Asset Allocation help

[dm]

I'm down to the last few weeks at work. I have 5 more 28 hour weeks to go. I can leave my 401k where it is or I of coarse can transfer it to an IRA.

My 401k has the following American Funds

Bond fund
American Balance
Investment Co. of America
New Perspective
New Economy
Smallcap World Fund
Growth Fund

I currently have the following percentages:

Investment Co. of America 40%
New Perspective 30%
New Economy 15%
Smallcap World Fund 15%

I have around 300k in the 401K

In my taxable account I have around 125K

FRO/SFL 10,000
QQQQ 10,000
MO/KFT 12,000
PWI 10,000
KRE 5,000
EVV 3,000

cash 75,000

I sold some stocks a few weeks ago, EGLE, DSX, FRO, and bpop. So I have more cash than I'm use to.

I'm 50 and my wife is 46. My wife is going to work at least one more year and has a very nice COLA pension. She also teaches a class at the local college. As long as she is working we will continue to add to the after tax savings.

If my wife retires next year and also quits her 4 hour a week college class we would need to draw around $12,000 a year from the above.

Actually I will be suprized if she retires from her job next year but I want to be prepared. I also dought that she will quit teaching her college class as she really loves it. I am trying to convice her to retire and draw her pension and work the 4 hours a week and have the summers off. The class pays $6,600 a semester so we would not have to draw any as long as she teaches the class.

So should I reallocate some of my funds within the 401k? Should I just cash them out and transfer to an IRA and buy a basket of ETF's. In my after tax account should I start buying some indexes or take some of the cash and put it in CD's?

[ziggy29]

First of all, I would recommend rolling this over into an IRA when you leave your job. You will have more control and likely better investment options.

In terms of using your portfolio for income for the next 8+ years if your wife retires next year, you have two choices: You could either tap the taxable account until age 59.5 (mostly exhausting it by the time you can get to the IRA), or use Rule 72(t) after you roll the $300K 401K into an IRA.

Which way you decided to go would likely determine what your overall asset mix in each account should be. For example, if you used 72(t) on the IRA, I'd keep the taxable account more in tax-efficient investments. But if you plan to tap the taxable account for income until age 59.5, you need to stay more conservative to make sure that money doesn't run out until you start draining the IRA.

Which would be better -- using the taxable account or 72(t)? I'd run what-if scenarios on your income and expected taxes both ways. The lower your current tax bracket would be, the more advantageous I think it would be to use 72(t). The higher your bracket, the better to use the taxable funds, or at least enough of them to kick any IRA distributions down to the 15% bracket if possible.

[LOL!]

To me, asset allocation is first deciding what percentage of equities, fixed income and cash you want. You might wish to read Rick Ferri's All About Asset Allocation, William Bernstein's The Four Pillars of Investing and Paul Merriman and colleagues articles at FundAdvice.com - Home to help you make a decision.

Next on the AA front is how to divide up your equities: how much large cap, mid/small cap? How much international large, mid/small? And whether you wish to have small cap and value tilt? You should use the Morningstar tools to figure out what you have and how to change it. M* has a 9-box style grid which can be helpful in this regard.

Next, is the bonds. Do you want to divide your fixed income up among TIPs, short term, intermediate term, and total bond index?

You should want to minimize taxes on your investment income, so you should not want your taxable account to generate any taxable income that is not needed for expenses. That will generally mean avoid bonds and CDs in a taxable account.

You should want to minimze expenses as well. That will mean rolling over to a low-cost fund provider like Vanguard or using ETFs such as the Vanguard ETFs in a no-cost brokerage like WellsFargo.

Or blow off all the details and have anonymous message board posters do the work for you.

[dm]

The pension will be $53,000 if she quits next year and increases around $5000 for each additional year she works. So I have to start there with taxes. The fundadvise website looks to be a start of what I'm looking for, thanks.

Since the majority of our income will come from the pension and its enough to pay our bills, I feel comfortable with a fairly high stock allocation. I'm thinking around 70%. And it may actually be years before we have to tap into it. And hopefully SS will be there for me also.

