Asset Allocation/Fund Advice

[yakers]

I would appreciate the collective wisdom (especially the folks who Federal Govt retirement funds) on our asset allocation and choice of funds. Our situation is that my wife plans to retire next year and would receive a small($20k) partially COLAd teacher pension. I expect to retire in 2.5 years but may go out sooner if there is a buyout offer. Our house is paid off, no other debt and we try to max the contributions to the Roth, my TSP and her 403b. One variable in our planning is that we still have one son at home in high school and we are not able to forecast college costs. Our figures do not reflect the EducationRoth and some other savings designated for college costs. I figure if he goes to a Junior College I have that covered in the small change jar, if a local state school we have it mostly covered and if he goes to Stanford, I get to keep working.

Our assets:

7.2% Cash/credit union

15% OPTFX my IRA Oppenheimer Large Cap Growth Fund
1.3% ANWPX my IRA American New Perspectives foreign/US growth fund

My TSP Thrift Savings Plan (internal allocation 40% C, 20% S, I and G Funds):
13.5% C fund (S&P 500)
6.8% S fund (small cap index)
6.8% I Fund (International index)
6.8% G Fund (short term bonds)

.6% OPM (US Office of Personnel Management) bond fund tax deferred, short term fund

Wife's 403b within an insurance annuity umbrella (don't ask me to explain how 403bs work for teachers, I can't understand them)
5.1% Dreyfus Growth and Income
7% Fidelity Contrafund
7.5% GartmoreGVIT Small Company
7.4% Oppenheimer Global Securities

.4% ibonds

7.2% DRIP stocks made up of six companies I like (BWA, WEC, KEY, UST, MOD, and HNZ)

3.7% VAAPX my ROTH Vanguard Asset Allocation Fund
3.7% VAAPX wife's ROTH

I add a small amount each month to the ibonds and the DRIPs. I expect to stop that or reduce that when my wife retires. We hope to live off our pension and not start tapping the tax deferred funds for a few years. My wife can receive a very small SS payment in 4 years and I am not eligible for SS and I have only Federal Govt employment.

Several things I have pondered, should I consolidate my two IRAs into the TSP program, there is some convenience in a reduced number of funds? Right now they offer a bit of diversification and they are currently performing well but they do have a higher ER than the TSP. I do not have much in the way of bonds as our Roth (VAAPX) has some and the TSP G fund is a form of bond and the small amount we add to the ibonds but mostly as my retirement is fully COLAd I think that ups the risk we can live with having limited bonds. I would like to add some REITs and bonds someday but right now they, like most other assets, seem overvalued. I can always shift some of my TSP funds into the F Fund which is a total bond index fund.

When my wife retires I want to get her funds away from the 403b system ASAP into a Vanguard fund, probably a Target Retirement 2025. For us, fewer funds and keeping things simple is preferable to complicated systems. We live in California and are at the 9% state income tax level.

One nice thing for us is that we are not reliant on the IRA funds. We live fairly simply (our house is 1000 SQ FT), and we are happy to vacation in our old VW camper. But if additional funds were to become available we could probable figure out how to use them. We took a cruise last year and I guess the other half lives pretty well, we could get used to that. I consider us to be moderate in risk tolerance. We have not sold any finds during the 2000 market decline. All I did was to switch new TSP contributions into the S, I and G funds. This may change a bit when retired as I could not use new contributions for reallocations.

I could technically retire next year at 56 but for two considerations, one is my son's education costs and the other is wanting to build up some assets that could be used for investing or inheritance. The advantage of a COLA pension is that I should not run out of money, the downside is that I never build up a lot of personal wealth as some do with their 401ks.

I recognize that this is more narrative than pure numbers and a lot of folks here are proficient number crunchers but I hope the text helps clarify our financial circumstances.

 


 

 

[Spanky]

it seems that you have almost 30% in large cap growth and not much in bond. Asset allocation is dependent on your risk tolerance and the level of income that you might withdrawal from your portfolio. I do not think too many people will advice on the proper mix. You might try http://www.smartmoney.com. It has an asset allocation tool based on your risk tolerance, your outlook of the economy and the time when you might need to withdrawl money.

Your wife's pension of $20k is not exactly small. It will pay for 50% of our living expense since it is about $40K per year.

