Hi! Asset allocation help for 39-year-old - managing risk if want to retire early

[akl432]

Do you recommend making the asset allocation changes (exchanging stable value/bonds for equities) all at once, or dollar-cost averaging over a period of time? If you recommend dollar-cost averaging, what timeframe do you recommend?

 

[Qs Laptop]

Do you recommend making the asset allocation changes (exchanging stable value/bonds for equities) all at once, or dollar-cost averaging over a period of time? If you recommend dollar-cost averaging, what timeframe do you recommend?

I would do it all at once. The longer you have money sitting on the sidelines you will be missing out on potential gains.

 

[ziggy29]

Do you recommend making the asset allocation changes (exchanging stable value/bonds for equities) all at once, or dollar-cost averaging over a period of time? If you recommend dollar-cost averaging, what timeframe do you recommend?

Well, in this situation, since the usual long term trend of the market is up, doing it in one chunk is *likely* to be a little better, but it is also riskier. Mathematically, for that reason, doing it all at once has a higher expected return over a lifetime.

If you are more risk averse I see no problem with maybe doing 1/4 of the reallocation every quarter on a specified date. Do it mechanically, on specific days three months apart no matter what the market has done or is doing (this takes the emotion out of the timing). That will reduce the chance of moving most or all of the money on the worst possible market day to do so.

I'd be OK with either as you feel comfortable doing -- it's better than being way underinvested for years.

 

[DFDubb]

Being close to your age, I watched the 08/09 meltdown ruin a lot of people too at a time when I was just starting to get some real skin in the game. I actually lost my job with a fortune 100 company that I had been with 10 years. Ultimately I ended up using the "opportunity" to leave my industry all together to pursue something different. Luckily that paid off. That being said, my spouse and I were always prepared for something like that to happen and when it did, oh well, it happens. The people you saw get ruined were the folks who lease new escalades and bought McMansions with 5% down. These folks weren't prepared for a minor hiccup, much less what actually ended up happening.

My point is that you're well setup now and realistically can weather that same storm again or even one bigger. You've worked hard for your money and it's just sitting there waiting to be put back into the game. You don't have to go 90% equities like me, but like others have mentioned, you're actually hamstringing yourself with your current allocation.

 

[38Chevy454]

I became risk-averse during the 2008-09 downturn. I didn't have much then, so I didn't have much to lose, but I saw so many others lose so much of their portfolios. I decided at that time that I preferred not losing my savings, rather than having the potential for much larger gains. I even bought $100K in gold, thinking the market would collapse...still beating myself up over that gold purchase!

If you or your acquaintances that were concerned about losing money in 2008-09, all you did by selling was to lock in your losses. If you would have rode it out, by keeping your stocks in the portfolio, you would not only have recovered all of the 2008-09 downturn loss, but you would be far ahead right now. That is why in my original reply I said just keep investing with buy and hold strategy for the long term. Your long term is much more than just 11 years, it is the rest of your life.



You can't go back in time, so stop beating yourself up over the gold purchase. I would sell that and invest into stocks such as an index fund that is widely held and diversified. Like a S&P500 or total market fund. Low (or zero fees even) and able to track market performance over the long term. It won't hit a home run like an individual stock might, but it will also not strike out and really lose money.

 

[medved]

When I first began any sort of focused financial planning, I was inclined to be what you termed "risk averse." But my financial advisor persuaded me that "over allocating" to fixed income was not really reducing risk, but instead simply trading off one risk (diminution in market value of equities) for other sorts of risks (inflation, inadequate returns to enable me to retire when I want and with the spending I want, etc.). So it is not really "risk averse" versus "risk prone," but instead a question of which risk you prefer. Because either way, you are taking risk.

With that, I aimed for an allocation of around 67/33. It worked out quite well for me. Much more recently, I have dialed that back to around 50/50 (maybe 48/52 now). But I did that only after I had saved enough money that I could probably live pretty well for the rest of my life with zero investment returns. I intend to stick with 50/50 for the indefinite future.

I agree with those who suggested that your spending goals seem very modest. I don't doubt that some people live on that kind of money, but it will require a pretty frugal existence. Also, you have to think about changed circumstances -- health issues that carry with them uninsured expenses, a possible future marriage with unknown financial impact, developing new interests that you want to pursue that cost money, high inflation, etc. I would build in a pretty substantial cushion.

