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Need AA advice
Old 10-02-2015, 09:19 AM   #1
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Need AA advice

New member. First time to post. Long time reader. I recently retired (age 50 wife 45) and would like some opinions on AA. Most of my nest egg is in cash at this point due to closing 401K, consolidating accounts and selling a primary residence. We feel comfortable with 2.5-3 % withdrawal rate (65,000) per year. Firecal gives us a 95% plus chance of success. Doing conversions suggested by Iorp gives us even better numbers.

We have 1.6mill. in tax advantage and 1.mill in taxable. We plan on 60/40 allocation in Total stock market / Total Bond market. I have read to treat tax advantaged and taxable as one and to allocate Bonds to tax advantaged.

Just wondering if it would be better to allocate 60/40 in both areas to reduce volatility in taxable due to the fact that I will be using those funds to live on until 59 1/2?
Thanks for any opinions you could give me
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Old 10-02-2015, 09:31 AM   #2
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Originally Posted by H-dog View Post
New member. First time to post. Long time reader. I recently retired (age 50 wife 45) and would like some opinions on AA. Most of my nest egg is in cash at this point due to closing 401K, consolidating accounts and selling a primary residence. We feel comfortable with 2.5-3 % withdrawal rate (65,000) per year. Firecal gives us a 95% plus chance of success. Doing conversions suggested by Iorp gives us even better numbers.

We have 1.6mill. in tax advantage and 1.mill in taxable. We plan on 60/40 allocation in Total stock market / Total Bond market. I have read to treat tax advantaged and taxable as one and to allocate Bonds to tax advantaged.

Just wondering if it would be better to allocate 60/40 in both areas to reduce volatility in taxable due to the fact that I will be using those funds to live on until 59 1/2?
Thanks for any opinions you could give me


Based on that info what I would do is I would put a couple years living expenses in cash in taxable. I would count the cash towards you bond allocation. I'd then put as many bonds in tax advantaged as possible and as many stocks in taxable as possible.

If you want to maximize taxes then it does make sense to split fixed income and equity up this way. If instead you want to make it as easy as possible to manage then just go for 60/40 in each.

Vanguard has a balanced fund that is 60/40 total stock and total bonds. You could use it if you want to make it as easy as possible.

It probably depends on how comfortable your spouse is with managing the money. If she isn't comfortable with it then it might be better to go the easy management route and accept that you will loose some on taxes. Not to be morbid, but we never know when we will pass on. So if she isn't comfortable managing it then you might want to go ahead and make it easy right from the start.
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Old 10-02-2015, 09:33 AM   #3
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Given that the dividend yield on the equities you mentioned is likely 2-3%, you may want to consider simply NOT reinvesting the dividends but instead using them for living expenses. Regarding whether to put the bond funds into the taxable account, it's generally recommended to have an emergency fund of a few years living expenses in early retirement. So instead of a full 40% bonds in taxable, perhaps $195k, I.e. The equivalent of three years of total withdrawals so you don't need to touch equities during a stock market drubbing. Then balance out the tax deferred accounts to get to your overall AA.


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Old 10-02-2015, 09:42 AM   #4
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Hi H-dog. Welcome to the board.

For me, I invest in tot stock, tot bond, tot international and hold some cash in money market.

Yes, I treat tax advantaged and taxable as one but end of having some of each class in tax advantaged and taxable. (Majority of taxable in equities. Majority of bond funds in tax advantaged). The reason for having some of each class is when rebalancing each year, I try mostly to only rebalance within the IRAs to not have a taxable event.
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Old 10-02-2015, 10:00 AM   #5
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If you have over $1mm with Vanguard, then you are a flagship member and you can discuss this matter with one of their cfps.
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Old 10-02-2015, 10:24 AM   #6
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...We feel comfortable with 2.5-3 % withdrawal rate (65,000) per year. Firecal gives us a 95% plus chance of success. ...
Welcome. But something doesn't sound right. A 2.5~3% withdrawal rate should give 100% success in FIRECalc.

IIRC, the FIRECalc report does something funny - I think it looks at your total spending, and reports the WR as a % of the total portfolio. But if (for a simple example), all your spending was covered by SS/pension, the WR% from the portfolio would be zero.

