How to deal with a aggressive Asset Allocation

[rkser]

How to deal with a aggressive Asset Allocation in Retirement

I am afraid our present AA of 58/42 will change much aggressive as we go along in our retirement & want to learn if there is a way to deal with it or how others if in similar shoes dealt with it.

1) I want to fund our retirement, by withdrawing funds initially from our all Bond Fund IRAs.

2) Continue to do Roth Conversions (& invest in Stocks in the Roths)

Because of, among other considerations -

A) Leave Stocks for children inheritance due to step up in cost basis, & no time limit to sell & en cash the funds, they may leave them to their kids.

B) Recent Secure act limiting the time to 10 yrs, in which the inherited IRAs should be cashed out & taxes paid, & Bonds are taxed at ordinary income rates.

C) RMDs can throw a wrench & bump up our Taxes starting at age 72, (I am 64 now) or when one of us passes away.

Our present Asset Allocation is 58% Stock Index Funds / 42% Fixed Income (Bond Index Funds + about 3 years of living expenses in cash ) of a 7 figure Total Portfolio.

Our bond fund IRAs & the cash can provide our living expenses for around 15 yrs, then we start to draw the stock taxable funds .

- One other lingering thought is my way of withdrawal goes against the prevailing general rule of initially spending the taxable all Stock portions & leave the tax deferred till later maximizing the tax deferral.

- This also goes against another way of proposed withdrawal where the withdrawals are from across all accounts taxable & tax deferred in their respective proportions. Michael Kitches mentions this way in one of his articles & Fidelity also recommends withdrawal in proportions.

- Although Bucket method of withdrawals is in line with leaving stocks till last for appreciation.

I wonder how other members spend their savings, meaning in what order ?

Thank you in advance for sharing & any suggestions

 

[sengsational]

Since I have nothing in after tax, my situation is different (no capital gains to optimize). But I like to point out that the walls between tax buckets are not impenetrable with respect to asset allocation. This is especially true now that commissions are cheap/free. So if your AA suggested getting cash from equities, but tax rules had you pulling from your IRA which had only bonds, you sell the equities in some other tax bucket, say Roth, and buy bonds there. So you didn't change bonds allocation (sold them to yourself).

 

[rkser]

That is definitely one way to do it.

Some how, Stocks in Taxable & Roths, & the Bonds in Tax deferred IRAs have been preached for so long, so much so that to pay taxes on the continuous dividends from say VBTLX in Taxable irks me.

Yes, push comes to shove, I can replace the stocks I presently have to Bonds in my Roth accounts, with out any tax issues.

When I start to liquidate the Bonds in my Tax deferred, I will have have to replace my stock funds with bond Funds in Taxable/Roths & accept lower returns.

I do not want a lopsided aggressive portfolio in my 70s & 80s. If I can continue to maintain a 50/50, it will be ideal for me.

Good point, thanks

 

[OldShooter]

This is another situation where IMO there is risk of the tax tail wagging the investment strategy dog.

Another point, an "aggressive" portfolio in our 70s and 80s may be ideal if the equity portion of the portfolio is going to end up in our estates. That is our situation and we're at about 75/25. OTOH, if someone is likely to need all the money then 50/50 may be too aggressive.

 

[Brat]

This is another situation where IMO there is risk of the tax tail wagging the investment strategy dog.

Another point, an "aggressive" portfolio in our 70s and 80s may be ideal if the equity portion of the portfolio is going to end up in our estates. That is our situation and we're at about 75/25. OTOH, if someone is likely to need all the money then 50/50 may be too aggressive.

I am not quite that 'agressive' but we are 79 & 83 with about a 55% stock portfolio. We have LTC insurance so can swing with the stock market. That said if the stock market shows signs of going *its-up I have no problem 'adjusting' my allocation to a more 'consertive' portfolio - aka my bailing bucket is handy.

 

[OldShooter]

I am not quite that 'agressive' but we are 79 & 83 with about a 55% stock portfolio. We have LTC insurance so can swing with the stock market. That said if the stock market shows signs of going 'its-up I have no problem 'adjusting' my allocation to a more 'consertive' portfolio - aka my bailing bucket is handy.

Well, there is no right answer except the one for each individual. Rules of thumb like "subtract you age from whatever" or the idea that as one ages the equity portion should get smaller are so crude IMO as to be useless. That was really my point, reacting to the OP's comments about a 50/50 AA. That might be exactly right in the OP's situation. I don't know. But further thought may cause the OP to conclude that a more dynamic or a different AA would be more suitable.

 

[rkser]

This is another situation where IMO there is risk of the tax tail wagging the investment strategy dog.

Another point, an "aggressive" portfolio in our 70s and 80s may be ideal if the equity portion of the portfolio is going to end up in our estates. That is our situation and we're at about 75/25. OTOH, if someone is likely to need all the money then 50/50 may be too aggressive.

I understand your point of maintaining a high equity % in one's old age, but the consequences of loosing 50% of one's high stock portfolio may be hard to take at that point in time. The Retirement Income Calculators indicate we will be leaving this planet with a good (for us) Inheritance behind.

Although Equities with their preferred tax structure of 15% Cap Gain & the stepped up in basis would be the right kind of dough to leave behind, I would have to think hard if I can stomach the volatility which accompanies savings with high equity % with not much time left.

It is like ending where we started with 80 to 90% equities in our 20's or 30's.

It is a kind of conundrum, darn if you do & darn if you dont. I do not see any way around it, although it is some years in future, a tough cat to skin, with no clear answers.

 

[OldShooter]

All true. These are very personal decisions. A lot depends on your assets vs your spend rate. If you are certain you have more than you need, then a big equity hitmay be (intellectually) a don't-care and a good tradeoff for the estate growth potential the AA offers. But your strategy also depends on your tolerance for volatility. if your tolerance is low, then your estate volatility is a care-very-much.

I'm pretty sure that no one who has actually been here thinks these decisions are easy.

 

[HI Bill]

1) I want to fund our retirement, by withdrawing funds initially from our all Bond Fund IRAs.

Why? bond funds in IRAs, MFs in IRAs, ETFs in IRAs, and individual stocks in IRAs are all 100% taxable.

I'd suggest an alternate strategy: If both your bond funds and equities are down at the time you want to take your withdrawal, take it from the cash bucket. If bonds are up and equities are down, take from the bond bucket. If equities are up, take from the equities bucket. This helps keeps your AA more balanced (reducing the need to rebalance frequently), and ensures that you're 'selling high'.

 

[Brat]

Perhaps the OP should consider rock-solid dividend payers as a part of his bond portfolio.