Retirement allocation pre/post age 59 1/2?

[NameTaken2]

Age 56, recently retired and developing a financial plan with a Vanguard Flagship CFP. Just over 2/3 of asset allocation is tax deferred, with 1/3 in my 401k (plan to rollover to VG IRA). The CFP plan allocates taxable assets to stocks with not quite 2yr expenses to cash. Portfolio total yield plus small retirement employment income approx equals our budget, and advice was to set all yield to go the money mkt fund, then withdraw expenses from there. Sounded good.

Post video conference, realized the plan doesn't seem to address the next 3.5 years (pre-age 59 1/2), when withdrawals should only be from taxable assets. Current taxable assets can fund well beyond the 3.5 years, but the 100% stock allocation is my concern.

The CFP also agreed that TIRA to Roth conversions to fill the 15% bracket are a good idea, therefore taxable assets will have to fund that tax and our budget to 59 1/2. Questions:

• Does taxable assets 100% stock with <2yr expenses in cash leave too much exposure to withdrawals in a down stock market before age 59 1/2 in 3.5 years?
• If I leave 2yrs' expenses in the 401k, allocated to the stable fund (2% yld) or PIMCO Total Return Fund, this would provide flexibility in down markets with income tax on any withdraws. Is this the best option? If yes: should taxable assets then remain 100% stock, and plan to withdraw from taxable assets unless this generates a loss > income tax on a withdraw from the 401k?
• A full 401k rollover, then planning to do 72T withdraws if needed for expenses doesn't seem like the best option(?)
• Recommendations I've seen for cash allocation are anywhere from 1-5 years' expenses(?) How do I determine what is right?

I want to max the assets invested/put to work, but also maintain a reasonably conservative allocation for budget expense.

Any recommendations other than what's listed above are welcome!
Thanks for your time-

 

[Animorph]

If your total portfolio is fine, you can transfer assets between accounts to get the cash where you want it. Sell equity shares in your taxable account and buy them at the same time in your retirement account using the available cash. Just watch out that you don't sell at a loss and buy the same shares within 30 days (forward or backward), which is a wash sale and disallows your loss. Forever, in the case of a retirement account buy. So "long" term you have the assets where you want them. You only move the cash to the taxable account as needed.

I assume you have bonds somewhere in the retirement accounts. Those can be accessed in the first 3.5 years in the same manner.

 

[nun]

Funding the years before 59.5 are tricky. You AA will be a function of your tolerance for risk, but having 2 years of cash on hand will at least give you time to react to market changes and you can always do a 72t if things look dicey.

However, here's my take on this. I'm 52.5 and looking at funding 7 years before I get easy access to my retirement accounts.

My overall AA is 60/35/5, but my retirement accounts are more weighted towards equities and the accounts I can easily access without penalty before 59.5 have an AA weighted towards cash and cash like stuff so that I have enough of those asset classes to cover 7 years of spending together with some rental income I have. Those assets look like this

Stable Value generating 2.6% = $110k
Cash = $40k
Equities = $90k

I will take dividends from the equities and sell some when they are up. In lean markets I'll use the cash and stable value

 

[NameTaken2]

Thanks for your replies-

If stocks are down in the next 3.5yr (before age 59 1/2) and the current <2yr expenses in cash is gone, here's the 4 options I see:

Leave taxable acct allocation at 100% stock index funds: withdraw from those funds at a big loss.
A raised taxable account cash allocation prevents need to withdraw stock fund assets before age 59 ½: withdraw cash, with no loss other than lower projected returns for the cash allocation.
401k stable fund or bond allocation left as buffer for this scenario: Withdraw from 401k, with no loss other than lower projected returns.
IRA Total Bond fund: withdraw and pay the 10% penalty.
A 5th option of 72T distributions from IRA doesn’t seem worth considering.

Am I seeing the entire field clearly with the above options? What's option best balances investing for returns with minimizing chance that I back myself into a corner before age 59 1/2 and forced to sell stock funds at a large loss?