I am really wondering where the American Funds that I have fit into things but I guess it would be simpler to sell them in the 401k and then transfer them to a IRA. Then buy some ETF.

If I was needing income would having CD's, Reit's, ect in a taxable account make any difference?

[Bikerdude]

Just curious, but what kind of job pays a cola pension of 53K at age 47?

[dm]

School administrator. They are offering a 25 year early out without a reduction for age. She will have 26 years in.

[LOL!]

Quote:

Originally Posted by dm \If I was needing income would having CD's, Reit's, ect in a taxable account make any difference?

Possibly. Income from CDs and REITs would be taxed as ordinary income and thus at the highest rates. If you had all equities in your taxable account, they would probably pay out about 2% in dividends. You could arrange for the dividends to be so-called "qualified dividends" that would be taxed at a favorable rate. If you needed more income, you could sell some small amount of equities each year as part of normal rebalancing. If you did this judiciously you would sell losers for the tax loss harvesting and perhaps positions with long term cap gains which are also taxed at a lower rate than your marginal income tax rate.

So managing your portfolio with an eye towards asset allocation, taxes and expenses will maximize your benefits.

My 76 year old mom is 100% equities since she gets SS and a pension that cover her expenses. She figures the stock market is fun and any gains will go to her heirs. And she doesn't really care about gains.

[dm]

Ive been doing some reading and I really want to simplify things. I'm thinking about going with the following:

35% VTI total market US
20% VEU total market non US
5% REITS ?
30% Bonds CDS ect.
10% Individual stocks.

I will continue to work on this as I may break down the stock allocations some but I wonder if its really worth the trouble.

[ziggy29]

Quote:

Originally Posted by dm The pension will be $53,000 if she quits next year

I clearly went into the wrong line of work.

[LOL!]

Quote:

Originally Posted by dm Ive been doing some reading and I really want to simplify things. I'm thinking about going with the following: 35% VTI total market US 20% VEU total market non US 5% REITS ? 30% Bonds CDS ect. 10% Individual stocks. I will continue to work on this as I may break down the stock allocations some but I wonder if its really worth the trouble.

Very nice and simple.

[Spanky]

Quote:

Originally Posted by dm School administrator. They are offering a 25 year early out without a reduction for age. She will have 26 years in.

The quarterly school district newsletters (we received) always complain about not getting sufficient funding from the state. I can see the reasons since they have to pay attractive pensions in addition to other program improvements.

[dm]

She puts in 12% of her income and so does the district. No Social Security. How much would a 401K be worth if you put in 24% of your salary for 25yrs?

[Spanky]

Quote:

Originally Posted by dm She puts in 12% of her income and so does the district. No Social Security. How much would a 401K be worth if you put in 24% of your salary for 25yrs?

Good question! Since her salary history is unknown, a present salary of $75,000 is assumed. If annual salary increase is 5% and return is 10%, the portfolio value is $441,196 (12% contribution) or $882,391 (with 100% match or 24%) after 25 years. If she retires now and withdraw $55,000 the first year and inflation adjusted subsequent years, her portfolio will only last for 11 years at 8.5% yield without the 100% match. However, with 100% match (or 24% contribution) while keeping everything the same, the portfolio will last for 42 years - a big difference.

In short, her pension plan (100% match) is far more superior than a typical 401K plan. Most 401K plans match 50 cents on the dollar but not over 6% of salary. In addition, there is no guaranteed return on your investment. The employee assumes the investment risk in contrast to a pension plan.

An inflation adjusted pension of $55,000 per year at 12% contribution is fantastic based on the assumption of current salary of $75,000. Even if her salary is doubled, the result will still be great.

P.S. I am not implying that your wife does not deserve her pension. You and your wife are not in great shape for retirement. Most people can live just on that kind of pension. You may never have to touch your investment. Good luck.

[jIMOh]

Quote:

Originally Posted by dm She puts in 12% of her income and so does the district. No Social Security. How much would a 401K be worth if you put in 24% of your salary for 25yrs?

depends on salary.

care to give specifics (salary, avg increases, expected return)