 

[akl432]

Thanks, all, so much great advice and insight! You have all been so helpful in articulating the downsides and risks of my existing portfolio. As I think further through how I am going to execute my asset allocation changes, I would really appreciate your recommendation:

As I start to sell the bonds/stable value and put that money into equities, which part of my portfolio should I keep in bonds/stable value - the 401K or the taxable accounts?

Do you recommend keeping some stable value in the 401K, or only keep some bonds (selling all the stable value)? Or sell all the stable value AND all the bonds, and just keep the taxable high-yield savings for the non-equity portion of my portfolio? For reference, here is my 401K:

Stock $169K
Bond $83K
Stable value 109K

Also, if I am going to dollar cost-average, should I sell the stable value or bonds first?

 

[24601NoMore]

The $36K budget assumption in retirement includes health care but not income taxes.

Maybe I just missed something as I admittedly did not read every post in the thread, but what are you budgeting for HC? We (me - 55, DW - 61) are budgeting $25K annually, and could easily exceed that number. Our premiums ALONE are $16K annually, with $6,500 per person deductibles. In a bad year, we could easily spend $30K or more on HC - and when you're 50+, things (in your body) start to break at a much more rapid rate than in your 30s.

If you haven't done so already, do some digging on actual HC premiums for people in your area in their 50s and 60s. I think you'll be very shocked at what you find, depending on where you live..

I've tracked our spending for years using Quicken and record "everything" (and I mean EVERYTHING - it's the only way to get a "real" expense number), and for 2 of us in a MCOL area in the midwest are at $60K "core" expenses, $20-25K HC and ~$5-10K taxes. Easy $90K before discretionary expenses or fixing things that break (like my driveway - will probably be another $10K this year), and we live pretty conservatively all in all (no fancy cars, don't eat out much, buy our clothes at Kohls..went through every expense with a fine tooth comb and eliminated or negotiated everything we could. Minimal to no travel..you get the picture..)

$36K annually - especially including HC - seems an insanely (and possibly unrealistic) target..even for a single person, unless you're living in the mountains of Appalachia in a shack without running water or electricity ....

 

[NgineER]

I would do as few taxable events as possible, but I believe that it is better to hold bonds in a tax deferred account vs taxable account.

 

[Col. Klink]

Thanks, all, so much great advice and insight! You have all been so helpful in articulating the downsides and risks of my existing portfolio. As I think further through how I am going to execute my asset allocation changes, I would really appreciate your recommendation:

As I start to sell the bonds/stable value and put that money into equities, which part of my portfolio should I keep in bonds/stable value - the 401K or the taxable accounts?

Do you recommend keeping some stable value in the 401K, or only keep some bonds (selling all the stable value)? Or sell all the stable value AND all the bonds, and just keep the taxable high-yield savings for the non-equity portion of my portfolio? For reference, here is my 401K:

Stock $169K
Bond $83K
Stable value 109K

Also, if I am going to dollar cost-average, should I sell the stable value or bonds first?

Hi!, I've got an idea. After reading back through this entire thread, OP, you may be a good candidate for the Vanguard Advisor Program. You appear to be a Vanguard client already since you inquired about their municipal bond funds and also appear to be someone who may enjoy and benefit from professional advice and portfolio management.

Information about the program is on their website. Basically they will do a financial (investment) plan for you and execute it on your behalf following an interview that they will do with you via Skype or Facetime. You can even go to their offices in person if you wish. They will consider your assets, goals, and tolerance for risk in the plan. Their fees for the service provided are among the best, if not THE best, in the financial services industry.

I would at least call them and talk with them about the program.

 

[akl432]

Maybe I just missed something as I admittedly did not read every post in the thread, but what are you budgeting for HC? We (me - 55, DW - 61) are budgeting $25K annually, and could easily exceed that number. Our premiums ALONE are $16K annually, with $6,500 per person deductibles. In a bad year, we could easily spend $30K or more on HC - and when you're 50+, things (in your body) start to break at a much more rapid rate than in your 30s.

If you haven't done so already, do some digging on actual HC premiums for people in your area in their 50s and 60s. I think you'll be very shocked at what you find, depending on where you live..