 

[yakers]

Spanky, thanks for the response. I posted a similar question on a Vanguard diehards site and the silence was stunning. I can not be sure how risk adverse I am. In the past I really did not care about voulitility as I was in the accumulation phase and DCA into whatever funds I have. Whether DCA is the best route, it is my only route as that is how my pay comes in and I don't have enough to speculate in the market or on hard assets.
As to bonds, I have two things against them one is I have a COLA retirement coming and two-I can only see them going down in the near future. I am more concerned about inflation.
But in theory I should have some bonds and maybe some REITs but I just refuse to buy them right now even if an asset allocation indicates I should.
Commodities are another way to go, maybe a commodities fund. So much for unemotional investing.
I have this "plan" which is mostly accidental for how I achieved some financial independence and I think it has worked well for the circumstances I have lived through. Its just I hate to waste a lot of really bright peoples insights on possible better ways to handle things. I haved learned things from Motly Fool, diehards and here, I thought it was time to throw my specifics in and see what I could learn.
I always wondered if I was some working Japanese fellow 15 or 20 years ago and I was aware that there was something strange about the real estate and stock market, what could be done? I just think we have arrived at that situation but I can't figure out what to do.

 

[Spanky]

If you can live on the income from the pension plans (yours and your wife's), then you really do not need to have any fixed income investments. A heavily tilted equity may be more appropriate for the long term. It seems that you are concerned about capital preservation even though you do not have to tap into your portfolio for living expenses. If you are really concerned, you might consider shifting more money into less volitile investments, such as TIPS, T-Bill, CD. Albeit commodities (i.e., energy, natural resources, precious metal) may provide some inflation protection, they can be quite volitile.


Spanky

 

[unclemick]

Hmmm

The I way I see it - you're sitting about 30% taxable and 70% tax deferred with the son's college as the big unknown swinger.

The central difficulty is to cover the 'worst case SWAG' as best you can estimate. Stay working(yuck) plus damp the volitility of your taxable(cap gains??) or some of both until the college thing is understood.

If in fact pensions cover the base budget - then you can allow some latitude for growth in your tax deferred.

If you are concerned with the current chewy high stock/low interest environment you can make yourself older with one of the Vanguard Target Retirement Series or go value via Wellesley.

Another consideration - when would he finish college vs your 59 1/2?

 

[grumpy]

Yakers,

Maybe you don't need any bond allocation. I am a retired Fed. I treat my pension as if it were the income stream from a large allocation to t-bills. That reduces my calculated stock allocation from 77% to 38%. I only have a small amount of I-bonds and 40 % of my TSP in the G fund as fixed income investments.

Grumpy

 

[Nords]

I posted a similar question on a Vanguard diehards site and the silence was stunning.

Sometimes I think that the only responses on that board are to posts containing the words "Vanguard" and either "rules" or "sucks".

You might do better with M*'s "Hands On" board or FundAlarm. Both have posters who love to dig into these details (but I'm not one of 'em).

 

[charlie]

yakers,

This may sound cold, but have you considered the
option of letting your son borrow some/all of his
college expenses and then helping him pay off the
loan? I think college loan rates are pretty low.
This would allow you to invest the difference and
let it grow until he graduates.

As for investment advise, you seem to have thought
everything out pretty well. I agree with the previous
posters that your COLA pensions allow you to be
more aggressive in your equity allocations. IMHO,
inflation is the big risk looming ahead so I suggest
you slant your equity allocation to the value side
and throw some money into the energy pot.

Cheers,

Charlie

 

[Spanky]

yakers,

This may sound cold, but have you considered the
option of letting your son borrow some/all of his
college expenses and then helping him pay off the
loan?

Yes, help him to secure a loan, but why paying for it?
He does not have to start any payment until he garduates and has 10 years to pay it off.

That's what I had to do for my college loan.

Anyway, I must be a cold-hearted person.

Spanky
Spanky

 

[JOhn Galt]

Hi Spanky! I wish my youngest had your attitude.
I helped all 3 of my kids, but post-divorce and post-ER
the "baby" has been causing me all kinds of trouble.
I still love her, but she is straining the bounds of
parental affection.

JG

 

[JohnP]

Yakers - I think you are doing well! I retired 2 years ago from govt, and also have a wife with a 403b and a son who just started in college. The DW retired 1 1/2 years ago and is working half time; we are maxing out her 403b in an expensive Putnam account (only real mutual fund choice in her school district plan) but got her out of a more-expensive ins co annuity account.

I completely agree with Grumpy (above) that the cola'ed pension seems very much like a whole bunch of T-bonds in terms of fixed income investments. I have a TSP account which is 90% I fund giving me a good international allocation. Other parts of our portfolio meet my balanced allocation as I see it.

