Rebalance or am I overthinking this?

[hilltide]

I am 42. House is paid off. Plan is to retire in 12 years. Income is peaking the last few years and hope for it to continue. Is the Allocation to aggressive?

I have a rollover 401k and Joint mutual with wife with one company worth 160k.

I have an active 401k worth 250k with another. Rebalance or just keep putting money in the accounts and stop thinking about it? Thank you for your feedback!

Rollerover 401k and Mutual Fund account Value 160k

US Equities
64.32 %
Non-US Equities
31.07 %
Fixed Income
1.05 %
Real Estate & Tangibles
0.00 %
Alternative Investments
0.00 %
Non-Classified
0.11 %
Cash & Cash Alternatives
3.45 %



Work 401k Value 240k

Small/Mid US Equity 25%
International Equity 25%
Large US Equity 36%
Fixed Income 14%

 

[golfnut]

Too aggressive in my humble opinion. You will get alot of different opinions, though.

I like Bogles'a advice - stocks equal 110 minus your age or in your case-70 % stock/30% bonds,

Maybe as a middle ground - go with 70/30 on your present balance and keep your present allocation for future contributions. This is still agressive, imo.

With your present allocation, can you stand to lose 50% of your stock or 45% of your portfolio in case of a deep market correction?

 

[Independent]

Depends on the word "plan".
Is that "would be nice too ..." or
"we'd be incredibly disappointed if we can't" ?

And,
Do you need high returns from the market to feel like you can retire in 12 years? or
You're saving so much that you'll be able to retire in 12 years even if the market goes nowhere?

Basically, if you're not worried about the downside risk, keep your allocation because it provides more upside potential.
OTOH, if you can't live with the downside, it's wise to take some off the table.

This would be an easier call if your timeframe were noticeably higher or lower than 12. If it were 20 years, it seems that all stocks makes sense. If it were 6 years, I'd be getting more cautious.
i.e. you may not want to rebalance today, but maybe put some of your future savings into something more stable. I wouldn't want to be 100% stocks on the day I retire.

 

[hilltide]

Thanks for the input. It would be hard to see it lose 50% but know historically it should recover.


Independent makes a good point. If all things remain the same I should be able to save between 50k to 100k per year now that my house is paid off. My plan was to invest 5-10k per month into the Joint mutual fund. I may just build up some cash in a money market or savings to balance it out.


Kind of weird when I asked my company advisor and regular advisor about this AA they both said I need to be right where I am at. After reading all these forums, I start to question everything.

 

[OldShooter]

I don't see a problem. You understand that you will probably go for a wild ride sometime before you retire, but that's OK. What you are doing is basically what we did. We were close to 100% equities until RE and rode maybe 60% equities through the tech bubble and the housing crisis without selling anything. It all worked out.

 

[Midpack]

Prudent advisors might suggest 80:20 at your age, and I wouldn’t suggest otherwise. But like others here, I was essentially 100% equity until I was 51 yo, and then started slowly converting to where I am today at about 60:40.

You have to decide what level of risk and return allows you to sleep at night, and meet your financial goals. The difference between 80:20 and 100:00 in returns and volatility aren’t much different to me. YMMV

I’m sure you’ve seen illustrations like this.

 

[gerntz]

I don't see a problem. You understand that you will probably go for a wild ride sometime before you retire, but that's OK. What you are doing is basically what we did. We were close to 100% equities until RE and rode maybe 60% equities through the tech bubble and the housing crisis without selling anything. It all worked out.

+1

 

[DrRoy]

I was never over mid 80's.

 

[audreyh1]

I was 100% equity until about a year before I retired. I did retire quite young, and if I’d been in my 50s I might have throttled down the equity exposure sooner. But gosh while you’re young and earning and adding to investments, and if you have 5 years to recover, going with a high equity exposure seems prudent.

 

[hilltide]

Thanks everyone. I shall stay the course!

 

[FIRE2024]

Personally I believe you’re allocated way too aggressively. The fact that you ask opinions in this forum indicates to me that you have too much allocated to equities and need to do some pruning.
https://firechecklist.net

 

[pb4uski]

What I would suggest is imagine that it is 12 years from now, you are 54 and about to retire.... what would you want to your AA to be?

Then, in planning your contributions over the next 12 years, invest your contributions a way that gets you from where you are today to where you want to be in 12 years.

Also, since you'll be retiring at 54 and will not have penalty-free access to 401k or IRA money for 5 1/2 years.... where are your funds to live on for those first 4-5 years going to come from?

 

[hilltide]

What I would suggest is imagine that it is 12 years from now, you are 54 and about to retire.... what would you want to your AA to be?

Then, in planning your contributions over the next 12 years, invest your contributions a way that gets you from where you are today to where you want to be in 12 years.