Is the current taxable cash allocation of just below 2yr expenses adequate by most standards, and should be maintained?

Thanks again-

 

[clifp]

I think you have identified your options.

My only question is when you say 2 years of expenses. How are you are treated the dividend income of your taxable portfolio. Assume you have 40K in expense after your retirement employment. You have a $500K taxable stock portfolio yielding 2% that generates $10K. Do you have $60K in cash or $80K. If it is 60K than I guess my is do what ever makes you feel comfortable like raising your cash allocation.

If it is $80k than I think you have 2 2/3 expenses in cash which is awfully close to the 3.5 before hitting 59.5.

 

[nun]

Thanks for your replies-

If stocks are down in the next 3.5yr (before age 59 1/2) and the current <2yr expenses in cash is gone, here's the 4 options I see:

Leave taxable acct allocation at 100% stock index funds: withdraw from those funds at a big loss.
A raised taxable account cash allocation prevents need to withdraw stock fund assets before age 59 ½: withdraw cash, with no loss other than lower projected returns for the cash allocation.
401k stable fund or bond allocation left as buffer for this scenario: Withdraw from 401k, with no loss other than lower projected returns.
IRA Total Bond fund: withdraw and pay the 10% penalty.
A 5th option of 72T distributions from IRA doesn’t seem worth considering.

Am I seeing the entire field clearly with the above options? What's option best balances investing for returns with minimizing chance that I back myself into a corner before age 59 1/2 and forced to sell stock funds at a large loss?

Is the current taxable cash allocation of just below 2yr expenses adequate by most standards, and should be maintained?

Thanks again-

I'd go with the stable value option and avoid the bond fund in case interest rates spike. Keep taxable allocation at 100% equities and live of a combination of tax, capital gains, sales and cash. If stocks don't perform don't sell at a loss just tap the stable value fund.

I'm biased as that's exactly what I'm doing, except my stable value is in a 457 plan.

 

[pb4uski]

If you have a SV fund paying 2% available to you in your 401k, I would probably put my entire fixed income/bond allocation there. You will be getting a good, safe return with no interest rate risk. You can't have access to stable value funds if you convert your 401k to an IRA.

Another good fixed income option would be to transfer some of your 401k (up to the FDIC limit) to PenFed and take advantage of the 3%, 5 year FDIC insured CD they are offering through the end of January.

Does your 401k allow penalty free withdrawals since you left service after age 55? Some do and some don't but if so it would be another reason for keeping the 401k in whole or in part.

I wouldn't fret too much about having so much stock in taxable accounts. My taxable accounts are cash (~ 2 years of expenses like you) and equity funds. Look across all your accounts in looking at your AA. If you need to sell stocks in your taxable accounts to raise cash but that leaves you light on stocks you can then exchange fixed income for stocks in your tax deferred accounts to bring yourself back to your target AA. As a plus, if you keep you income in the 15% tax bracket any taxable account gains are tax-free. If you have losses you can carry them forward and use them later.

If you put your international equities in your taxable accounts as well you can take advantage of the foreign tax credit but the trade-off is that some of your dividend income will be non-qualified and subject to tax.

See Principles of tax-efficient fund placement - Bogleheads

 

[nun]

If you have a SV fund paying 2% available to you in your 401k, I would probably put my entire fixed income/bond allocation there. You will be getting a good, safe return with no interest rate risk. You can't have access to stable value funds if you convert your 401k to an IRA.

Another good fixed income option would be to transfer some of your 401k (up to the FDIC limit) to PenFed and take advantage of the 3%, 5 year FDIC insured CD they are offering through the end of January.

I'd do the stable value over the PenFed CD as the stable value provides more liquidity and the possibility of a higher return when rates go up.

 

[gerntz]

What does age 59.5 have to do with anything? No reason stated why that's relevant that I can see.