I've tracked our spending for years using Quicken and record "everything" (and I mean EVERYTHING - it's the only way to get a "real" expense number), and for 2 of us in a MCOL area in the midwest are at $60K "core" expenses, $20-25K HC and ~$5-10K taxes. Easy $90K before discretionary expenses or fixing things that break (like my driveway - will probably be another $10K this year), and we live pretty conservatively all in all (no fancy cars, don't eat out much, buy our clothes at Kohls..went through every expense with a fine tooth comb and eliminated or negotiated everything we could. Minimal to no travel..you get the picture..)

$36K annually - especially including HC - seems an insanely (and possibly unrealistic) target..even for a single person, unless you're living in the mountains of Appalachia in a shack without running water or electricity ....

Thanks for this frame of reference; this helps a lot. I live in a moderate COL area in the south. I only assumed $150/month for health care in current dollars (my current cost is $90/month), but I did not account for the employer-subsidized portion or the fact that it will be much more expensive if not purchased through an employer. Big mistake! Also, I did not include replacement of expensive items, such as roof or driveway. My budget spending numbers (core expenses) do not include income taxes, but I was trying to capture all other expenses, and I see now that I missed a lot of expenses. Thank you for pointing this out!


This further supports that feedback from many others on this thread that I need to be investing more aggressively.

 

[akl432]

QS Laptop, Ziggy 29 - Thanks; that helps. I understand about missing out on more gains by waiting longer. I think I will invest a chunk now and then the rest over perhaps a month (maybe dollar-cost averaging every Friday).


DFDubb - Thanks for the perspective.

 

[Aerides]

I only assumed $150/month for health care in current dollars (my current cost is $90/month), but I did not account for the employer-subsidized portion or the fact that it will be much more expensive if not purchased through an employer. Big mistake! Also, I did not include replacement of expensive items, such as roof or driveway.

Healthcare can vary quite a bit, state to state, year to year, and as you age. In FL, we're on a subsidized plan for two this year of $450 per month, $6500 pp deductible, and we're pretty happy with that.

No one can remotely project what the costs will be in 8 years, or what the laws will be, so for now, a swag placeholder in your budget in the range of $20k is probably smart, as a starting point. More if you'll retire with minor children. Same for taxes, so I'd probably add something like 15% to your budget for that (again swag, years out.)

For housing, maintenance, repairs, I've seen someone say to budget about 1% of your house value per year. That sounds about right to me, realizing some years will be much lower, but then the new-roof-year balances things out.

Don't get too worried about being precise this far out, but do cast a wide net for a good big picture.

 

[akl432]

When I first began any sort of focused financial planning, I was inclined to be what you termed "risk averse." But my financial advisor persuaded me that "over allocating" to fixed income was not really reducing risk, but instead simply trading off one risk (diminution in market value of equities) for other sorts of risks (inflation, inadequate returns to enable me to retire when I want and with the spending I want, etc.). So it is not really "risk averse" versus "risk prone," but instead a question of which risk you prefer. Because either way, you are taking risk.

With that, I aimed for an allocation of around 67/33. It worked out quite well for me. Much more recently, I have dialed that back to around 50/50 (maybe 48/52 now). But I did that only after I had saved enough money that I could probably live pretty well for the rest of my life with zero investment returns. I intend to stick with 50/50 for the indefinite future.

I agree with those who suggested that your spending goals seem very modest. I don't doubt that some people live on that kind of money, but it will require a pretty frugal existence. Also, you have to think about changed circumstances -- health issues that carry with them uninsured expenses, a possible future marriage with unknown financial impact, developing new interests that you want to pursue that cost money, high inflation, etc. I would build in a pretty substantial cushion.

All helpful insight. Could I ask how old you were when you selected your allocation of 67/33? And at what age did you dial back to 50/50? Are you retired or still working? Don't feel obligated to share, but I would appreciate as many reference points as possible.

 

[mrfeh]

OP - ultimately, nobody can answer this question for you. People can provide answers for what the "average" person should do, but only you know what AA will allow you to sleep at night.

I'd hate to see you go to 80/20 and then panic sell when/if the market tanks. You need to formulate a plan that you will stick with, regardless of market gyrations.

 

[Qs Laptop]

Thanks, all, so much great advice and insight! You have all been so helpful in articulating the downsides and risks of my existing portfolio. As I think further through how I am going to execute my asset allocation changes, I would really appreciate your recommendation:

As I start to sell the bonds/stable value and put that money into equities, which part of my portfolio should I keep in bonds/stable value - the 401K or the taxable accounts?

