56 yr old ER asset allocation question with pension

[supernova72]

Hello,

I'm feeling a bit exposed with my 401K asset allocation as of late. My employer ER'd me in July (was 55 then) and I'm six months into this new space of *retirement*. My theory is to be heavier in equities in my 401K since my pension is a fixed stable income stream and covers 80% of my expenses (so far---Ha Ha).

I recently decided to payoff my home (I realize some think this is not a good idea but peace of mind right?). My asset allocation is now 88% equities (reduced bond and stable value holdings).

My situation
56 yrs old
Single
715K in 401K
pension (non cola) at $43,000 a year
SS will be $20K annual at 62 when I plan to draw it
Other savings is pretty small at $20K
Home value is %560K no mortgage (Seattle WA prices have gone nuts)
Expenses are 52K a year (included fed tax and prop tax)
I've set aside enough cash to fill gaps I might have in 2017 for taxes
Health is good (I'm a fitness nut)
I am fortunate enough to have retiree medical ($20 a month)
I'm debt free for the first time in 25+ years

I would probably sleep a bit better at 70% equities but another part of says that nut needs to last me for 30 yrs ish. I'm guessing most on this forum are more like 60/40 AA. Thoughts on asset allocation of 88%??

Thanks in advance!

 

[exnavynuke]

What do you expect SS to be and when do you anticipate you'll start taking it? Do you have any savings outside of the 401k?

 

[supernova72]

What do you expect SS to be and when do you anticipate you'll start taking it? Do you have any savings outside of the 401k?

Shoot, I knew I forgot something.
SS will be $20K at 62 when I plan to take it.
Other savings is pretty small at $20K.

 

[Sunset]

So your 715K in 401K should by my avg estimation generate $14,300 in dividends.
Set your 401K to NOT reinvest the money.
Then you can withdraw those dividends and spend / invest them.
That will cover all your expenses.

If your 401K is not flexible to allow you to do the above, then roll it over to Vanguard or some other brokerage in a rollover IRA and do it.

As for the allocation, I think mine is 90-95% stocks, and I find it hard to buy bonds right now given stocks etf's generate 2% -> 3% dividends, and both bonds and stocks could go down with interest rate rising.

 

[stepford]

Hello again Supernova,

So long as you have enough money from your pension that you won't need to touch your investments during a protracted market downturn then it's probably OK for you to keep a larger portion of your savings in equities. That said, it could be awfully painful to watch your net worth drop significantly for a few years like we did in the crashes of 2000 and particularly 2008.

I'm too much of a chicken for that, so even though our ages and pensions are similar I've opted for a much more conservative 50/45/5 allocation. Since I'm not trying to leave any legacy after I die I believe that the equity portion of my portfolio plus SS will provide adequate inflation protection while my relatively heavy fixed income portion (mostly short/intermediate maturity) should provide a cushion when the SHTF.

Everybody's philosophy is different, but this one both satisfies the retirement calculators and lets me sleep at night.

 

[respond2u]

Most of those "60/40" guidelines ignore pensions and social security.

Assuming you had those in treasuries, they'd be worth about 2.5M (at 2.5% interest), assuming the pension is solid.

From that perspective, you have very low equity exposure!

(for myself, I'm about 78% stocks, with no pension other than social security. I'm keeping a few years cash in case of a crash)

 

[rodi]

If your 401K is not flexible to allow you to do the above, then roll it over to Vanguard or some other brokerage in a rollover IRA and do it.

He's less than 59 - so he needs to keep it in his 401k till then if he wants (needs) to make withdrawals. And it sounds like he does need that.

OP - I remember reading a thread on here where someone ran various firecalc scenarios with a range of AA. And the outcome was basically pretty good anywhere from 30/70 to 70/30.... So I'd lower it to 70% equities.

Have you run firecalc - making sure to properly mark your pension as NON COLA.

 

[supernova72]

So your 715K in 401K should by my avg estimation generate $14,300 in dividends.
Set your 401K to NOT reinvest the money.
Then you can withdraw those dividends and spend / invest them.
That will cover all your expenses.

If your 401K is not flexible to allow you to do the above, then roll it over to Vanguard or some other brokerage in a rollover IRA and do it.

As for the allocation, I think mine is 90-95% stocks, and I find it hard to buy bonds right now given stocks etf's generate 2% -> 3% dividends, and both bonds and stocks could go down with interest rate rising.

Thanks for the tip. I'll need to double check to see if our company allows the no-reinvest option. I was under the impression that if I roll to an IRA no withdraws until 59.5 (but maybe dividend distributions are not "drawing"?).

 

[supernova72]

Hello again Supernova,

So long as you have enough money from your pension that you won't need to touch your investments during a protracted market downturn then it's probably OK for you to keep a larger portion of your savings in equities. That said, it could be awfully painful to watch your net worth drop significantly for a few years like we did in the crashes of 2000 and particularly 2008.

