Asset Allocation help and review.

[Matthew J]

I'm looking for a little help setting up my asset allocation.

First a few demographics:
I'm 42, Wife is 40
I would like to retire when I am 55, wife when she is 54.
I have two children 6 and 2 years old, will be 20 and 15 at time of retirement.
I live in the midwest.

I've divided my retirement up into what I call buckets as follows:

Bucket 0: my pension, I first qualify for a full pension on my 55th birthday, thus the date I plan to retire, (without a pension I would probably not have enough to retire at 55, with the pension I will probably have plenty to retire at 55). No asset allocation here, it is what it is, thank you State of Ohio.

Bucket 1: Two 457 plans, one through VOYA and the other through Ohio Deferred Compensation. 36K and 28K, respectively, with 18K to both in contributions each year (36K total). This money plus my pension would have to get me from 55 to 59.5 (and hopefully well beyond) before bucket 2 sets in.

Bucket 2: Two Roth IRAs, Both through Vanguard, 62K and 75K, with 5.5K in contributions each year (11K total).

Bucket 3: A rollover (traditional) IRA at Vanguard, 23K, with 0 in contributions each year.

Buckets 4 and 5: These are 529 plans for my two children, invested through College Advantage (Ohio) 63K and 61K. 0 in contributions each year. Starting withdraw dates of 2026 and 2031.

Bucket 6: My wife's Defined Contribution plan through the State of Ohio: 95K. plus 12.9K in contributions each year.


I have been working with a Vanguard adviser. I believe I am comfortable with an 80% stock, 20% bond mix. The mix would apply to the IRAs and 457 plans. Based on that the Vanguard Adviser suggested the following:

34% US Large Cap Stock
14% US Mid/Small Cap Stock
32% International Stock

6% US Short Term Bonds
7% US Intermediate Term Bonds
1% US Long Term Bonds
6% International Bonds

Here is how Vanguard suggested I invest my money to get the allocation above:

32% Vanguard Total International Stock Index Fund Admiral Shares
48% Vanguard Total Stock Market Index Fund Admiral Shares
6% Vanguard Total International Bond Index Fund Admiral Shares
2.8% Vanguard Short-Term Investment-Grade Fund Admiral Shares
4.2 % Vanguard Intermediate-Term Investment Grade Fund Admiral Shares
7% Vanguard Total Bond Market Index Fund Admiral Shares

Maybe we will stop there for now. I can easily make the above allocation with my Roth and Traditional IRAs.

Before I move forward, does the above allocation look OK? I don't want to pour over the fund choices in my an DW's 457 plans before I'm sure the allocation I'm going with is fine.

Also, I plan to keep this allocation into retirement. I hope to set up my finances somewhere along the way so that I create a trust fund to help my children along. Something that kicks in at age 40 so they are forced to experience work and maybe a career, but not so late that the can't enjoy a little leisure as they age.

 

[samclem]

Before I move forward, does the above allocation look OK? I don't want to pour over the fund choices in my an DW's 457 plans before I'm sure the allocation I'm going with is fine.

Also, I plan to keep this allocation into retirement.

Matthew,
The funds recommended by your Vanguard look like a good fit for the allocation you've decided upon.

I notice that you didn't include Social Security. Are you (and your wife) exempt from that?

About your allocation during your withdrawal phase: How much of your "no kidding" essential spending will be covered by your government pension? If you'll be dependent on your investments to fund a significant portion of your living expenses, you may want to reconsider the high equity allocation you are planning for right now. You've got plenty of time to decide on that, but you may find that, during the withdrawal phase, volatility has some unappealing aspects that aren't a factor during the accumulation phase. It's not a big problem if the withdrawals are small, but if you need to take 4% every year from your portfolio for baseline spending, then a higher allocation to bonds may be appropriate.

 

[catotx]

32% Vanguard Total International Stock Index Fund Admiral Shares
48% Vanguard Total Stock Market Index Fund Admiral Shares
6% Vanguard Total International Bond Index Fund Admiral Shares
2.8% Vanguard Short-Term Investment-Grade Fund Admiral Shares
4.2 % Vanguard Intermediate-Term Investment Grade Fund Admiral Shares
7% Vanguard Total Bond Market Index Fund Admiral Shares

Generally a good allocation. The only thing that stands out is the allocation to international bonds. For some reason, I have been seeing that Vanguard is pushing for international bonds. I don't have one and I bet the majority don't have this asset class either.

 

[Matthew J]

Good questions.

