Katsmeow
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Jul 11, 2009
- Messages
- 5,308
I have a situation that I haven't really seen discussed. This is sort of long but appreciate those who stick with it. My primary question is what asset allocation to have during the next 3 years and what funds to put that allocation in.
For the TL ; DR – Due to 2 kids in college we will draw out 34% of our portfolio over the next 3 years and then our spending drops sharply. Firecalc give a 100% for our planned spending with a 55/45 asset allocation. I am wondering if I should switch to a 45/55 asset allocation to avoid some volatility over the next 3 years and, if so, which equities to sell to accomplish that.
DH retired in 2010 and I semi-retired. DH receives SS. For purposes of this exercise I want to not consider my income. Our current asset allocation is 55/45.
We have 2 kids at home, one is full-time in college and the other is starting in the spring on a 2 year program. We expect both to be out of school by mid-2016.
Mostly due to these kid-related expenses, we will have very high spending the next 3 years. Basically, after DH's SS, we expect to withdraw from the portfolio13% each in 2014 and 2015 and 8% in 2016. In 2017, however, our expenses will drop precipitously. I will be eligible for SS then as well. If I took it in 2017 (not decided), our portfolio withdrawals would be about 2.2% of today's portfolio (about 3.5% of a portfolio that was 60% of today’s portfolio)
With the above spending and our current portfolio, Firecalc gives us 100% with some cushion for higher spending.
So I could just stop there and keep on with what we are doing currently. But I’m worried about volatility over the next 3 years and withdrawals in 2014 and 2015 will be higher than they were this year (8% this year versus 13% in 2014 and 2015).
I've run various Firecalc runs with starting amounts 3 years from now. I've found that if our 2017 portfolio is no less than 60% of today's portfolio then the runs starting in 2017 are still at 100%. I recognize that over the next 3 years we will pull out roughly 34% of our today portfolio. So, if the next 3 years were just flat years with the market doing nothing then we would be OK. On the other hand, if the next 3 years were average years, then in 2017 we would have extra money which would be nice.
On the one hand, Firecalc says that historically if we have the spending I mention above and have a 55/45 portfolio then it would have succeeded 100%.
On the other hand, Firecalc also shows that if 3 years from now we have a portfolio that is less than 40% of what we have now then our success rate goes down (how far it goes down depends on how much less it is).
I also ran a run that set a minimum portfolio floor of 60% of the starting portfolio 3 years from now and that has a 80% success rate with 55/45 AA and 90% success rate with 35/65 AA. That said, I looked at the cycles that failed and several of them were the portfolio dipping in year 2 but then being back up to 60% at the end of the 3 years and several were the portfolio missing the 60% by a trivial amount.
So I am inclined to switch our AA somewhat to reduce volatility in the next 3 years. I found with Firecalc that on the long-term 30 year plan we do best with a 55/45 AA. On the next 3 years we do better for plan success with less equities but the average ending amount of the plan goes down. I am thinking about basically switching to a 45/55 asset allocation over the next 3 years. Would welcome any thoughts on this.
If I do it, the hard part is how to accomplish it.
Right now we have the following portfolio:
DH's IRA/Vanguard
Wellesley VWIAX 12% Portfolio .18 ER
Vanguard High-Yield Corporate VWEHX 5% Portfolio 0.14 ER
Vanguard Prime Money Market VMMXX 2% Portfolio 0.23 ER
Vanguard Short-Term Investment Grade VFSUX 14% Portfolio 0.16 ER
Vanguard Total Bond VBTLX 11% Portfolio 0.1 ER
Vanguard Extended Market VEXAX 11% Portfolio .14 ER
DH's IRA - Cash 2.5% Portfolio
My 401k/Fidelity
Dreyfux S&P 500 PEOPX 31%Portfolio .51 ER
Taxable
Cash 2.5% Portfolio
Vanguard Total International VTIAX 8% Portfolio .16 ER
Vanguard Total Stock Market VTSAX 1.5% Portfolio .05 ER
Right now my 401k is entirely equities. The reason for this is twofold. I am 6 1/2 years younger than DH so the plan is to withdraw first from his IRA since he will have to start RMDs in 2018. Second, the choices in my 401k aren't great. The only somewhat reasonable other choice is a stable value fund (current yield is .84%) or the Strategic Income fund (FSIAX) with a .98 ER. I could possibly put some of my 401k into one of those.
