Asset alocation with pension

D

dm

Full time employment: Posting here.
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Mar 15, 2005
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Punta Gorda, FL
As I posted earlier, I plan to retire this summer with my wife working full time one more year. I plan to roll my 401k into a IRA and she will receive a pension. She teaches a 3hour class at the local college and will continue to do this as she enjoys it.

I currently have the following American Funds in my 401K. About 250K.

Investment Co. of America 40%
New Perspective 30%
New Economy 15%
Smallcap World fund 15%

In my taxable account I have 100K with 70% stock and 30% bonds/ fixed. I should have another 35K or so by summer.

Our home is paid for and we have no debt. We could also downsize our home and probably put 100K in our pocket.

With the pension and part time work we should be fine. I'll be 50 this year and she is 46. I am currently with TD Ameritrade and I have a small IRA there and my thinking is to roll the 401k into that.

We shouldn't need the 401K/IRA money for 10yrs or more and thats only when the wife deceids she dosn't want to put in the 3hrs a week for two semesters per year. She makes $5000 per year.

Ive went over our budget and we need $26,000 to pay our bills. This would be our bare bones budget though. $58,000 is more in line with what we are spending now. Her pension will be $54,000 and does have a cola and survivor benefits. I'm assuming 15% taxes.

I should have around 385K to invest. $250k tax defered and $135K after tax. Im thinking of keeping around 35K in bonds/fixed in the after tax account but not sure how much I should put in the IRA. I can just keep the American Funds, but Im thinking of just buying a mix of ETF.

Any idea's. Should I even consider buying more bonds?
 
Thanks for the link, MB! My two cents (and worth about that much...) I have a pension that I consider to be the "bond" portion of my retirement planning, and as a result almost all the rest of my investing is in stocks and real estate. Good luck! Katie
 
A couple of items to consider: Most pension plans don't allow retirement until at least age 50 and some much later than that. Your wife being 46 .... Your current age (49) is also a important factor as you can't touch your IRA money until age 59 1/2 without paying a significant penalty in addition to state and federal income taxes (10% federal and several percent state) until you reach at least age 55. At 55 you can start substantially equal withdrawals based on your anticipated life expectancy per IRS guidelines.
 
Any income stream coming in or permanent reduction in spending going out can be considered a "bond" in a portfolio.

You can take more volatility in your investments if you have regular income to offset some spending; same thing if you dont need to take as much to service your spending needs.

A really important fine point that often goes unnoticed or is avoided because its considered "too complex".

And a serious linchpin in decisions like when to take annuities, pensions, social security, or phase out loans/mortgages/the second home/etc.

Even a smaller, higher equity portfolio coupled with an income stream or reduced debt spending can create higher returns than a larger, more balanced, higher bond component portfolio in the absence of the income stream or presence of a higher spending demand needing monthly service.

More potential volatility to be sure...so you have to be able to 'take' that...

but the numbers make sense... ;)
 
Thanks for the links. So it looks like some count their pension as a bond and some as just a reduction in income needed. In one of the links it mentioned that you cant dip into the principle or sell the bonds, you also can't leave it to your kids. This makes more sense to me.

Maybe I'll just go with a fairly high stock allocation with the money I have to invest. Something like 85/15. If I put 15% in my after tax account I should have enough to get by on from the interest alone. And if something came up I still wouldnt have to start selling stocks right away. If the market did good I'm sure we could always increase our spending some. And there's always Social Security.
 
Some claim that past 80% you take on more volatility than the excess returns would warrant, and below 20% bonds you take on less returns than the reduced volatility buys you. But there are dissenters to that opinion that can show ways to avoid the dampening effect. The difference between 80 and 85 is probably not that big of a deal either way.
 
rogerc1944 said:
A couple of items to consider: Most pension plans don't allow retirement until at least age 50 and some much later than that. Your wife being 46 .... Your current age (49) is also a important factor as you can't touch your IRA money until age 59 1/2 without paying a significant penalty in addition to state and federal income taxes (10% federal and several percent state) until you reach at least age 55. At 55 you can start substantially equal withdrawals based on your anticipated life expectancy per IRS guidelines.
Click to expand...

She only needs 25 years in the pension in order to retire. We actually bought 3yrs in order to bring her up to 25. She is going to work one more year so she will be 47 when she retires with 26 yrs of service. The plan is offering an early out till July 08 that does not include a reduction because of her age. If she dosn't retire in 08 she will have to work 4 more yrs.
 
Cute Fuzzy Bunny said:
Some claim that past 80% you take on more volatility than the excess returns would warrant, and below 20% bonds you take on less returns than the reduced volatility buys you. But there are dissenters to that opinion that can show ways to avoid the dampening effect. The difference between 80 and 85 is probably not that big of a deal either way.
Click to expand...

Im still thinking this out. Ive still got a while and just starting to think this through. Also I'd like to just draw out of the taxable account for 10 yrs and not worry about the 72t deal. 20% bonds with most of that in the taxable account should throw off just about enough to get by. Then if something came up that I needed more, I could sell bonds or stocks depending on how the market was doing.

I can always find something to spend more on if I find the portfolio growing to much. And there is always Social Security (maybe).
 
I have a very small pension that I can turn on in a couple years. I looked up the present dollar amount needed to create an annuity with the same payments on immediateannuity.com and Vanguard's site.