In today's dollars:

Pension will cover about $52,000, a rental will cover $5,000 of my $80,000 desired living expenses.

That means investments would have to cover $23,000/yr in living expenses.

I will not receive social security, neither will my wife, we are exempt.

According to Fire Calc, which uses a 75% equity, 25% bond calculation, I should be able to withdraw 3.3% of my portfolio, increasing with inflation, for the rest of my life, which means I would need about $700,000 to fund my retirement plan. ($23,000/0.033). I currently have 319K saved towards that. Contributing 59.9K towards that goal I'd be there in 6.4 year if there was no growth to my account. that would give me 6.6 years to go above and beyond what I need to start my withdraws and still be safe. (I suppose, technically I could change to a 75% Stock, 25% bond allocation to mimic FireCalc at that time).

Retiring at 55 years old would mean that I'm still a long term investor, however I do understand the risk of ruin if I am not careful with my investments during my retirement.

If worse came to worse, I suppose I could cut my spending to just my pension for a while. When I retire I will have two houses paid for, one is a rental, one where I live. Rental is worth about $5,000 a year in income so that makes my pension plus rental at $57000.

NOTE: I edited my first post by adding a bucket 6, which is one of my larger accounts. Makes a huge difference.

 

[papadad111]

Rental income is an uncertainty
Your investments could drop and lose money, not just stay flat no gains. They could go in reverse!
No SS means no backup plan. How safe are the pensions ? How safe are your jobs for the next 10-15 years ?

How committed are you to being able to uncompromisingly make the 18K X 2 into your 457's ?

The kids 529s are looking good but could also stall or go in reverse.... And college costs are rising. Would they cover their school residual cost via loans ? Kids also get more expensive as they grow up.

I think with guaranteed pensions that you should set up a "no really" budget and a "living large" budget and you might find you're dancing between the two as market ebbs and flows.

As for choices, those are good fund selections.

With big pensions I would be 90- 100 percent equities ... Especially still working. You're early 40's...

But that's me and my own risk tolerance and distaste for bonds that pay almost no interest. I'm 90/10 ...FIREd. In my mid 40s. That 10 is cash not bonds.

 

[MrLoco]

You've done a wonderful job of saving so far.

One thing I didn't notice is any consideration given to healthcare costs when (if) you do retire at 55. Remember.....at 55 you will need health coverage not just for you and your wife, but for both children as well. Think what healthcare costs will be in 13-14 years even with coverage under the ACA ( if this is still available).

Just to give some perspective, I am 56 and my wife 55 and we will both be retired by the end of the year and need healthcare coverage under the ACA. You will have 10 years before MEdicare is available ( if it is still available in its current form) All I can say is 'WOW" when I looked at what the premiums and deductibles will be.....even with a silver plan and we are both in good health. And this is with $4.3M in investable assets......I am still concerned.

Also, you may want to scale back the AA ....from 80/20 to something like 60/40 when you do reach 54. The last thing you want to see is a 50% drop in equities the year you retire and you are sitting there with 80% of your assets in stocks. Just my opinion. Best of luck.

 

[eytonxav]

I see your international allocation is 40% of equities and I know a lot of people believe in a pretty high international allocation as a % of equities. For me, I am more comfortable keeping international between 25-30%, as I deem a bias towards US as the safer bet.

 

[target2019]

Allocating 20% bonds to four funds seems too complex.

 

[nun]

I have been working with a Vanguard adviser. I believe I am comfortable with an 80% stock, 20% bond mix. The mix would apply to the IRAs and 457 plans. Based on that the Vanguard Adviser suggested the following:

34% US Large Cap Stock
14% US Mid/Small Cap Stock
32% International Stock

6% US Short Term Bonds
7% US Intermediate Term Bonds
1% US Long Term Bonds
6% International Bonds

Here is how Vanguard suggested I invest my money to get the allocation above:

32% Vanguard Total International Stock Index Fund Admiral Shares
48% Vanguard Total Stock Market Index Fund Admiral Shares
6% Vanguard Total International Bond Index Fund Admiral Shares
2.8% Vanguard Short-Term Investment-Grade Fund Admiral Shares
4.2 % Vanguard Intermediate-Term Investment Grade Fund Admiral Shares
7% Vanguard Total Bond Market Index Fund Admiral Shares

I don't think allocations under 10% are very useful.....except maybe with cash and the short term bond fund might be thought of being in that vein. I'd eliminate a couple of funds on the bond side.

