Asset allocation across several accounts

[utrecht]

I have an asset allocation question. My situation.

Im 42 and married. We plan to retire in 7 years. We will have pensions that will account for about 65% of out projected income so I am now and plan to stay fully invested in stocks and funds even in retirement.

Current portfolio is as follows

61% Large Cap growth (Spartan index 500 fund, Contrafund and SPY)

10% Large Cap Blend (Vanguard Total Stock Market fund)

11% Mid Cap (Fidelity Low Priced Stock)

3% Small Cap (Vanguard Small Cap index)

14% International (Vanguard Intl, Fidelity Diversified Intl, MS Emerging Markets)

Any comments on this mix is appreciated but my real question is in regards to this: These funds are spread across 2 457b accounts, 2 Roth IRAs and a taxable account. Each account has different options available and the 457b accounts (where most of the money is) options are limited.

I want to add some more small cap exposure and some sector ETFs. The easiest way to do this would be to sell the SPY which is in the taxable account and buy something else there. But since the taxable account only account for about 9% of my entire portfolio, if I wanted to have , lets say 9% of my portfolio to be in an energy ETF or a REIT, it would amount to my entire taxable account being in one specific sector. That account would be very volatile. Is that a big deal if its still only a small portion of the total portfolio?

Also, do you think its best to think of my and my wifes accounts seperatley for AA purposes or as one larger unit?

[LOL!]

1. You should look at ALL your accounts as a whole to get to your asset allocation. So, YES, include your wife's accounts with your accounts for this.

2. It is not a big deal at all if a single account holds only one asset class. Indeed, you will want to have REITs and other tax inefficient funds in your tax-free (Roth) and tax-deferred (401k) accounts and use for taxable accounts for tax efficient funds like large cap blend index funds.
fixed income.

My spouse has an IRA that is 100% TIPS. I have a 401k that is 90% fixed income. Our taxable account has tax-efficient ETFs. Our total AA is just fine.

For more help with asset allocation, the best place on the web is the Diehards forum where folks live to just give out personalized AA advice.
Bogleheads :: View Forum - Investing and Personal Finance

[Linney]

LOL's post provides you with good advice. I too treat our collection of retirement accounts --- 401k, Trad IRA, Roth IRAs X 2, SEP IRA, and taxable account --- as One Big Portfolio. Like your 457b accounts, my 401k only offers a limited selection of funds. You have to figure out your overall portfolio asset allocation FIRST and then see how you can make it work with the funds and accounts that you have. You may have to make some tradeoffs like I do, but keep the Big Picture (your desired asset allocation) in mind as you do this.

Personally, I can't handle the volatility of having my small accounts invested into a single asset class. So I have done a compromise. 25-50% of these tax-deferred accounts are invested in a more stable mutual fund such as a balanced fund (OAKBX in my case) and the rest of the money is invested in a more volatile asset class. It may not give me the best possible overall return, but it does let me sleep at nights knowing that no one account should get 'slammed' with tremendous volatility in any particular investment year. As LOL says, it is fine to have a single asset class in one account. But if the volatility will bug you, there are other options such as the approach that I use.

[jIMOh]

I differ from the allocation advice given above, I try to maintain each account as it's own allocation. I don't have much in taxable accounts, though and this would change my line of thinking.

In your situation I would look at things differently... look at bridging the 35% income gap. How do you plan to get this 35% in income?

Here are some examples and the pros/consequences on asset allocation:

1) sell the SPY in taxable accounts. This would decrease the large cap allocation, and also allow you take advantage of long term capital gains rates.

2) use the dividends from SPY, leaving principal invested. Then withdrawing from large cap investments in tax favored accounts. This maintains the SPY principal, slightly lowering cost basis. The dividends get favorable tax treatment, whereas the large cap withdraws are being taxed as ordinary income (higher rates than dividends or LTCG).

In either of above cases the small cap % increases, simply because you are drawing down other asset classes.

In the mean time I would contribute new money to small caps (if that's what you want, buy it). Who cares what account type the small caps are in, if you need it in your allocation, buy them.

My logic for having each account maintain it's own allocation is to allow me to rebalance each on it's own (statements come at different times, each has it's own rules about short term trading). In addition to that, I have had 3 401ks in 10 years. One job, one employer (bought and sold 3 times). We were acquired again this year and in January I will be on my 4th 401k with the same job. Wife is on 4th 401k right now (in 7 years). We each have a rollover IRA and Roth IRA to boot. If I had to buy/sell IRAs based on 401k changes, that would be way too much work, and we still have around 20 years to go to ER and 35-40 years for normal retirement.

The Roths are considered one portfolio with 100% equity allocation (75% domestic and 25% international).