I'm too much of a chicken for that, so even though our ages and pensions are similar I've opted for a much more conservative 50/45/5 allocation. Since I'm not trying to leave any legacy after I die I believe that the equity portion of my portfolio plus SS will provide adequate inflation protection while my relatively heavy fixed income portion (mostly short/intermediate maturity) should provide a cushion when the SHTF.

Everybody's philosophy is different, but this one both satisfies the retirement calculators and lets me sleep at night.

Hi Stepford. Long time. I rode out both of those downturns you mention above. It was easier to stomach mostly because I was still working and investing in the 401K.

I'll probably end up in the 70/30 range just so I don't sit around and worry about it.

 

[supernova72]

Most of those "60/40" guidelines ignore pensions and social security.

Assuming you had those in treasuries, they'd be worth about 2.5M (at 2.5% interest), assuming the pension is solid.

From that perspective, you have very low equity exposure!

(for myself, I'm about 78% stocks, with no pension other than social security. I'm keeping a few years cash in case of a crash)

Thanks respond2U. Company is very solid and just posted record profits for their 2016 earnings call. $100B in revenues and growing profitability. They make really big planes that all start with a "7". Ha. Still adjusting to NOT working there but each day brings a new perspective like going to the gym at 1pm vs. 5:30pm.

 

[supernova72]

He's less than 59 - so he needs to keep it in his 401k till then if he wants (needs) to make withdrawals. And it sounds like he does need that.

OP - I remember reading a thread on here where someone ran various firecalc scenarios with a range of AA. And the outcome was basically pretty good anywhere from 30/70 to 70/30.... So I'd lower it to 70% equities.

Have you run firecalc - making sure to properly mark your pension as NON COLA.

Good point about Firecalc. For whatever reason I have not plugged in the new numbers W/O mortgage pmt and different AA mix etc. Non-COLA yes. I missed that box the first time I ran FC.

 

[respond2u]

He's less than 59 - so he needs to keep it in his 401k till then if he wants (needs) to make withdrawals. And it sounds like he does need that.

There's a chance OP could be eligible for the "age 55" rule and take money out of the 401K penalty free right now as he's over 55. The Age 55 Rule.


Another retirement calculator is ********. It allows for adding Social Security and pensions (COLA'd or not), and several different asset classes.

 

[rodi]

I agree, respond2u... That would be a reason for leaving it in the 401k rather than rolling it to an IRA.

 

[38Chevy454]

I am around 86% total equities, thanks to recent run-up in stocks. I have a target of 80%, and I sleep fine with that. I will be able to cover approx 75% of anticipated income needs through my modest pension and SS (both me and DW) once I am not working. It will be less than the 75% until SS kicks in. Both of us are still working, part-time for each now, which basically covers expenses and so not taking any regular withdrawals from savings. We even still contribute to savings with 401k and TSP, just a lot less now being part-time.

If you consider your pension as like equivalent to a fixed income portion, you are really less than your currrent 88% equities/12% fixed ratio in your 401k. Example, if you use the 4% withdrawal rate for calculation your pension is equal to about $1.075M equivalent. Of course being non-COLA'd it will be less of your total income as time and inflation go on.

So if you consider the $1.16M (1.075 + .12 x 715) as fixed, and your $630K (.88 x 715) as equity; then you sort of have an equivalent ratio of 35% (630/1790) equities and 65% (1160/1790) fixed income. Just call your other $20K as cash for simplification purposes.

My conclusion: stay the course you are on and you are fine. Take withdrawals as needed to supplement income until SS kicks in. Sleep well and don't worry.

Good suggestion to take the dividends as cash instead of reinvesting. Use that first before principal for the supplement needed until SS kicks in.

 

[Sunset]

There's a chance OP could be eligible for the "age 55" rule and take money out of the 401K penalty free right now as he's over 55. The Age 55 Rule.
.....

Right, I skipped over that.

OP - if you are under 59.5 the IRA thing does not work well due to the 10% income tax penalty for withdrawals from an IRA.

Check with your company about being allowed to withdraw from the 401K since you are over 55 (should be no penalty).

Otherwise, do you have non-retirement cash to get from 56 -> 59.5 ?

 

[NgineER]

Well,
OP could roll over into two separate IRA's. One for longer term investing and one set up to pay out a portion every year until 59 1/2 with a 72T distribution.

 

[pb4uski]

If the stable value fund pays a decent rate of interest that alone would be a good reason to stay in the 401k, not to mention being able to tap those funds as needed between 55-59 1/2.

Just sell stocks and buy stable value within the 401k to get to your desired AA. Given your pension and SS, I don't see a huge need to be heavy in equities... certainly no need to be heavier than 70%. One could argue that now is a good time to dial down.. either at once or over the next 6 months.

I don't see any advantage to taking dividends in cash... just reinvest them and adjust your AA as you take withdrawals as needed for living expenses.

 

[pb4uski]

Well,
OP could roll over into two separate IRA's. One for longer term investing and one set up to pay out a portion every year until 59 1/2 with a 72T distribution.