Generally speaking you want income producing securities like bonds in a tax deferred account because dividends and interest is taxed at whatever tax rate you're in. In contrast, long term capital gains from selling equities are capped at a tax rate of 20%.

Don't let worrying about this stuff paralyze you, start moving your savings account money into your taxable account and invest it in equity funds. For now look for funds that don't pay dividends and don't pay capital gains distributions. Index funds are usually ideal in this regard. One way to tell if a fund pays capital gain distributions is to look at the fund's turnover rate. Low turnover rates, say less than 20%, means the fund manager doesn't buy/sell individual stocks too often within the fund, so doesn't create a capital gains event that could be passed on to you.

With your relatively high annual income it could be that you are in a particular tax bracket with a lot of headroom and income from dividends and interest won't push you into a higher bracket. In this case you wouldn't need to be super concerned about having income producing investments in your taxable account.

With your high income and higher balances in your accounts you're going to want to get some advice from a tax pro. A tax pro can look at your overall income and your tax bracket and help you strategize what accounts to put equities and bond investments to lower your tax burden.

But start making money moves now.

 

[akl432]

Generally speaking you want income producing securities like bonds in a tax deferred account because dividends and interest is taxed at whatever tax rate you're in. In contrast, long term capital gains from selling equities are capped at a tax rate of 20%.

Don't let worrying about this stuff paralyze you, start moving your savings account money into your taxable account and invest it in equity funds. For now look for funds that don't pay dividends and don't pay capital gains distributions. Index funds are usually ideal in this regard. One way to tell if a fund pays capital gain distributions is to look at the fund's turnover rate. Low turnover rates, say less than 20%, means the fund manager doesn't buy/sell individual stocks too often within the fund, so doesn't create a capital gains event that could be passed on to you.

With your relatively high annual income it could be that you are in a particular tax bracket with a lot of headroom and income from dividends and interest won't push you into a higher bracket. In this case you wouldn't need to be super concerned about having income producing investments in your taxable account.

With your high income and higher balances in your accounts you're going to want to get some advice from a tax pro. A tax pro can look at your overall income and your tax bracket and help you strategize what accounts to put equities and bond investments to lower your tax burden.

But start making money moves now.

Thank you for pushing me -- I am setting up a transfer today to move funds from my savings account to my taxable Vanguard account, buying VTSAX. Updated: I made $80K in changes today (equities).

 

[akl432]

Healthcare can vary quite a bit, state to state, year to year, and as you age. In FL, we're on a subsidized plan for two this year of $450 per month, $6500 pp deductible, and we're pretty happy with that.

No one can remotely project what the costs will be in 8 years, or what the laws will be, so for now, a swag placeholder in your budget in the range of $20k is probably smart, as a starting point. More if you'll retire with minor children. Same for taxes, so I'd probably add something like 15% to your budget for that (again swag, years out.)

For housing, maintenance, repairs, I've seen someone say to budget about 1% of your house value per year. That sounds about right to me, realizing some years will be much lower, but then the new-roof-year balances things out.

Don't get too worried about being precise this far out, but do cast a wide net for a good big picture.

This is very helpful - thank you!

 

[WhenIsItTime]

I agree that the significant holdings in gold and high-yield accounts are way too conservative for someone with >5 years to retirement and trying to support retirement for 30+ years. The time horizon allows for weathering a market dip.

If you have held the gold for 3 years, its value probably hasn't covered the cost of inflation. Meanwhile a simple S&P 500 investment would be up 50%.

 

[akl432]

Hi!, I've got an idea. After reading back through this entire thread, OP, you may be a good candidate for the Vanguard Advisor Program. You appear to be a Vanguard client already since you inquired about their municipal bond funds and also appear to be someone who may enjoy and benefit from professional advice and portfolio management.

Information about the program is on their website. Basically they will do a financial (investment) plan for you and execute it on your behalf following an interview that they will do with you via Skype or Facetime. You can even go to their offices in person if you wish. They will consider your assets, goals, and tolerance for risk in the plan. Their fees for the service provided are among the best, if not THE best, in the financial services industry.

I would at least call them and talk with them about the program.

Thank you! I will research this!

 

[akl432]

Put your numbers into FIRECALC, and be sure to customize the retirement investments to match your portfolio. I think you'll find that with your AA, the chances of having your portfolio last throughout a 40+ year retirement horizon are low. Most of us here shoot for a 95-100% success rate in FIRECALC. IMHO, anything less than 85% means you need to change your AA, reduce your spending, or keep working. These are the three variables. Maintaining a very conservative AA means you need to save more!

