Begin increasing Fixed Income

[oldman]

I have a different situation by still earning income and now 74 years old. I have not had to take income from my investments and have used the maximum from IRA distributions to fund Roth IRA for wife and I for past 4 years. We have a mostly equity portfolio of mutual funds and individual stocks and a few bonds. My largest mutual fund is OAKBX which has been around 60/40. I expect to formally retire in about 1 year and will need to adjust my asset allocation and start taking 4-5% from investments. We both have regular IRA's (wife is 72) and a taxable account. Any thought on how to approach a major shift in asset allocation for the future?

[RetireeRobert]

You weren't real specific on your current allocation, but said "mostly equities and a few bonds". Do we take it then you are maybe 90% equities and 10% fixed income?

At your ages, and with you saying you will need to withdraw at 4 or 5% rates from holdings, I would suggest an allocation maybe 50/50 equities and fixed income, with 50% being as "high" as I would go on the equity side. Depending on your risk tolerances, you may want to be more conservative then that.

At ages 74 and 72, a prolonged market downturn could put you in a bad spot relying mostly on equities. You do not have decades to recover like 30, 40, even 50 year-olds.

If you share more details, folks may be able to render more specific advice.

[donheff]

And welcome to the Board. "Early" is in the mind of the beholder. My 75 year old brother just set his retirement target for 80. 70 would have been "early" for him, 75 normal, and 80 pushing it a bit.

[oldman]

Robert, I just did an xray on Moningstar. We have 2 roth ira, 2 regular ira and a taxable account. The combined allocation is 26% cash, 50% U.S. stocks, 13% Foreign stocks, 8% Bonds, 3% other. The IRA's are 82% of total. I have only 3 individual corp bonds in an IRA, the rest of the bond holding are actually in the mutual funds I have. For instance, Oakmark Equity income is 35% bonds. Other mutual funds also have some bonds. The total of all investments is about $1m. My stock styles are 18% large value, 42% large growth, 12% large core. the balance is mid cap and small cap. The taxable account is about 20% cash, no bonds. About 25% is in 2 stocks with very low cost basis. Perhaps this data will help with advise. I know allocation has to be adjusted and maybe more individual bonds, short term or CD's. Most fixed income should go in IRA's to keep tax liability low. We also have a small variable annuity at Vanguard, about $20,000, not included in total. Our home has no mortgage and has worth about $225,000.

[oldman]

I changed my post from Late Retirement to increasing fixed income. I thought it might get a response.

I want begin increasing the fixed income to 50% over the year. I'd appreciate some suggestions how to proceed with that in our IRA accounts. I realize a long way to go and with rates so low, not the best of time.

If I have an Equity Income Mutual Fund that is 60% Equity and 40% income, do you include that 40% as bonds in your allocation or do you only use individual bonds or bond funds?

[FinanceDude]

Quote:

Originally Posted by oldman I changed my post from Late Retirement to increasing fixed income. I thought it might get a response. I want begin increasing the fixed income to 50% over the year. I'd appreciate some suggestions how to proceed with that in our IRA accounts. I realize a long way to go and with rates so low, not the best of time. If I have an Equity Income Mutual Fund that is 60% Equity and 40% income, do you include that 40% as bonds in your allocation or do you only use individual bonds or bond funds?

Do you want the 50% in bonds/fixed because you're concerned about the market? If you believe in the Efficient Frontier, a 60/40 allocation of stock to fixed income has produced the highest return with the lowest volatility of an mix.

The 40% of the income in an equity income fund COULD be dividend paying stocks. If that is the case, it would be more volatile in periods like this month than "plain" bonds.............

[oldman]

I think my original post describes why. Nothing to do with market.

I selected 50% as I am now age 74 a 50/50 allocation is most suitable.

The bond allocation in my mutual fund are all individual bonds.

[FinanceDude]

I like the funding of the Roth IRAs from the IRA distributions. Depending on how long you will get earned income, that could be quite a nice tax-free next egg.

I see no problem with a 50/50 split. Most folks in your age group run to CD's and Treasuries, thereby eliminating any inflation hedge.

I don't do much with individual bonds, I use bond funds. Over the last 10 years my clients have done better in bond funds that any laddering I could have done.

What I do is watch duration and yield, and switch the mix in long, intermediate, and short-term funds based on interest rate environments.

If the Fed continues cutting, the short bonds will rally first, then intermediate, etc.


No more inverted yield curves, please.........

[walkinwood]

With $1M, you could consolidate all accounts at Vanguard and use their free financial advice (for clients with $1M+) to get a financial plan. Their plan deals mainly with asset allocation. Or find a fee-only financial planner (Scott Burns now has a company) to help you.

Alternatively, you could use index funds or ETFs to get to your allocation. Put the bond funds or funds that throw off a lot of dividends in the tax deferred accounts and equities in the taxable accounts.