Investment mix leading up to retirement

[Uncle]

I'll start with my question: I'm curious what you did, wished you would have done, or plan to do in the few years leading up to retirement when it comes to investment mix, framed in the context of where the market is today. Long background below:

8 years later from this post (thanks to those who responded with their thoughts!): Investments Structure for retiring pre-55

My goal is to increase our portfolio from $2.9M to $3.3-3.5M over the next 4 years before I retire. I am currently 100% in index funds (see mix below).

The updated #'s:
401K: $1.2M
Roths: $0.8M
Rollover IRAs: $0.8M
Non-retirement: $0.1M
The rest of our cash is earmarked for college costs and replacing at least one of our aging vehicles.

Investment Mix (index funds):
S&P500: 40%
Small Caps: 25%
International: 25%
Mid Cap: 10%

History says there will likely be a market correction in the next four years, which I'm a bit nervous about. I'm considering moving half of our 401K (20% of overall portfolio) into defined maturity bond ETFs, or just individual bonds, maturing in 2029. I'm not set on the % of fixed income leading up to retirement (should it be more?). Also, I have some knowledge but am a relative newbie when it comes to bonds.

Note that post-retirement I want to be at 80% equities, 20% fixed income. If you made it this far, thanks for reading!


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[SnowballCamper]

So the question is what's the best way to get to 20% fixed income / bonds?
I gave up on bond funds when interest rates went back up (because prices go down). Now there are the defined maturity ETFs to handle that though. I find treasury direct to be pretty easy...it's just a clunky govt website that takes some getting used to. Short term rates are around 3.6% currently. Higher yield is out there. Do you have to pay state income tax?

How are you accessing your funds pre age 59.5? It looks like only $100k is not locked up in IRAs.

 

[COcheesehead]

Research return sequence risk strategies. You are in what Kitces calls the retirement red zone. You are at risk for asset erosion. There are good ways to deal with that though.
Also FYI rates are dropping which makes bond funds appreciate, The rate hikes were in 2022 and killed stocks and bonds. Watching rates is one of the easiest market timing mechanisms.

 

[Al18]

Your plan looks fine. Based on your previous post, it appears you are now 51 and want to retire at age 55. A common plan on this forum is to have enough fixed income from when you retire, until you reach age 59 1/2, when you can withdraw from your 401k or IRA without penalty. If it was me, I would plan on contributing less to your 401k and instead put in a brokerage account or a local bank/ credit union to build a 4 year CD ladder. Ideally, you could save 1 year of baseline expenses for each of the next 4 years. Near the end of this year, open a 4 year CD. Next year do a 3 year CD, etc and the final year keep the expenses in a Money Market fund or a high yield Savings account.

 

[engineernerd]

Have you used FIRECalc yet? I think it's a great retirement calculator.

One feature you might want to try out is the "Investigate changing my allocation" option under the Investigate tab. Unless you have WAY oversaved so your graph looks flat (100% success no matter what you invest in), you will notice that your odds of success in not outliving your portfolio are worst at both extremes of stock allocation.

 

[OldShooter]

Why are you fussing with multiple index funds? Your broker can probably run an analysis to identify stock holdings that overlap and fund holdings that result in tilts towards and away from specific areas.

Be sure your "index" funds are truly what is advertised. Broad and low cost. Total US and Total International in your favorite mix is a good choice. Re S&P 500, that is only 500 stocks out of IIRC 3500 traded in the US market. Are you sure that narrow a sample is what you want? Probably none of the future US market stars are in the 500.

Re market corrections, there is always a market correction in the future. And one after that one. And another one after that ... Worrying about this is a waste of time once you have prepared for SORR.

 

[engineernerd]

Regarding bonds and bond funds, their resale value does drop at times, but this does not bother me for two reasons. First, they throw off much higher dividends than stock funds typically do. A "fair" comparison has to be on the basis of total returns, not market value. And second, their prices don't fluctuate as much as stock prices do. They are much less likely to lose half their value in a crash.

They are intermediate between stocks and cash-equivalents like CDs - higher returns and volatility than CDs but lower returns and volatility than stocks.

Caveat: I'm not talking about junk bonds.

 

[Uncle]

Thanks for the replies : )

To engineernerd and OldShooter: great points.
I have used FireCalc and will continue to play around with it.

Research return sequence risk strategies. You are in what Kitces calls the retirement red zone. You are at risk for asset erosion.

This hits on my main concern - being so close to retirement, how do I keep my portfolio growing AND mitigate SORR. I was hoping to understand strategies others have used that should work well in the current market environment.

So the question is what's the best way to get to 20% fixed income / bonds?
I gave up on bond funds when interest rates went back up (because prices go down). Now there are the defined maturity ETFs to handle that though. I find treasury direct to be pretty easy...it's just a clunky govt website that takes some getting used to. Short term rates are around 3.6% currently. Higher yield is out there. Do you have to pay state income tax?

How are you accessing your funds pre age 59.5? It looks like only $100k is not locked up in IRAs.

I suppose I had several questions wrapped up in my post, two of which are: what is a good % of fixed income/bonds leading up to retirement to mitigate SORR, and what are low- to medium-risk mix investment types to get there - defined maturity bond ETFs could be one source? I do have to pay state income tax, though I plan to hold the fixed income investments in my 401K (I can invest via Fidelity BrokerageLink). Also, I plan to work until 55, and access 401K via the rule of 55.


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[imjustawarrior]

For whatever it is worth, I went from 80/20 to 75/25 at age 50. I retired at 55. I have been retired almost 3 years. My portfolio is essentially VTI, VXUS, and BND. I am happy with that. We have roughly 10 years worth of bonds. That is fine with me. Firecalc shows 100% success. That is good enough for me.