To move from 55/45 AA to 45/55 AA is where I am having problems.
Option 1: Move about 1/3 of my 401k to either the stable value fund or the strategic income fund. What I don't like about that is that the money in my 401k was money I wasn't planning to touch for years (I might do some Roth conversions when we are in a lower tax bracket 3 years from now).
Option 2: Sell the Extended Market Fund in DH's IRA. Put about half of it in the new Vanguard Total International Bond Fund. Put the other half somewhere. Would need feedback on that.
This is fairly easy to do. The negative of it is that we have the extended market fund so that it and the S&P 500 fund in my 401k approximates a total stock market fund. If I sell the Extended Market Fund then I no longer have that coverage of the overall stock market since I would still have 31% of our portfolio in an S&P fund. (There are other stock funds in my 401k but most of them have high expenses: Available stock funds are FCTLK, FNITX, HRSVX, JDERX, RSPFX, FTADX, ODVNX, FAGNX, FGDTX, FREAX). FTADX is an international fund, so I could move my international part of the AA to my 401k and then in the taxable account I could just have Total Stock Market so then I only have 23% of the portfolio in the S&P 500 fund so maybe that makes it easier to sell the Extended Market fund. However, FTADX has a 1.59% Expense ratio so I don't really like that.
Option 3 - Split the difference. That is, sell some of the S&P 500 fund and a proportionate amount of the extended market fund. I would then buy either the stable value or strategic income fund in my 401k and would then buy Total International in the IRA.
Option 4 - Sell everything in the taxable fund and put it all in cash or in CD's. That would be a great idea if I planned to use this money for living expenses in the next 3 years but I specifically do not want to do that. It is a small part of our Asset Allocation and I want to keep it available in case I want to spend money without it being something where it is all taxable (for example, if I want to keep within a certain tax bracket or don't want AGI to go above a certain number). I just don’t want to end up with little after tax money available in case I need it. I really don’t plan to spend more than 10% of the taxable account during the next 3 years so that is why I planned to keep it in equities particularly given that it is a taxable account.
For the TL ; DR – Due to 2 kids in college we will draw out 34% of our portfolio over the next 3 years and then our spending drops sharply. Firecalc give a 100% for our planned spending with a 55/45 asset allocation. I am wondering if I should switch to a 45/55 asset allocation to avoid some volatility over the next 3 years and, if so, which equities to sell to accomplish that.
DH retired in 2010 and I semi-retired. DH receives SS. For purposes of this exercise I want to not consider my income. Our current asset allocation is 55/45.
We have 2 kids at home, one is full-time in college and the other is starting in the spring on a 2 year program. We expect both to be out of school by mid-2016.
Mostly due to these kid-related expenses, we will have very high spending the next 3 years. Basically, after DH's SS, we expect to withdraw from the portfolio13% each in 2014 and 2015 and 8% in 2016. In 2017, however, our expenses will drop precipitously. I will be eligible for SS then as well. If I took it in 2017 (not decided), our portfolio withdrawals would be about 2.2% of today's portfolio (about 3.5% of a portfolio that was 60% of today’s portfolio)
With the above spending and our current portfolio, Firecalc gives us 100% with some cushion for higher spending.
So I could just stop there and keep on with what we are doing currently. But I’m worried about volatility over the next 3 years and withdrawals in 2014 and 2015 will be higher than they were this year (8% this year versus 13% in 2014 and 2015).
I've run various Firecalc runs with starting amounts 3 years from now. I've found that if our 2017 portfolio is no less than 60% of today's portfolio then the runs starting in 2017 are still at 100%. I recognize that over the next 3 years we will pull out roughly 34% of our today portfolio. So, if the next 3 years were just flat years with the market doing nothing then we would be OK. On the other hand, if the next 3 years were average years, then in 2017 we would have extra money which would be nice.
On the one hand, Firecalc says that historically if we have the spending I mention above and have a 55/45 portfolio then it would have succeeded 100%.
