AA Question - Taxable and Tax Advantaged

[ItsTime]

Hi All,

I have been researching the recommended approach to thinking about asset allocation as I prepare to leave the corporate world. My portfolio currently sits as:

Taxable - $1.8M (90% Stock Index Funds / 10% Cash)
Tax Advantaged - $1.52M (IRA/401K)
Annual expenses are $72K before taxes

Any thoughts on treating my two accounts as two separate income sources? For example; is the thinking accurate that I can view my taxable account as my singular retirement "phase one" income source for the next several years and set an asset allocation that would be representative as a single source?

Or should my AA be set for my total $3.3M portfolio and it treat as one master account? I am planning to set an AA of 70% Stock Index Funds / 20% Bonds / 10% Cash.

Thanks in advance for any feedback and please let me know if I can clarify my intentions if helpful.

Thanks!

 

[PaunchyPirate]

Most advice that I read suggests that you view all of your accounts together when setting up your asset allocation. In other words, find a way to spread your 70/20/10 allocation across the $3.3m.

I retired at 56 with only 1 taxable account and 1 traditional IRA and a savings account. MY desired allocation is 55/45 stocks/bonds. My entire IRA is in bond plus another $275k of bonds in my taxable account to reach my goal of 45%. I treat the cash in my savings account as bonds in the AA. I adjust between the 3 accounts as necessary to maintain my AA.

For now, I am living off dividends from the taxable account plus some withdrawals from the savings account.

 

[SnowballCamper]

I think the general consensus is that the asset allocation is for the entire portfolio. I'd consider the tax implications though. Depending on what you have in the taxable account and the tax basis, it might make sense to harvest out of it if you have some loosers to sell, before having to pay taxes on bond interest. Other folks know more about this than me though...

 

[ItsTime]

Thanks for the replies, PaunchyPirate and Snowball Camper. Makes sense that viewing the accounts together for establishing AA is the optimal approach.

I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.

 

[PaunchyPirate]

Thanks for the replies, PaunchyPirate and Snowball Camper. Makes sense that viewing the accounts together for establishing AA is the optimal approach.

I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.

My first year was filled with my mind racing thru the “how to’s” of the finances. But after that I found I was in a well-oiled machine that I had set up. Now I just enjoy watching myself execute my planning.

 

[pb4uski]

So I would treat as one fungible pot of money and go:

Taxable: $332k cash and $1,468k stock
Tax-Deferred: $664k bonds and $856k stock

for tax efficiency.

Then rebalance cash to 10% periodically by selling stock in taxable account, then rebalance bonds as needed in tax-deferred account to or from stocks in the tax-deferred account.

 

[Out-to-Lunch]

I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.

Totally normal! (Or I am messed up, too, which is eminently possible! )

I believe that, unsurprisingly, the plan @pb4 outlined is advisable.

 

[Koolau]

I agree with combining the two as far as figuring asset allocation. On a somewhat different front, I suggest thinking of tax advantaged accounts as being worth less than their nominal amounts (this doesn't change asset allocation).

Realistically, tax-advantaged accounts are worth their value minus the taxes which will be due when cashing out. I mention this since OP has a significant allocation within tax advantaged. Only the owner can make the calculation if desired as YMMV.

 

[mrfeh]

Most advice that I read suggests that you view all of your accounts together when setting up your asset allocation.

+1

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[Out-to-Lunch]

I agree with combining the two as far as figuring asset allocation. On a somewhat different front, I suggest thinking of tax advantaged accounts as being worth less than their nominal amounts (this doesn't change asset allocation).

Realistically, tax-advantaged accounts are worth their value minus the taxes which will be due when cashing out. I mention this since OP has a significant allocation within tax advantaged. Only the owner can make the calculation if desired as YMMV.

I agree with your points, except to say that you certainly CAN use this information to tailor your AA, if desired: https://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

 

[RunningBum]

I agree with your points, except to say that you certainly CAN use this information to tailor your AA, if desired: https://www.bogleheads.org/wiki/Tax-adjusted_asset_allocation

Good to see that I'm not the only one to do this. Even if I was the only one, I wouldn't change what I'm doing.

 

[Out-to-Lunch]

Good to see that I'm not the only one to do this. Even if I was the only one, I wouldn't change what I'm doing.

You may remember a "battle of wits" you and I had with Mr. pb4, which was my first real foray onto this forum. I was shocked that this viewpoint wasn't more widely held, or at least known. (https://www.early-retirement.org/forums/f28/asset-allocations-in-roth-and-traditional-101915.html)

 

[RunningBum]

You may remember a "battle of wits" you and I had with Mr. pb4, which was my first real foray onto this forum. I was shocked that this viewpoint wasn't more widely held, or at least known. (https://www.early-retirement.org/forums/f28/asset-allocations-in-roth-and-traditional-101915.html)

I had to refresh my memory, but I do!

btw, you had a ')' sneak in at the end of your url. The thread, if anyone else cares, is at https://www.early-retirement.org/forums/f28/asset-allocations-in-roth-and-traditional-101915.html

My use of post-tax numbers goes back to when I had a lot of unexercised stock options, most of which were going to be taxed at 39.6% fed and 7.75% state. It would have been totally foolish to look at that money at full value. And it would've been foolish to ignore those options since that's what put me on the fast track to ER.

Nowadays, my taxes are much lower so it matters less if I use post-tax numbers, but I don't see a reason why not to use them, if I can make a reasonable guess at future taxes.

 

[Out-to-Lunch]

btw, you had a ')' sneak in at the end of your url. The thread, if anyone else cares, is at https://www.early-retirement.org/forums/f28/asset-allocations-in-roth-and-traditional-101915.html

Argh, I hate when that happens. Thanks for the heads-up; I got it fixed before the edit button went away.

My use of post-tax numbers goes back to when I had a lot of unexercised stock options, most of which were going to be taxed at 39.6% fed and 7.75% state. It would have been totally foolish to look at that money at full value. And it would've been foolish to ignore those options since that's what put me on the fast track to ER.

Yes, that would do it!

For me, I am planning to start a 5-year course of Roth conversions. Same idea, but not as extreme as your situation. This regimen will "wipe out" about $300k of my portfolio (in taxes paid). But, of course, the conversions will not change my real financial position. So, it becomes natural to strive to start thinking in post-tax dollars. Natural to strive, that is, not natural to do. I will continue to struggle with this. I admit that I prefer anchoring on the pretax portfolio value!

All that having been said, I was a bit surprised how little difference it made in my AA. My goal now is about 50/50, and about 1/4 of my money is post-tax, and 3/4 is pretax, and that is where the bonds are. If I count all dollars "the same," my AA is 48/52. Calculated on a post-tax basis, it is 52/48.

 

[ivinsfan]

Regarding AA does anyone care that the OP and spouse are in their early 50's and will need HI for around 15 years before Medicare. I think they have one or two kids on HI at this time as well. I realize they have ample means to pay rack rate for HI. I'm just curious if AA for subsidy managing is turning into a thing...

The OP doesn't have access to much after tax cash IMO/