Also, since you'll be retiring at 54 and will not have penalty-free access to 401k or IRA money for 5 1/2 years.... where are your funds to live on for those first 4-5 years going to come from?

So.... the plan is to continue to max out 401k @ 18k. My company also puts in profit sharing at 36k so that's 54k. (They just started doing this last year). I am going to contribute 5k per month to after tax mutual fund. That should put me at 114k per year. I have some other long term investments that may pay off but not counting on them. This should get me close to my number.

 

[GTFan]

What I would suggest is imagine that it is 12 years from now, you are 54 and about to retire.... what would you want to your AA to be?

Then, in planning your contributions over the next 12 years, invest your contributions a way that gets you from where you are today to where you want to be in 12 years.

Also, since you'll be retiring at 54 and will not have penalty-free access to 401k or IRA money for 5 1/2 years.... where are your funds to live on for those first 4-5 years going to come from?

I would disagree, given that you can immediately rebalance your 401k to the desired AA as soon as you retire (or any time prior). I was 95%+ equity until a couple of years before ER, if you do this with rebalancing with contributions over the long term you're most likely giving up returns.

He can use the 72t rule for 5 years to live off of the 401k penalty-free, too.

 

[joeea]

So.... the plan is to continue to max out 401k @ 18k.

For those under 50, the current 401k max is $18.5k.
Once you reach 50, you can go up to $24.5k.

 

[GTFan]

I am going to contribute 5k per month to after tax mutual fund.

Good call on this, having a mix of before and after tax assets can be very important. But take a look at tax efficient investing strategies when you do so (I didn't when I was your age, probably cost me some money).

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[pb4uski]

I would disagree, given that you can immediately rebalance your 401k to the desired AA as soon as you retire (or any time prior). I was 95%+ equity until a couple of years before ER, if you do this with rebalancing with contributions over the long term you're most likely giving up returns. ....

He can do that, but if a big downside move in equities occurs just before he retires and rebalances, he's screwed. It's the same old risk/reward thing.

He can't do the 401k penalty-free because he's retiring at 54.

 

[hilltide]

He can do that, but if a big downside move in equities occurs just before he retires and rebalances, he's screwed. It's the same old risk/reward thing.

He can do the 401k because he's retiring at 54.

I am pretty conservative. When I get to age 49 or 50 I will start rebalancing. When I am that close I won't want to take any unwarranted risk. I will roll the dice for the next 6 or so years.

 

[OldShooter]

I am pretty conservative. When I get to age 49 or 50 I will start rebalancing. When I am that close I won't want to take any unwarranted risk. I will roll the dice for the next 6 or so years.

You might benefit from reading a little bit about the "bucket" approach. To me it is more useful that looking at AA. If I were you I"d start about five years before retirement filling a bucket with safe investments like bonds so that you retire with about five years expenses in the bucket. Historically that's enough to ride out most bubbles and other downturns without selling into a seriously down market. The % amount in the bucket doesn't matter.

Here's an example article on a bucket strategy: The Bucket Approach to Retirement Allocation There are those here that will argue that thinking in buckets is no different than thinking in AA terms. I disagree but YMMV.

 

[GTFan]

He can't do the 401k penalty-free because he's retiring at 54.

You might be getting this confused with the rule of 55 which is the other early exception.

https://www.thebalance.com/what-is-the-rule-of-55-2894280

72t is an exception for WDs before 59 1/2, there is no penalty and in his case with ER at 54 it would work out nicely since you have to commit to equal payouts for a min of 5 years or until 59 1/2, whichever comes later. There is no minimum age with 72t's.

https://www.investopedia.com/terms/r/rule72t.asp

I'm not saying he should use this because living off of after-tax WDs is the superior option IMO, but it is a penalty-free 401k early WD method. The main problem with it is that separate equal payments for 5 years is not very flexible.

 

[pb4uski]

After re-reading your previous post I see you were talking about a 72t for a 401k.... I had misread that you were suggesting a 72t or rule of 55... the former works but the latter doesn't work for the OP because he is retiring at 54.

One problem with a 72t might be that the maximum 72t might not be sufficient for his needs. At 54 I think he couldn't even get 5%.

 

[marinauser]

I kept essentially 100% equities until 55 and then gradually ramped up to 35-40% bonds by 60. I was comfortable with any volatility and understood what the risks were. I would never have 30% bonds at the OP's age. But everyone has a different risk tolerance.

 

[GTFan]

Yep, exactly. I was 95%+ equities until a couple of years before ER. Obviously everyone has to evaluate their own risk tolerance, but the way I looked at it is that if the market tanked I might have to work an extra year or two to recover and that was the only downside.

But the upside was a better portfolio at ER under normal to good markets, and that's what happened for me at end of 2014.