On the other hand, Firecalc also shows that if 3 years from now we have a portfolio that is less than 40% of what we have now then our success rate goes down (how far it goes down depends on how much less it is).
I also ran a run that set a minimum portfolio floor of 60% of the starting portfolio 3 years from now and that has a 80% success rate with 55/45 AA and 90% success rate with 35/65 AA. That said, I looked at the cycles that failed and several of them were the portfolio dipping in year 2 but then being back up to 60% at the end of the 3 years and several were the portfolio missing the 60% by a trivial amount.
So I am inclined to switch our AA somewhat to reduce volatility in the next 3 years. I found with Firecalc that on the long-term 30 year plan we do best with a 55/45 AA. On the next 3 years we do better for plan success with less equities but the average ending amount of the plan goes down. I am thinking about basically switching to a 45/55 asset allocation over the next 3 years. Would welcome any thoughts on this.
If I do it, the hard part is how to accomplish it.
Right now we have the following portfolio:
DH's IRA/Vanguard
Wellesley VWIAX 12% Portfolio .18 ER
Vanguard High-Yield Corporate VWEHX 5% Portfolio 0.14 ER
Vanguard Prime Money Market VMMXX 2% Portfolio 0.23 ER
Vanguard Short-Term Investment Grade VFSUX 14% Portfolio 0.16 ER
Vanguard Total Bond VBTLX 11% Portfolio 0.1 ER
Vanguard Extended Market VEXAX 11% Portfolio .14 ER
DH's IRA - Cash 2.5% Portfolio
My 401k/Fidelity
Dreyfux S&P 500 PEOPX 31%Portfolio .51 ER
Taxable
Cash 2.5% Portfolio
Vanguard Total International VTIAX 8% Portfolio .16 ER
Vanguard Total Stock Market VTSAX 1.5% Portfolio .05 ER
Right now my 401k is entirely equities. The reason for this is twofold. I am 6 1/2 years younger than DH so the plan is to withdraw first from his IRA since he will have to start RMDs in 2018. Second, the choices in my 401k aren't great. The only somewhat reasonable other choice is a stable value fund (current yield is .84%) or the Strategic Income fund (FSIAX) with a .98 ER. I could possibly put some of my 401k into one of those.
To move from 55/45 AA to 45/55 AA is where I am having problems.
Option 1: Move about 1/3 of my 401k to either the stable value fund or the strategic income fund. What I don't like about that is that the money in my 401k was money I wasn't planning to touch for years (I might do some Roth conversions when we are in a lower tax bracket 3 years from now).
Option 2: Sell the Extended Market Fund in DH's IRA. Put about half of it in the new Vanguard Total International Bond Fund. Put the other half somewhere. Would need feedback on that.
This is fairly easy to do. The negative of it is that we have the extended market fund so that it and the S&P 500 fund in my 401k approximates a total stock market fund. If I sell the Extended Market Fund then I no longer have that coverage of the overall stock market since I would still have 31% of our portfolio in an S&P fund. (There are other stock funds in my 401k but most of them have high expenses: Available stock funds are FCTLK, FNITX, HRSVX, JDERX, RSPFX, FTADX, ODVNX, FAGNX, FGDTX, FREAX). FTADX is an international fund, so I could move my international part of the AA to my 401k and then in the taxable account I could just have Total Stock Market so then I only have 23% of the portfolio in the S&P 500 fund so maybe that makes it easier to sell the Extended Market fund. However, FTADX has a 1.59% Expense ratio so I don't really like that.
Option 3 - Split the difference. That is, sell some of the S&P 500 fund and a proportionate amount of the extended market fund. I would then buy either the stable value or strategic income fund in my 401k and would then buy Total International in the IRA.
Option 4 - Sell everything in the taxable fund and put it all in cash or in CD's. That would be a great idea if I planned to use this money for living expenses in the next 3 years but I specifically do not want to do that. It is a small part of our Asset Allocation and I want to keep it available in case I want to spend money without it being something where it is all taxable (for example, if I want to keep within a certain tax bracket or don't want AGI to go above a certain number). I just don’t want to end up with little after tax money available in case I need it. I really don’t plan to spend more than 10% of the taxable account during the next 3 years so that is why I planned to keep it in equities particularly given that it is a taxable account.
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