Question about Asset Allocation

[davidbeitz]

I would like opinions on the following scenario. I will be retiring at the end of this year at 59. Over the last 40 years my wife and I have accumulated about 10 different investment accounts of various types (cash, 401’s, traditional ira’s, and roth ira’s. I understand the order in which I need to withdraw from during retirement but would like comments on how to setup my asset allocation across these accounts. If for example my overall risk tolerance gives me an 60/40 allocation, should I take an account that will not be needed for over 10 years and allocate it at 70/30 and accounts needed sooner at say 50/50? What I am thinking about is trying to achieve an overall 60/40 allocation while taking more risk with accounts I don’t need for many years and less risk (more principal stability) with short term funds.



I understand this AA will need to be managed as I move through retirement to lessen my risk as I get older but it seems prudent to take advantage of the market with funds not needed in early retirement.


Comments?

 

[nun]

It makes little difference. You should think about your net AA across all accounts and rebalance appropriately.

 

[Blue Collar Guy]

put ur bonds portion in the tax deferred accounts, they generate constant taxable events and u will pay the tax man now,

 

[nun]

put ur bonds portion in the tax deferred accounts, they generate constant taxable events and u will pay the tax man now,

Yes, be tax efficient.

 

[davidbeitz]

sorry for the stupid question, but not sure what you mean

 

[Blue Collar Guy]

sir, are u asking me? if so ill explain in more detail

 

[davidbeitz]

sir, are u asking me? if so ill explain in more detail

yes sorry

 

[Blue Collar Guy]

ok, i read this from the heavy weight investor guru. John Bogle specifically(founder of Vanguard), he said if you have multiple accounts it is best to have the bond portion of your portfolio in the tax deferred accounts, this way the interest they payout continues to grow tax deferred until you with draw it, so in real world example:you said u have many accounts. lets say you have 1 million dollars and you decided u wanted a 70 % stock 30 % bond asset allocation, in your taxable accounts have 300k in stocks and in ur 401ks have 300k in bonds, and 400k in stocks

 

[Whisper66]

sorry for the stupid question, but not sure what you mean

Good outline at Bogleheads wiki worth reading about what tax efficient portfolios are:
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[OldShooter]

... Comments?

I would first consolidate accounts as much as possible and move them to one brokerage house if possible.

Then I would consult an investment advisor who is also a CPA to discuss allocation strategy. First decision is an overall strategy, which you may already have. Then decisions on which type of asset to put in which accounts. It will depend not only on the types of account but their size. (You can't move money in or out of a Roth, for example.)

Tax considerations include the distributions from mutual funds. Actively managed high-turnover funds will generate more taxable income (though probably not more alpha) than passive index funds. If you are committed to high-turnover funds (a whole separate discussion) then you may want them in tax-sheltered accounts. TIPS have their own set of issues in taxable accounts because the growth of principal is taxed every year but you don't get your hands on it until maturity.

Lots of stuff to consider and a few hundred bucks spent with a professional will probably pay back handsomely.

 

[travelover]

............ it is best to have the bond portion of your portfolio in the tax deferred accounts, this way the interest they payout continues to grow tax deferred until you with draw it.......

The reason to put bonds in a tax deferred account is because withdrawals from tax deferred accounts are taxed as ordinary income. Stock capital gains and dividends are taxed at a maximum of 15%, less if you are in a low tax bracket. Thus, you want these in a taxable account if possible to take advantage of the lower tax rate.

 

[davidbeitz]

ok, i read this from the heavy weight investor guru. John Bogle specifically(founder of Vanguard), he said if you have multiple accounts it is best to have the bond portion of your portfolio in the tax deferred accounts, this way the interest they payout continues to grow tax deferred until you with draw it, so in real world example:you said u have many accounts. lets say you have 1 million dollars and you decided u wanted a 70 % stock 30 % bond asset allocation, in your taxable accounts have 300k in stocks and in ur 401ks have 300k in bonds, and 400k in stocks

In my situation I have only about 10% in taxable accounts so the tax situation I don't have much control over. Mainly interested in placing more risk into accounts that are not needed for years and reducing risk in accounts to be drawn from in early retirement years.

 

[GravitySucks]

I've been living off the 401K from 54 to 59.5 so I was keeping that account around 40% equities and 60% bond funds. That account is down to the home stretch so it's now around 20% equity funds, 30% bond funds, and 50% cash.
The larger IRA account is about 65% equities and 35% bonds. Four years ago it was about 85 / 15 and I will take it down to 60/40 after the first of the year.

 

[sengsational]

I can identify with the OP. I also have way too many accounts, but it is not possible to consolidate because of various tax statuses, etc.

Here's what I do: I just get the target allocation right, by whatever means, irrespective of which account I will spend from.

This may seem imprudent from a volitility standpoint, but because I have a wide variety of investment choices in all accounts, volitility is not a concern.

So for example, say it's that time of year when I pull cash for spending. The best account to pull from tax wise happens to have something that's recently taken a beating. Normally I'd cringe to be "selling low" but the key is that the rebalancing that happens concurrent to the cash pull will have me buying, in another account, the same thing I'm selling. Maybe not precisely the same thing, but something very highly correlated.

If you don't have a wide selection of high quality options, you might have a harder time of it. I have had to open associated brokerage accounts under my 401k and HSA in order to keep my AA, and there are small ongoing fees, I'm always able to solve the AA puzzle to get where I want to be. Mine is more involved than strictly required since I have an 8 way split target, not just cash, bonds, equity 3 way split, but still, you can get it done without having to pull from "the wrong account"

 

[Montecfo]

1. Consolidate as much as you can (without changing tra statuses)
2. Adhere to your overall asset allocation
3. Apportion your asset allocation to each account by time horizon and tax characteristics.

Examples: My Roth Iras i expect to tap last, if ever. 100% stock there, longterm growth. 20 year + time horizon
My taxable account i expect to tap first. Dividend paying stocks, short-term bonds, Munis and cash. This is my safest money account overall. 2-10 year time horizon.

Traditional IRAs-in between, mixture of equities and intermediate term bonds. 10-30 year time horizon.

Obviously, if you are 20 years from expecting to tap funds, then you should prioritize tax efficiency, since you have time to move things around as you begin to approach 5-10 years from retirement.

 

[DrRoy]

I would first consolidate accounts as much as possible and move them to one brokerage house if possible.

+1. Multiple firms for the accounts just makes $ management more difficult.

I can identify with the OP. I also have way too many accounts, but it is not possible to consolidate because of various tax statuses, etc.

You can still consolidate how many firms you have the accounts at, while still maintaining the number of account types that you need.

 

[nun]

In my situation I have only about 10% in taxable accounts so the tax situation I don't have much control over. Mainly interested in placing more risk into accounts that are not needed for years and reducing risk in accounts to be drawn from in early retirement years.

You need to thing of your accounts all together and with an overall AA. If you spend cash from a savings account or if equities increase in value you should rebalance somewhere in your portfolio. Of course you want to have cash somewhere that is easily accessible.

 

[lem1955]

I really like Vanguard's Portfolio Tester tool for allocating assets between accounts. Almost all of my retirement accounts are at Vanguard. A few Roth IRA's are held at other institutions but I can include them in the Vanguard Tester for purposes of getting my AA mix right. My overall strategy is 60/35/5. But my Roth accounts are at 80/20. I don't plan to touch those Roth assets for 20 - 25 years, if ever.