I'm close enough now that I'm figuring in the present value dollar equivalent of the small pension into my allocation percentage, as far as if/when to rebalance. If I would have figured out how much PV there was sooner, I probably would not have rebalanced the last time.
 
And you can reinvest excess income.

Thats the awful position I find myself in on a regular basis.

And if the volatility becomes too excessive, presumably for not more than a few years...most people have the flexibility to cut their spending significantly for a short time or defer some larger expenses for a year or two.
 
I'm not counting the small pension benefits I am expected to recieve as bond investments until I am able to actually start receiving benefits. This is still several years away for me. Until then, I consider this part of my net worth to have significant risk. So I ignore there value in computing my asset allocation and deciding when to rebalance. My current thinking is that I will start to consider this income stream as a bond investment as soon as it actually becomes an income stream.

I have no quantifiable justification for this practice. It's just the way I decided to approach the problem and since my pension benefits are not a big part of my retirement plan, it doesn't seem to matter that much. If I consider my future benefits as bonds, then my portfolio is a little bit more conservative than I consider it to be now.

:) :)
 
The only trouble with that strategy is that, as described in many other mutually destructive diatribes...the appearance of an income stream later in life can positively affect your current SWR.

That having been said, while i'm aware of several pensions, social security, the wifes variable annuity and some other income goodies, I dont plan for them. Should they materialize, I'll take advantage of them as roll-overs or immediate benefits...in that order where possible. Lobster and champagne money, or perhaps college funds.

But then again, I'm already retired with satisfactory income. Someone on the ragged edge of planning and executing might want to consider a future income stream to raise their current SWR, with a failure percentage guesstimate on the future income stream...and a backup plan.
 
Cute Fuzzy Bunny said:
The only trouble with that strategy is that, as described in many other mutually destructive diatribes...the appearance of an income stream later in life can positively affect your current SWR.
Click to expand...
What strategy are you talking about?
 
Not considering the income stream until it actually materializes.

Or pick something else that'll make your head explode...I'm gonna go disassemble and move my larger storage shed...by the time I get back you could have a good head of steam built up... ;)
 
Cute Fuzzy Bunny said:
Not considering the income stream until it actually materializes.

Or pick something else that'll make your head explode...I'm gonna go disassemble and move my larger storage shed...by the time I get back you could have a good head of steam built up... ;)
Click to expand...
Of course an income stream later in retirement will affect SWR. I think that is probably why the OP asked the question about how to deal with it. Don't you :confused:

Pick any strategy to account for it and it will have flaws. All an investor can do is try to understand the flaws of each option and choose the flaws they want to live with. You give no indication in your post that you have done either yet. I imagine you have but for some reason think that you will have more fun simply disagreeing. Good luck with that. :) :D :D
 
Even though I am almost all in equities now, I wonder about the "consider it a bond" school of thought on pensions. I have a fed pension that will be supplemented by a portfolio. Using the Cut-Throat, maximize spending theory, I would want to ensure the largest SWR from the portfolio that I could manage. The pension does provide a lot of security in a worst case scenario, but I wouldn't want to unnecessarily court frequent years in which I had to cut back spending due to high volatility. Thus if I calculate what WR I want from the portfolio for my lifestyle of choice and - if that starts approaching 4% - shouldn't I add 20 - 30% bonds or so to reduce volatility and allow myself access to some slices to dice to keep my spending on an even keel?
 
donheff said:
Even though I am almost all in equities now, I wonder about the "consider it a bond" school of thought on pensions. I have a fed pension that will be supplemented by a portfolio. Using the Cut-Throat, maximize spending theory, I would want to ensure the largest SWR from the portfolio that I could manage. The pension does provide a lot of security in a worst case scenario, but I wouldn't want to unnecessarily court frequent years in which I had to cut back spending due to high volatility. Thus if I calculate what WR I want from the portfolio for my lifestyle of choice and - if that starts approaching 4% - shouldn't I add 20 - 30% bonds or so to reduce volatility and allow myself access to some slices to dice to keep my spending on an even keel?
Click to expand...

Doneff,

That's what I would suggest - to simply minus the pension $$ from your yearly expenses, and use that # as the withdrawal amount from your portfolio. Then, simply keep a couple of years expenses [5,6,15, your call here] in Bonds/CD's [ala Nords].

I think whatever makes you comfortable is applicable here.

One should also note that the COLA, or non COLA, aspect of a pension may influence what the rest of your investments are in. You, for example, don't have to be as concerned about inflation as someone with a fixed pension. A person with a fixed pension may want to use more TIPS, commodities, etc. [i.e. those assets that are more highly correlated with inflation].

Also, for people with corporate pensions, they may want to favor treasury bonds over corporates b/c corporates may suffer more when/if their company goes under and sheds gifts their pension onto the PBGC.

- Alec
 
$58,000 is more in line with what we are spending now. Her pension will be $54,000 and does have a cola and survivor benefits.
Click to expand...

You can invest in anything as you desire. All you need is a fixed income of $4,000.
 
dm said:
I don't have a problem with spending more. :)
Click to expand...

Back to your original question - you do not need any more bonds. You can simply invest in high dividend stocks or funds and live off the dividends. Also, it might not be a bad idea to have a couple of years of emergency cash in a money market account.
 
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