 

[karluk]

What does age 59.5 have to do with anything? No reason stated why that's relevant that I can see.

I tend to agree that all of this planning on what to do prior to age 59 1/2 seems a little excessive. OP has an abundance of taxable accounts and a 401k that appears to be accessible without early withdrawal penalties because of the age 55 separation from service rule. So getting access to money doesn't seem to be much of an issue at all, regardless of whether it's before or after 59 1/2

If I were OP, I would put 100% of my taxable money into index stock funds because of the favorable tax treatment and retain the 401k, using it to primarily invest in the stable value fund and/or bonds, which don't get favorable treatment in taxable accounts and so should be sheltered from current taxes. Then, if I needed money for living expenses over and above my dividends, I would sell some stocks from the taxable account and simultaneously purchase the same amount of stocks in the 401k (always remembering to not buy substantially identical securities when selling at a loss, in order to avoid the wash sale rules). This technique involves buying and selling the same amount of stock, so it's irrelevant whether you're selling from your taxable account at a loss. I'm fairly certain this is roughly the same strategy as Animorph was recommending in his earlier post.

 

[clifp]

I tend to agree that all of this planning on what to do prior to age 59 1/2 seems a little excessive. OP has an abundance of taxable accounts and a 401k that appears to be accessible without early withdrawal penalties because of the age 55 separation from service rule. So getting access to money doesn't seem to be much of an issue at all, regardless of whether it's before or after 59 1/2

IIRC while you can withdraw my money from "most" 401K if you terminated employment at 55, with no penalties, he did plan on rolling it over to an IRA. Once it is is an IRA I believe you can't touch the money before 59.5 without either paying a penalty or setting up a 72(t).

I agree with the rest though.

 

[karluk]

IIRC while you can withdraw my money from "most" 401K if you terminated employment at 55, with no penalties, he did plan on rolling it over to an IRA. Once it is is an IRA I believe you can't touch the money before 59.5 without either paying a penalty or setting up a 72(t).

I agree with the rest though.

Right, that was one of OP's questions, whether it would be best to do a full or partial rollover from the 401k into a Vanguard IRA. My post may not have made it clear, but I was recommending either not rolling over the 401k at all, or at most doing only a partial rollover, so as to not mess up the penalty free withdrawals that are available from the 401k, but not from the IRA.

 

[karluk]

Not to mention that Vanguard doesn't have a fixed income option with as good a yield as the stable value fund in the 401k.

 

[NameTaken2]

Thanks very much for your replies-

Clifp-
Taxable acct yield will pay taxes on the planned annual TIRA to Roth conversions to fill the 15% tax bracket, and anything left over is a buffer.

Nun and Pb4uski-
My 401k does allow penalty-free withdraws. I originally planned to move all 401k assets to my IRA, but now that appears to be a stupid move. Leaving 2 years of expenses (maybe more) in the 401k stable value fund earning 2% looks like the good move, and keeps those assets accessible without penalty. This provides total cash allocation of 4 years’ expenses between the taxable acct and 401k. The taxable account has a large Int’l Stock Index allocation, so I can take advantage of that as you described. (Overall int’l allocation is 30% of stocks.)

gerntz and karluk-
You’re right. I was overly-concerned with selling stock at a large loss, because my perspective to age 59 ½ focused on living off the 100% stock taxable account and avoiding IRA 10% withdrawal penalties or withdrawing tax-advantaged assets from my 401k. I wasn’t aware of the strategy of replacing stock sold in the taxable account by buying stock in the tax-advantaged account.

I’ve learned a lot: strategies I’m now considering:

The 401k Stable Fund yield is only 0.2% below Total Bond Market Index yield, with no downside risk from rising rates.
Therefore, does it make good sense to consider allocating a proportional amount in my 401k to the Stable Fund to equal my desired allocation in Total Bond Fund? Is this a common strategy with 401k Stable Value Funds?