Why do that vs leaving in 401k for a few more years where you have the ultimate in flexibility to withdraw at will?

 

[NgineER]

It's an option if he is not allowed to withdraw money from his 401(k) prior to 59 1/2

 

[pb4uski]

Most of those "60/40" guidelines ignore pensions and social security.

Assuming you had those in treasuries, they'd be worth about 2.5M (at 2.5% interest), assuming the pension is solid.

From that perspective, you have very low equity exposure!

(for myself, I'm about 78% stocks, with no pension other than social security. I'm keeping a few years cash in case of a crash)

Not sure I agree with the first sentence above... any cites for that? I think you are right but that they do it in a different way than you suggest.

While some people include an imputed value of pensions and SS in calculating AA, more do not based on my experience. I recall exploring that a few years ago and concluding that it was preferable not to do so as in most cases you end up overloaded in equities.

The more common practice is to reduce spending/withdrawals for pensions and SS in computing a WR and go with a more moderate AA.

 

[donheff]

I would look solely at expenses that need to be funded outside your pension and SS. Clearly the next few years involve some, then your combined pension/SS will cover everything for a few years, after which inflation will probably eventually bring you into withdrawal range again. As others have stated dividends will probably be sufficient to cover your expenses so you could stay high in equities and not even need to free up cash for the short term (just direct distributions into a MMF and withdraw as needed). The downside to that is the potential need to fund a surprise major expense. It might make sense to liquidate a somewhat bigger cash cushion now that you could use for a roof or whatever in the next few years. If you keep expenses at your current level you will start generating excesses that can fund a cushion for a while post age 62 before inflation catches up to you.

 

[pb4uski]

It's an option if he is not allowed to withdraw money from his 401(k) prior to 59 1/2

True, but most 401ks allow penalty-free withdrawals if you terminate service in the year you turn 55 or later... which seems to apply to the OP.

 

[Cobra9777]

...While some people include an imputed value of pensions and SS in calculating AA, more do not based on my experience. I recall exploring that a few years ago and concluding that it was preferable not to do so as in most cases you end up overloaded in equities.

The more common practice is to reduce spending/withdrawals for pensions and SS in computing a WR and go with a more moderate AA.

+1

That's been my take-away after much reading on this topic here and on other forums.

We have 2 pensions that cover 55% of spending. If I count their NPV as a bond equivalent, I need to own 100% equity in the portfolio to be 60/40 overall. I'm not comfortable with 100% equity to cover the other 45%. I like some stability provided by bonds. The numbers get even more lopsided if I count the NPV of SS as a bond equivalent. I'm just not sure how meaningful these AA numbers are.

Seems to me that our situation is not substantively different than someone, with no pension/SS, who uses a 60/40 portfolio to cover their total expenses equal to my 45%. Guaranteed income just needs to be carved out separately. Then, portfolio AA should align with your risk profile in terms of withdrawing the remainder, and time-frame.

 

[Nature Lover]

The more common practice is to reduce spending/withdrawals for pensions and SS in computing a WR and go with a more moderate AA.

+1

I think the underlying question goes to how much risk the OP "needs to take" vs. how much he "wants to take". He has enough to not need to take more risk; so to sleep better at night, I'd go with a more moderate AA...55-60% equities until ss kicks in. Then, I'd re-evaluate.

NL

 

[supernova72]

I am around 86% total equities, thanks to recent run-up in stocks. I have a target of 80%, and I sleep fine with that. I will be able to cover approx 75% of anticipated income needs through my modest pension and SS (both me and DW) once I am not working. It will be less than the 75% until SS kicks in. Both of us are still working, part-time for each now, which basically covers expenses and so not taking any regular withdrawals from savings. We even still contribute to savings with 401k and TSP, just a lot less now being part-time.

If you consider your pension as like equivalent to a fixed income portion, you are really less than your currrent 88% equities/12% fixed ratio in your 401k. Example, if you use the 4% withdrawal rate for calculation your pension is equal to about $1.075M equivalent. Of course being non-COLA'd it will be less of your total income as time and inflation go on.

So if you consider the $1.16M (1.075 + .12 x 715) as fixed, and your $630K (.88 x 715) as equity; then you sort of have an equivalent ratio of 35% (630/1790) equities and 65% (1160/1790) fixed income. Just call your other $20K as cash for simplification purposes.

My conclusion: stay the course you are on and you are fine. Take withdrawals as needed to supplement income until SS kicks in. Sleep well and don't worry.

Good suggestion to take the dividends as cash instead of reinvesting. Use that first before principal for the supplement needed until SS kicks in.

Like you and DW I'm considering some part-time contract work. I retired as an IT project manager and was a financial analyst prior to that (and I still have finance questions!).

I get your point that in the big scheme of things my AA is lower than 88% since my pension is a fixed income stream. It's more about my age and at this point not adding to the 401K since right now I'm not working after 31 yrs of doing it M-F 8-5pm. Ha.