 

[nun]

Rental income is an uncertainty
Your investments could drop and lose money, not just stay flat no gains. They could go in reverse!
No SS means no backup plan. How safe are the pensions ? How safe are your jobs for the next 10-15 years ?

How committed are you to being able to uncompromisingly make the 18K X 2 into your 457's ?

I did something similar to the OP as I have a DB pension and aggressively saved into 457, 403b and ROTH accounts. I also have rental income and if you buy a quality rental it is a nice diversifier and you should get some capital appreciation as well. Not having SS males the OPs DB state pension even more important.

There is certainly risk in everything, but having a DB pension, monthly rental income and investments in 457 and ROTH accounts looks like a nice mix to me. I would suggest that the OP now look at budget.

 

[nun]

Retiring at 55 years old would mean that I'm still a long term investor, however I do understand the risk of ruin if I am not careful with my investments during my retirement.

If worse came to worse, I suppose I could cut my spending to just my pension for a while. When I retire I will have two houses paid for, one is a rental, one where I live. Rental is worth about $5,000 a year in income so that makes my pension plus rental at $57000.

I like your plan, probably because it's very close to mine. I also have a state DB pension and two paid off homes and rent one out.

I'm about to retire at age 55 and get a $20k state DB pension and $15k a year from a rental property......after all the deductions the rental comes out to $7k taxable income. Rent and pension cover my expenses and I have a 70/30 allocation in the rest of my portfolio. Having the income floor is great and I see that it's also freed you up to take on more risk with the rest of your money.

I'm lucky that I also have SS checks coming from the US and the UK, although the US SS will get WEP'ed because of my state pension.

 

[Matthew J]

Thanks for all the replies and ideas. I'll try to address some of the good points that were made.

Budget:

According to Quicken I spend a little less than $3500/month based on all of 2015. So about $42,000/yr. So $57,000/yr with pension plus rent income may be cutting it a little close, since last year did not include anything like major home repair or car replacement. I guess that means I would have to either downsize, or take a mandatory $10,000 or so a year from my retirement accounts to live current in retirement.

Now on to my future budget:
Childcare goes away, medical expenses come in. My medical would be covered under my pension. Wife and children not so. I've tried to put together a future budget before, however I always reach the same conclusion: medical expenses is the elephant in the room. The cost of medical coverage may change dramatically in the next 13 years.

So I'm taking a wait and see approach to my future budget, mainly because I'm already tapping myself out by putting aside $59,900 a year for retirement as it is already. With rare exception, I have always been able to live within my means, and I don't expect that will change in retirement. I can reevaluate as time passes.

Solvency of my pension: by Ohio law, my pension must be funded to meet 30 years of future obligations. Of Ohio's 5 state run pension systems, mine is the most solvent. 30 years of assets are set aside already, and do not require additional taxpayer income to pay out.

Commitment to my plan and setting aside so much money each year:

Somebody asked this. Commitment is high! I have not increased my lifestyle as fast as my household income has increased, which has allowed me to put more and more money aside for retirement. Also, the savings I have so far are all mine and DW, not from an inheritance or as gifts. Yes, I will be the millionaire at work driving the 14 year old car (and be perfectly happy doing so).

Asset allocation:

Looks like people are comfortable with stock allocations from 60% to 100%. I'm happy with a 80%/20% stock/bond split because it is aggressive enough for me, but still has enough non-stock holdings so I can reallocate as needed when the markets do their thing.

I am thankful with the reiterations some have made as to the quality of the Vanguard funds. Nobody really balked or threw any red flags at that, which makes me feel more confident about my Vanguard advisor. Thanks!


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[Markola]

Bravo for being so focused on your savings goals. Someday, sooner than seems possible since time flies, you will be glad. I just turned 50 and can hardly believe the career finish line is actually in sight. Two points:

1) You might ask your advisor if there is any significant difference between his/her suggested allocation and the Vanguard Life Strategy Growth Fund. The latter is a fund of index funds that seems to have about the same allocation but with the enormous advantage that it is self-rebalancing. I own lots of this one single 80/20 global fund rather than the baker's dozen of underlying index funds it would take to replicate it. Simplicity.

2). With all of your accounts in different places, it is next to impossible without help to know what your overall portfolio allocation really is. I recently plugged all my accounts into the free Personal Capital app and website. Now, at the press of a button, I can summarize every account I own with the latest data. The catch is that you will get a polite sales call after you create an account asking if PC can manage some of your money, but they don't push. I'm impressed with this service and plan to use it as long as they keep it free. Maybe there are similar free "aggregator" programs out there that I am unaware of.

Good luck!