401k Stable Fund yields 2% (better than MM=nothing) so keep 2 years’ expenses (or more) there and roll over the rest.
After the taxable acct's approx 2yr cash allocation is spent down, begin withdrawing annual expenses from the taxable account stock funds.
Replace sold Total Stock Index with the 401k’s Vanguard S&P 500 (closest match) and replace sold Total Intl Stock Index with the 401k’s Fidelity Diversified Intl. (No experience with wash sales, but assume not applicable if the taxable Vanguard stock funds are sold at a loss and replaced by the above 401k funds?)
At age 59 ½, consider rolling over my 401k to my Vanguard IRA and continue the same strategy using the IRA until the taxable account is depleted.

Does this sound like the best strategy to go with?

Also-
Is there a Retirement Rule of Thumb regarding a reasonable cash allocation to maintain? (in years of expenses or percent of portfolio?) -I need to determine if 4 years of expenses is the right balance between maximizing stock/bond allocation while maintaining a reasonably conservative cash allocation.

 

[nun]

Why spend down 2 years of cash? If your stocks are doing well take some gains/income from those. I have a spreadsheet where I track my various funds and I intend to look at how each has done every three months and sell if there are some winners to top up my cash. If the equity funds are down I'll top up the cash from the stable value. I'll also make adjustments in my tax deferred accounts to keep my AA on course.

 

[NameTaken2]

Why spend down 2 years of cash? If your stocks are doing well take some gains/income from those. I have a spreadsheet where I track my various funds and I intend to look at how each has done every three months and sell if there are some winners to top up my cash. If the equity funds are down I'll top up the cash from the stable value. I'll also make adjustments in my tax deferred accounts to keep my AA on course.

A couple reasons -maybe they are flawed:

If stocks are down, spend cash earning zero rather than sell stocks earning a 2% yield at a loss.

If stocks are doing well, unless balancing is required spend the cash that's earning zero.

Spending down the taxable acct cash also addresses the initial 4 years of expenses in cash (in taxable and non-taxable accts) seeming too high for the long term. Unless I learn otherwise, 2 years of expenses in cash after age 59 1/2 seems more appropriate.

Thanks -all comments welcome, I need the education!

 

[nun]

A couple reasons -maybe they are flawed:

If stocks are down, spend cash earning zero rather than sell stocks earning a 2% yield at a loss.

I agree that you don't want to sell stocks at a loss. So you either spend more cash or use the stable value. I would spend the cash until you reach some preset minimum and then top it up form the appropriate source.

If stocks are doing well, unless balancing is required spend the cash that's earning zero.

It comes down to the amount of cash you want to keep on hand I suppose. I plan to keep 2 years in cash, at least until pensions and SS begin, and replenish the cash every 3 months. If stocks are up I'll take some profits while I can

 

[NameTaken2]

Going a step further with this strategy:

As mentioned above, my 401k Stable Fund yields 2%. This is only 0.2% less than Total Bond Market Index yield, with no downside risk from rising rates.
Therefore, should I consider replacing my Total Bond Fund allocation with the 401k Stable Fund?
Is this strategy common among retirees with 401k Stable Value Funds?

Seems like a good idea, at least until the Total Bond Fund yield becomes more enticing.

 

[nun]

Going a step further with this strategy:

As mentioned above, my 401k Stable Fund yields 2%. This is only 0.2% less than Total Bond Market Index yield, with no downside risk from rising rates.
Therefore, should I consider replacing my Total Bond Fund allocation with the 401k Stable Fund?
Is this strategy common among retirees with 401k Stable Value Funds?

Seems like a good idea, at least until the Total Bond Fund yield becomes more enticing.

That's what I did. My 457 is 78% stable value paying 2.6%, the rest is in equity index funds. My 401a is 73% equity indexes and 17% TIAA-Traditional currently paying 3.75%. I still have 15% of my portfolio in intermediate corporate bonds (Wellesley and Intermediate Investment grade), but those are in my IRA and I don't plan on touching that for 10 to 15 years.