-ERD50
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Old 10-02-2015, 10:43 AM   #7
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My plans are similar to yours (though I'm still a few 1's of years away from retirement) - part of that is because I'm still w*rking. I have stocks and bonds in both taxable and tax-advantaged accounts. My plan is initially to live off of the taxable accounts until they're nearly exhausted then switch to the advantaged accounts. I have different AA's for the two sets of accounts. Over time, the tax advantage account (which is heavier in equity funds than the taxable accounts) will have a similar AA as the taxable account. Other than that, the primary differences are the bond funds.


I'm more in the total return camp, rather than the dividend camp. You can find lots of discussions on that topic with many people liking one or the other. My taxable accounts use muni-bond funds for the bond portion of my portfolio for tax reasons whereas my tax advantaged accounts use US Treas bond funds for the bond portion.


There are doubtless many ways to crack this nut, including withdrawing from both types of accounts, when allowed, when it's possible to do so and stay in a lower tax bracket. That may have advantages when you're 70 1/2 and have to start RMD's. That may naturally result in a different AA.
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Old 10-05-2015, 11:40 AM   #8
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Thanks for the advice


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Old 10-05-2015, 11:57 AM   #9
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One day at a time and the serenity prayer......


Wait - that's not what you meant, is it?
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Old 10-05-2015, 12:30 PM   #10
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.....Just wondering if it would be better to allocate 60/40 in both areas to reduce volatility in taxable due to the fact that I will be using those funds to live on until 59 1/2? ...
No, think of it across both taxable and tax-deferred... as one big pile... and you want to have your tax inefficient investments (like bonds) in tax-deferred and rest in taxable. The reason for viewing it across taxable and tax-deferred is that when you redeem taxable investments and take cash to live on you can rebalance by buying or selling equities in your tax-deferred accounts as necessary.

So for example, let's say at the beginning of retirement you want to have a little over a year in cash so your overall AA is 60% equities, 36% bonds and 4% cash. So your taxable account would be 1,496 of equities and 104 of cash and your tax-deferred account would be 64 of equities and 936 of bonds for a total of 2,600.

A year later, equities have increased 10%, bonds 3% and you used 78k for living expenses... so in your taxable account equities are 1,646 (110% of 1,496) and cash is 26 (104-78) and in your tax deferred account equities are 70 (110% of 64) and bonds are 964 (103% of 936) for a total of 2,706.

When you rebalance, your new targets are 60%/36%/4% of 2.706 or 1,623 equities, 974 bonds and 109 cash. In your taxable account, you sell 83 of equities and put it into cash, bringing your cash balance to 109 (and reducing the equities in your taxable account to 1,563). You then sell 10 of equities in your tax-deferred account and buy 10 of bonds in your tax deferred account.

After those two transactions you are now back to 60/36/4 with 1,623 in equities (1,563 in taxable and 60 in tax deferred), 974 in bonds (all tax-deferred) and 109 in cash (all in taxable).

Rinse and repeat each year.

Edited to add: Sometimes a picture is easier

  Begin Activity Before rebal Rebal Ending
Taxable     
Equities 1,496 150 1,646 (83) 1,563
Cash 104 (78) 26 83 109
  1,600 72 1,672 - 1,672
Tax-deferred     
Equities 64 6 70 (10) 60
Bonds 936 28 964 10 974
  1,000 34 1,034 - 1,034
      
      
Equities 1,560 156 1,716 (93) 1,623
Bonds 936 28 964 10 974
Cash 104 (78) 26 83 109
  2,600 106 2,706 - 2,706
      
Equities60% 63% 60%
Bonds36% 36% 36%
Cash4% 1% 4%
 100% 100% 100%
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Old 10-05-2015, 05:30 PM   #11
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One day at a time and the serenity prayer......


Wait - that's not what you meant, is it?
That's the first thing I thought of too when I saw the thread title. My father was an alcoholic so I was familiar with the "other AA" at an early age.
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Old 10-06-2015, 08:46 AM   #12
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Just wondering if it would be better to allocate 60/40 in both areas to reduce volatility in taxable due to the fact that I will be using those funds to live on until 59 1/2?
Thanks for any opinions you could give me
Planning on retiring next year (at 50), and will be in exact same boat as you (no pension, so living off taxable investments).

As you said, for tax efficiency, your taxable accounts should hold equities. What I'll be doing to protect those funds, is to have 3 years of expenses in short-term, safe investments (CDs, short term bonds, I Bonds). If the market takes a nose dive, we have 3 years to wait it out.

Our AA is also 60/40, so extremely similar situations, although we have less set aside than you do.
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