AA 1/2 CD's and 1/2 index funds?

[Jimonlimon]

Question about splitting my 401k asset allocation between CD's and index funds with nothing in between.
(EDIT to clarify: "index funds" meant a mix of Large Cap, Mid Cap, Small Cap, and international stock index funds. Actually I'm more in managed funds but was planning to move to index funds.)

My thought is to buy extremely safe, FDIC insured Certificates of Deposit for the money I need to withdraw in the next 5 years. For the funds that would be nice to enjoy I would keep them in index and managed funds.

Is it crazy to mix very secure CD's with much more volatile index funds without a moderate risk/reward component to the portfolio?

Reasoning for this strategy is that I don't want to delay retirement if we have another big dip this year. So I'm considering putting everything that I need to match our current income into a ladder of CD's. These would be within my Nationwide 401k through a Schwab Personal Choice Retirement Account. Current available CD rates range from 5.15% for 1 year to 4.6% for 5 year.

I haven't seen any other insured or "extremely safe" investments that offer 5%. Since this is within my pre-tax 401k I don't have an incentive to invest in lower-interest tax-advantaged government bonds.

Total in my 401k is $520k. My wife's 401k has about the same and we would just let hers ride for several years until we need it. We will both be 58-1/2 when I retire. Most of our needs will be covered by my pension; once we start drawing SS at around FRA our expenses will be more than covered by pension plus SS.

 

[Out-to-Lunch]

No, it is not crazy. You only care about the volatility and performance of the portfolio as a whole. You can achieve that in many ways. A barbell as you suggest is fine -- you do not need things in the middle if you do not want them. Money is fungible, and trades in a 401(k) are not taxable events.

 

[jazz4cash]

No, not crazy. Sometimes called a “barbell” strategy. Can you actually buy CDs in your 401k? That would be unusual. I did something similar but I had to roll funds over to an IRA.

 

[xlf11]

If your 401k allows brokerage option, it should be able to buy Tbill and/or CD as well as ETF/stock. But it is normally limited as of % of 401k total (plus some fees). Check with your plan to see if it's available.

 

[Jimonlimon]

If your 401k allows brokerage option, it should be able to buy Tbill and/or CD as well as ETF/stock. But it is normally limited as of % of 401k total (plus some fees). Check with your plan to see if it's available.

Yes, I already set up the Schwab brokerage account. Now to move some funds over and buy the first CD.

 

[xlf11]

Yes, I already set up the Schwab brokerage account. Now to move some funds over and buy the first CD.

My 401k has a function to directly transfer to brokerage account and the money is available to trade on next business day. Call you 401k if not there as each 401k has different rules. For example, I can sell MF and transfer to brokerage on the website, but I has to call brokerage for buying CD (not available on their website).

 

[pb4uski]

Yes, and where you say index funds I presume that you mean stock index funds. So all you are doing is substituting CDs for a bond fund/ETF and in this situation I think that is smart.

What do you plan for an overall AA? 5 years of withdrawals would usually be only a part of a fixed income allocation for someone close to retirement.

 

[DrRoy]

Vanguard has a Total World Stock Index ETF symbol VT.

 

[Midpack]

Most of our needs will be covered by my pension; once we start drawing SS at around FRA our expenses will be more than covered by pension plus SS.

Any asset allocation that meets your spending needs and risk tolerance is acceptable, there is no universally accepted AA. The statement above tells us your AA doesn’t make much if any difference. So whatever you’re comfortable with…

 

[Marc]

There was a book in the 1980s called "How to Retire at 35." This couple was burned out on work and decided to see the world with $500K earning 9% in CDs for $45,000 annual income. Luckily they made money on their book(s) because that advice was useless given CDs quickly dropped and inflation bites. There was also a financial guru (forgotten his name) in the 1980s that said you should move from stocks to bonds to fixed income based on an arbitrary funds interest rate; I don't think we have ever hit that interest rate since the 1980s. Point is that you need to look at the long term; if you make long term solutions based on current conditions only you might really screw up.

However, have a similar plan to you. When I retired in 2017 I started increasing my cash position to 10% or two years of (fixed and discretionary) expenses. Nominal asset allocation 55/35/10. With market down this last year I haven't sold any stock funds since December 2021 so my cash position is going down; currently 7%. I will need to sell bond or stock funds by sometime in mid-2024 or cut discretionary expenses.

edited to add: I think that second book might have been based on business cycles versus funds rate; I discarded the book long ago.