Could I ask what date you recommend for the "Include performance since" date"? It defaults to 1871.

 

[akl432]

Hi!, I've got an idea. After reading back through this entire thread, OP, you may be a good candidate for the Vanguard Advisor Program. You appear to be a Vanguard client already since you inquired about their municipal bond funds and also appear to be someone who may enjoy and benefit from professional advice and portfolio management.

Information about the program is on their website. Basically they will do a financial (investment) plan for you and execute it on your behalf following an interview that they will do with you via Skype or Facetime. You can even go to their offices in person if you wish. They will consider your assets, goals, and tolerance for risk in the plan. Their fees for the service provided are among the best, if not THE best, in the financial services industry.

I would at least call them and talk with them about the program.

Thanks for this recommendation. I have had two calls with them so far, and I am probably going to go with them. I don't have the skill and interest in doing the periodic rebalancing of my portfolio (I tried to do it myself and struggled). This is a good fit for me.


Also, I put a large portion of my savings account funds into VTSAX, so I took a huge step! I will invest the remainder after meeting with the Vanguard advisor again.


Thanks to everyone for your feedback and suggestions! I am on my way to building a more suitable plan. You all are the best!

 

[Qs Laptop]

Also, I put a large portion of my savings account funds into VTSAX, so I took a huge step! I will invest the remainder after meeting with the Vanguard advisor again.

Excellent! It's kind of an intimidating step to take but you are going to reap the rewards in the years ahead. Congratulations.

 

[akl432]

Excellent! It's kind of an intimidating step to take but you are going to reap the rewards in the years ahead. Congratulations.

Thank you (and everyone else) for firmly encouraging me to take the steps!

 

[2177V]

Hi, everyone! I am a long-time lurker but recently just started posting. I wish I had found this site much earlier in my life; you all are so knowledgeable and helpful!

I am requesting help with my asset allocation. I am 39, single, and plan to retire around age 50. My problem is that I am very risk-averse, which is compounded by my desire to retire early. I am unsure how much of my portfolio to put into VTSAX, versus my high-yield savings accounts, if I want to retire in about 11 years.

If there is any additional information needed, please let me know. Thank you in advance for your input!

I am already retired and I discovered that investment strategy is completely different during retirement.

I keep a portion of my portfolio into stock funds and a portion into bond fund. My bond funds portion are designed for liquidity and low volatility. My stock funds are designed for performance and less liquidity.

Liquidity becomes important "during" your withdrawal phase and Liquidity was NOT a major factor "before" retirement. A good liquidity and low volatility is VFSTX which is rated 4 star Morningstar. Review the quarterly returns and you will note the quarterly returns are small but the losses are also small. I do not look at the 10 years performance because this fund will be liquidated within 5 years or even sooner. I keep at least 5 years of retirement income in low performance but high liquidity bonds because any market crash "should" recover within 5 years and you need these bond funds to be liquid as your rainy day funds. If you are risk adverse, you can up this to 7 or even 10 years of retirement income.

My stock portion are designed for performance and diversification. As I liquidate my bond funds, i need to replenish it with my stock funds. Since i have a diversified portfolio of stock, I then select the stock fund that is higher in value than the other stock funds to maintain the "sell high" strategy. Your portfolio does not have sufficient diversification to play this game. I also do not like co-mingling funds with different asset classes because you also cannot play this game. Co-mingled stock funds works OK before retirement but they are problematic during liquidation because you may be selling low in some portion of that specific co-mingled fund.

Finally, after I liquidate a bond fund for my retirement income in January to fund my expenses for 1 year, I watch the market carefully before deciding which stock fund to liquidate. For example, I have already liquidated a bond fund but I am waiting for the China Trade agreement to be finalized which should cause the stock market to rise predictably. Afterwards, I will exchange one of my stock fund for a bond fund to maintain 5 years of liquidity in my portfolio.

I noted that you are 11 years away from retirement. You can be more aggressive since you are more than 5 years away from retirement. However, the 5 years is my personal opinion of a stock market recovery time and everyone's opinion is different. However, 11 years is a long time so i question why you have high liquidity in your portfolio. Once you understand how to manage liquidity then you will become a better investor.

Hope this helps.