRA (traditional or Roth)

Any inheritance would be unearned income.

 

[RoadRunner7]

You need earned income to contribute to an IRA (traditional or Roth)

Any inheritance would be unearned income.

Thanks so what does this mean? I thought I could take the inheritance and open an IRA with the inheritance I receive?

 

[VanWinkle]

Thanks for the feedback...I ordered the Book flintnational recommended and also the Boglehead's book on investing.

One more question, kind of off the direct topic...

I was told that the inheritance I will be receiving, the estate will be liquidated and taxes will be paid off the top and the beneficiaries will each be cut a check to do what they want with it. I was told because taxes are paid off the top, so to speak, I can do what I want and not worry about taxes at that point...But what about if I invest in a IRA and then start withdraws in a few years, won't those withdraws be taxed again? (or just capital gains?)

Still learning...Thanks

You can start by contributing the maximum (5500) for you and your spouse(5500) to a Roth IRA. You will never be taxed on that money or the earnings under current tax law. Then I would max out my deferred (401K) or IRA to shield the maximum amount from current income taxes. This advice is based on a tax rate of over 12% for 2018. In the 12% tax brkt, I might just maintain a brokerage account as you will not pay taxes on the qualified dividends as you reinvest them for future growth. Do the Roth no matter what your tax brkt.

Best wishes,

VW

 

[audreyh1]

Thanks for the feedback...I ordered the Book flintnational recommended and also the Boglehead's book on investing.

One more question, kind of off the direct topic...

I was told that the inheritance I will be receiving, the estate will be liquidated and taxes will be paid off the top and the beneficiaries will each be cut a check to do what they want with it. I was told because taxes are paid off the top, so to speak, I can do what I want and not worry about taxes at that point...But what about if I invest in a IRA and then start withdraws in a few years, won't those withdraws be taxed again? (or just capital gains?)

Still learning...Thanks

The earned income you can put in an IRA has nothing to do with money received from an inheritance.

 

[audreyh1]

You can start by contributing the maximum (5500) for you and your spouse(5500) to a Roth IRA. You will never be taxed on that money or the earnings under current tax law. Then I would max out my deferred (401K) or IRA to shield the maximum amount from current income taxes. This advice is based on a tax rate of over 12% for 2018. In the 12% tax brkt, I might just maintain a brokerage account as you will not pay taxes on the qualified dividends as you reinvest them for future growth. Do the Roth no matter what your tax brkt.

Best wishes,

VW

As long as it is earned income. They can’t contribute to a ROTH if there are no wages or self-employment income.

 

[VanWinkle]

As long as it is earned income. They can’t contribute to a ROTH if there are no wages or self-employment income.

Thanks for the clarification audreyh1! My mistake to assume he/she was still working and had earned income. His original post did not make that clear.

VW

 

[RunningBum]

Not trying to be mean to RR7, but I think you lack a basic understanding of all this, especially given the IRA/inheritance concept. Getting advice a little at a time here is probably dangerous, especially since you are trickling out details like your inheritance and nobody really understands your situation.

Do your reading. http://www.early-retirement.org/for...reading-list-with-a-military-twist-46732.html has more sources. I'd also suggest an hour or two or more with a financial advisor to discuss your situation and what to do. Find one that charges per hour, not based on a % of assets.

You are welcome to ask questions here, but the more you know, the better you will be able to ask reasonable questions and get helpful answers.

 

[audreyh1]

Thanks so what does this mean? I thought I could take the inheritance and open an IRA with the inheritance I receive?

Nope.

Only money you earn by working can go into an IRA, and there are limits as to how much can be put in each year.

 

[rayvt]

Have a Short Term Bond fund with 2 year’s worth of spending.
Have a standard Savings/Checking account with 2 year’s worth of spending.

It happens to give my a 2 year cushion of living expenses in case I need to leave the rest of the portfolio alone.

Are you planning for just 2 years, or a lifetime?

All this is doing is spending money from your portfolio ... with a 2 year lag. What have you gained?

 

[VanWinkle]

Are you planning for just 2 years, or a lifetime?

All this is doing is spending money from your portfolio ... with a 2 year lag. What have you gained?

Gained 2 years- and slept better due to the 2 year cushion. You sleep your way, I'll sleep my way.

 

[Gumby]

You sleep your way, I'll sleep my way.

Just don't hog the covers.

 

[VanWinkle]

Just don't hog the covers.

 

[RoadRunner7]

I should have said Mutual Fund instead of IRA...I mixed up my words...I was in a bit of a fog yesterday...Sorry

I do plan on talking with a Financial Advisor and will be reading a few books.

 

[pb4uski]

Yes, you can take your inheritance and invest it in a taxable account in mutual funds... depending on your other income streams and how you invest it the tax rate could be 0% or 15% or the same rate as on ordinary income.

Equity fund dividends are generally qualified income, as are long-term capital gains... those are generally taxed at 0% or 15% depending on your total income. Bond fund dividends and short-term capital gains are ordinary income and taxed at ordinary tax rates just like earned income.