Each 401k is also 75-25
The rollovers are extra (and much smaller) so these compliment the Roths.

[grumpy]

Utrecht,

I think you should be cautious about putting all of your taxable account into a single fund, particularly a volatile one unless you have a separate cash account somewhere that you do not include in your allocation. From where will you withdraw funds to augment the pensions to cover your ongoing expenses? You should probably have two to five years worth of such funds in cash or other liquid investments at retirement such that you would not have to liquidate taxable equity investments in a down market. Most of us plan to withdraw from our taxable accounts first, to allow the maximum compounding to take place in our tax deferred accounts.

Grumpy

[Brat]

Grumpy,

Reconsider using assets outside IRAs first if you are an older retiree. In our case required minimum distributions are fast approaching. If my non IRA assets are invested for growth (tax efficient) then it is smarter to use traditional IRA for income after converting as much as wise (depending on tax bracket) to a Roth.

I too had been of the opinion that I should use up my non-IRA assets first but after

studying our RMD situation,

the fact that the tax rates of capital gains is lower that other income, and

inherited non-IRA assets get a step up in value while IRA assets have an accelerated withdrawal schedule -

I changed my mind.

[jIMOh]

Quote:

Originally Posted by Brat Grumpy, Reconsider using assets outside IRAs first if you are an older retiree. In our case required minimum distributions are fast approaching. If my non IRA assets are invested for growth (tax efficient) then it is smarter to use traditional IRA for income after converting as much as wise (depending on tax bracket) to a Roth. I too had been of the opinion that I should use up my non-IRA assets first but after studying our RMD situation, the fact that the tax rates of capital gains is lower that other income, and inherited non-IRA assets get a step up in value while IRA assets have an accelerated withdrawal schedule - I changed my mind.

I have heard this from numerous sources.

If you "need" 40k to live on, the 40k comes easiest if it's from a Roth (tax free).

It's next easiest if it comes from a taxable account. Several reasons. First is long term capital gains rates are LOW, and the 40k being used in this example is from a Roth and LTCG, then it's possible the LTCG are at 5%, even if you were in a much higher bracket earlier in life.

Lastly use the RMD's from IRAs. These will be at ordinary income rates AND will make the LTCG mentioned earlier be at higher rates. It is in your best interests to keep overall tax rate low throughout all withdraws.

[grumpy]

Quote:

Originally Posted by Brat Grumpy, Reconsider using assets outside IRAs first if you are an older retiree. In our case required minimum distributions are fast approaching. If my non IRA assets are invested for growth (tax efficient) then it is smarter to use traditional IRA for income after converting as much as wise (depending on tax bracket) to a Roth. I too had been of the opinion that I should use up my non-IRA assets first but after studying our RMD situation, the fact that the tax rates of capital gains is lower that other income, and inherited non-IRA assets get a step up in value while IRA assets have an accelerated withdrawal schedule - I changed my mind.

Brat,

The OP is 42 and plans to retire at 49. RMD's will not be a consideration for him for 21 years.

Grumpy

[Brat]

I would be inclined to let Roths roll until one has the status of last to die. The folks who frequent this forum aren't likely to be the objects of litigation, but the one advantage of IRAs (including Roths) is that they are protected from creditor claims in most situations

[utrecht]

Quote:

Originally Posted by grumpy Utrecht, I think you should be cautious about putting all of your taxable account into a single fund, particularly a volatile one unless you have a separate cash account somewhere that you do not include in your allocation. From where will you withdraw funds to augment the pensions to cover your ongoing expenses? You should probably have two to five years worth of such funds in cash or other liquid investments at retirement such that you would not have to liquidate taxable equity investments in a down market. Most of us plan to withdraw from our taxable accounts first, to allow the maximum compounding to take place in our tax deferred accounts. Grumpy

Thats a good question. I hadnt really thought about that much. Since the size of my taxable account will be pretty small in comparison to my 457b, I didnt think it would be a major issue.

Now though , I have extra money to invest. I was going to start adding it to my taxable account but I also just realized that I can have max out my 457b AND still have a 401k so I might start a 401k. The problem with 401k is that its subject to all the withdrawal restrictions. The 457b account has no restrictions. I can withdraw whatever I want whenever I want as long as Im no longer employed there. Obviously the taxbale account is the same.

[Brat]

Quote:

Originally Posted by grumpy Brat, The OP is 42 and plans to retire at 49. RMD's will not be a consideration for him for 21 years. Grumpy

Missed that. I retired at about that same age, it seems like yesterday.

OP should absolutely tap other assets and let those IRAs grow as long as possible. When to tap them, after 59.5, will depend on how big they have grown and what the impact of RMDs will be 10 years later.