Look closely at the 403b - I think that they are designed to be incomprehensible. My wife had several sub-accounts which had names of well known mutual funds but the share values never correlated with that of the actual funds. They had wrapped the mf names around a fund and added a layer of expenses to them so there was little that could be tracked. We discovered that we could easily transfer the money in the ins-co 403b into a VG Traditional IRA without a surrender fee since she was of retirement age.

JohnP

 

[Spanky]

Yakers - I think you are doing well! I retired 2 years ago from govt ...
JohnP

Doing well after retirement from the government seems to a common theme among early retirees. May be these are just coincidences - when I am on vacation in popular tourist places, San Francisco, Vancouver, etc. the people I met usually are in their early 50s retired as school teachers, police officers, fire fighters, misc occupations from the government.

I have come to the realization that working for government afterall has some tangible benefits.

 

[JOhn Galt]

Yep, but many of these jobs require your brain
to be disengaged until the pension kicks in, unless
you count firefighters deciding where to send out for pizza or cops looking for the nearest donut shop

JG

 

[REWahoo]

... or cops looking for the nearest donut shop

JG

A Cleveland radio station had a morining call-in contest called Cop or Not. Contestants would be asked to guess "cop" or "no cop" and the DJ would then call a Duncan Dounuts shop and asked whoever answered if there was a policeman in the house. Winners got a dozen glazed.

REW

 

[grumpy]

Yep, but many of these jobs require your brain
to be disengaged until the pension kicks in, unless
you count firefighters deciding where to send out for pizza or cops looking for the nearest donut shop

JG

JG,

You should also count NASA employees. I found my work at NASA to be extremely challenging despite having to put up with the bullcrap that exists in any large organization.

Grumpy

 

[haha]

Yep, but many of these jobs require your brain to be disengaged until the pension kicks in, unless you count firefighters deciding where to send out for pizza or cops looking for the nearest donut shop  

Cops and firefighters may have some downtime, but they also operate in an extremely decision-rich environment that would overwhelm less able people. How many of us have to try to decide if someone we encounter at work is going to shoot us?

Mikey

 

[JOhn Galt]

Hi Mikey! First, my post was PARTLY tongue in cheeky.
Second, as far as cops go, in the little towns near where I
live you could not find a softer job. You would have to turn off your brain if you had one to start with, or if you
were real loquacious, you could just make the rounds of the cafes and coffee shops until your shift ended.

JG

 

[brewer12345]

Cops and firefighters may have some downtime, but they also operate in an extremely decision-rich environment that would overwhelm less able people. How many of us have to try to decide if someone we encounter at work is going to shoot us?

Mikey

Heheh! If you are my boss every damn day!



Hmmm, buck shot or the slugs today...

 

[JohnP]

I thought this was a forum on "Investment Strategies" - what is your point, gentlemen?

JohnP

 

[charlie]

Well, my son-in-law is the fire chief of a 2 man
(paid) + volunteer force in a small town in N. Texas.
He is on call 24/7 and is constantly on the go ....
but not to Dunkin Donuts. He works harder than
I ever did and probably most of you.

Cheers,

Charlie

 

[REWahoo]

I thought this was a forum on "Investment Strategies" - what is your point, gentlemen?

JohnP

JohnP, I may have figured out the connection. I think the point is a lot of cops' assets in donut shops.

REW

 

[soupcxan]

Asset allocation for young dreamer

As usual, I'm still trying to come up with a reasonable asset allocation for the "volatile" portion of my portfolio. Would be curious to hear anyone else's thoughts...age 23, long time until I will need the money (if ever):

US large cap 14%
US small cap 8%
Intl large cap 14%
Intl small cap 8%
US RE 6%
Intl RE 6%
Commodities 12%
Gold 8%
US bonds (intermediate term) 12%
Intl bonds (unhedged, intermediate term) 12%

Plus, a hefty portion of i-bonds on the side to help anchor the portfolio.

 

[charlie]

Well soup, if it were me I would just divy up the
equity in equal piles ...... but you are doing great.
I hope you are using index funds.

Cheers,

Charlie

 

[soupcxan]

Hi Charlie - you're saying equal piles of large cap and small cap? Wouldn't that overweight small cap relative to the "market" portfolio (which seems to be about 70% large cap, 30% small cap)?

And yes, I'm using low-cost index funds for as many of the classes as possible, with the lowest-cost funds for the remaining classes that don't have a true "index" fund.

 

[grumpy]

With a portfolio value of only $30K you may already have too many asset classes.

Grumpy