How to move to target asset allocation

[petershk]

As I'm moving closer to the RE part of Fire, I have finally decided on my preferred asset allocation (pretty simple 60/40 vanguard with 2 years of cash).

The problem is... My current allocation isn't very close to that.

Did you guys have that problem? If so did you just shift it quickly or do it over time?

My thought was to do it over a 6-12 month period minimizing tax impact. The other thought was to allocate all future investments (I'm still working and saving) into that split and then when I RE spend down in a way that results in the target over time.

Other part of me thinks... Just do it all now, get it over with and have a drink .

Thanks!

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[MBAustin]

The complexity varies based on how much of your investments are tax-deferred vs. taxable. If mostly tax-deferred, it's pretty easy. Based on your comments, I think you must have significant taxable investments. I moved from 80-20 to 60-40 over several years by cashing out some taxable accounts for large expenditures (college tuition, an RV, etc.) and shifting the tax-deferred accounts to more like 50-50 by changing the mix of funds. I didn't get too fancy with that - over a couple of years just picked a fund or two to move to a more conservative position. But in your situation, I think I would just do a big chunk all at once and allocate your future investments to bring you to the right allocation at ER time.

 

[MasterBlaster]

I believe what the OP is asking is....What percentage of my assets should I move every month to asymptotically approach my ideal allocation ? Should the OP reallocate all at once or somewhat gradually over many months ?

My personal opinion is that large re-allocations are risky in that you may - or may not catch a market correction to your detriment or vice versa. I prefer the gradual adjustment over a number of months.

 

[EastWest Gal]

As I'm moving closer to the RE part of Fire, I have finally decided on my preferred asset allocation (pretty simple 60/40 vanguard with 2 years of cash).

The problem is... My current allocation isn't very close to that.

Did you guys have that problem? If so did you just shift it quickly or do it over time?

My thought was to do it over a 6-12 month period minimizing tax impact. The other thought was to allocate all future investments (I'm still working and saving) into that split and then when I RE spend down in a way that results in the target over time.

Other part of me thinks... Just do it all now, get it over with and have a drink .

Thanks!

Sent from my HTC One_M8 using Early Retirement Forum mobile app

Whatever you sell to shift will generate capital gains and will have a tax consequence. The tax consequence will be an annual issue, not affected by which months you make this change, so if you change it all in the same year, it doesn't matter how you spread it out.

Look at the total capital gains you will need to report when you make the changes you want to make. If that amount plus any other income you report is in the 15% tax bracket, then you should wait and do it all at once when you have no earned income at all; when you stop working, then you pay no taxes. Or, you could do it in two chunks, split over two years.

Since you are still working, I think you should invest into your portfolio so that it begins the rebalancing process.

What I would do is look at the unrealized gains in your portfolio and figure out what you would sell in order to rebalance the whole thing, and calculate the cap gains income you would have to report. Then you can figure out how fast or slow you can make these changes. But it makes sense to do it in chunks to get it over with. You may want to spread the process over 2 years to minimize the tax consequences, for example.

I'm currently reinvesting a messy but a lucrative equities heavy portfolio managed by an advisor into a 60/40 portfolio. So I am unfortunately reinvesting the entire portfolio. It will cost me quite a bit of capital gains tax due to the need to reinvest virtually the whole portfolio, so I'm doing it over 3 years, but 1/3 at a time. This is a mistake we made, and we will need to pay for it. Once it's done:

Another thing I did was to stop reinvesting all the dividends and that helped build up my cash reserves for ER.

 

[EastWest Gal]

I believe what the OP is asking is....What percentage of my assets should I move every month to asymptotically approach my ideal allocation ? Should the OP reallocate all at once or somewhat gradually over many months ?

My personal opinion is that large re-allocations are risky in that you may - or may not catch a market correction to your detriment or vice versa. I prefer the gradual adjustment over a number of months.

Good point about the large re-allocation. We caught the market before the slump, which was good, since we were selling equities.