 

[Koolau]

Looking back 20 years to when I retired:

If I had it to do over, I would have emphasized taxable investments and de-emphasized 401(k)/tIRA investing. I ended up with mostly "qualified" money which made it difficult to get cash in early retirement.

I'd also put every dime into Roths first, then capture the company match for a 401(k) and THEN emphasize taxable.

All the best in your journey - and don't forget it IS a journey. Enjoy the journey as you go for your goal.

 

[big-papa]

A few years before I retired, I knew that a large part of our income for spending would come from TIPS ladders. I had been 60/40 stock/intermediate nominal treasury bond fund for quite a while, so the first thing I did was change the treasury bond fund to 2 TIPS funds: LTPZ and SCHP held in such proportion that it could support 35 years of income. I was no longer rebalancing between stocks and bonds but I continued to contribute to both. Any ESPP, RSU and corporate bonus proceeds were used to buy more stock in our taxable brokerage account.

When I retired, my plan needed to support 32 years of income. I continued on with LTPZ and SCHP, adjusting their ratios each quarter to reduce the duration to continue to match my investment horizon. But I was also withdrawing from the funds to generate inflation indexed income.

When I got to 31 years, we sold all of LTPZ and SCHP and we built TIPS ladders with the first rung maturing about 1 year after the ladder was built. I used an ultrashort bond fund that I pre-populated with the equivalent of what 1 year's spending from the TIPS ladders would be and we used that as part of spending sources for the year. It was drained in the last quarter of 2025 as per the plan. The first ladder rung matures in about 2 weeks. We'll take the proceeds from that, its final coupon payments + all coupon payments from 2025 and spend from that over the course of 2026. We use the same ultrashort bond fund we used before the ladder started to mature to hold the money from TIPS from the until it's time to transfer it out of our IRA for spending.

Today, TIPS + dividends from our stock fund + SS (once that starts) pays for our normal everyday spending, including baseline taxes. We still have plenty of stock that can be used to fund lumpy, unexpected, and discretionary expenses. Among those expenses is the incremental tax for Roth conversions each year.

Cheers

 

[srblanco7]

We ramped down from 80+% equities to 65% equities over the 2-3 years leading up to retirement and built up our stash of cash.

Wanted 1-2 years of expenses in cash/short term fixed income (e.g., 1 year t-bills or shorter duration), 9-10 years in bonds and 20+ years in equities.

Retirement started today, and thus far this approach has been a rousing success .

 

[engineernerd]

To the OP:

I let FIRECalc guide me to my best stock allocation. But for now I would think 80% stocks is likely not a bad temporary target pending future cogitation and analysis.

If you want a quick-and-easy option and your rollover IRA is a self-directed brokerage account, you could start by just selling some of your stock funds and letting the proceeds go into your settlement fund, which at Fidelity and Vanguard is a money-market fund paying a decent return (between 4% and 5% almost 4% right now).

BTW, it is tax efficient to hold fixed income investments in tax-deferred (tIRA) accounts, not Roths. The earnings grow more slowly, which limits your future RMDs and hopefully lowers your taxes when your taxable income in retirement will include SS and RMDs.

 

[SnowballCamper]

Thanks for the replies : )

To engineernerd and OldShooter: great points.
I have used FireCalc and will continue to play around with it.


This hits on my main concern - being so close to retirement, how do I keep my portfolio growing AND mitigate SORR. I was hoping to understand strategies others have used that should work well in the current market environment.


I suppose I had several questions wrapped up in my post, two of which are: what is a good % of fixed income/bonds leading up to retirement to mitigate SORR, and what are low- to medium-risk mix investment types to get there - defined maturity bond ETFs could be one source? I do have to pay state income tax, though I plan to hold the fixed income investments in my 401K (I can invest via Fidelity BrokerageLink). Also, I plan to work until 55, and access 401K via the rule of 55.


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So the state tax doesn't matter since you're drawing from a 401k. Some options are:

• high yield money market funds
• Treasury Bills
• TIPS ladder
• corporate bonds
• generic bond fund
• MYGAs
• CD ladder
• a retirement date fund

To grow from 2.9M to 3.4M is only about 4% per year over four years.
I think the thing to do is decide how long of a stock market decline you want to be able to weather without selling any stock funds. I think 4-5 years is plenty, but it's more about what you're comfortable with. Then make a bond ladder for that time period. Personally, I'd use treasuries since I'm not bond savvy. FWIW I'm in the SIRE category (secured income, retired early) with pensions.

 

[COcheesehead]

The Retirement Answer Man has a great podcast. He recommends laddering quality bonds out to 5 years as a SORR strategy.
I went with Kitces bond tent strategy when I retired 5 years ago and it saved my butt retiring into 2 bear markets in 2020 and 2022. You can google the bond tent from Kitces to understand it better.
Hope for the best, but prepare for the worst. No way I could have anticipated retiring into a pandemic, but there I was. Today I hit my all time high portfolio value. When you got it, grow it, but also protect it.

 

[brett]

I stayed heavy on equities.

Why? Market conditions, the fact that I knew that my run rate income from pensions would cover our basic expenses. My aversion or willingness to accept risk, advice from investment advisors, advice from my spouse...you name it.

I covered off the downside based on the impact of a 50 percent decrease in portfolio value and then made a decision to remain heavy in the equities market.

No regrets. Now in our early seventies we are looking to reduce our equities exposure, transfer some wealth our children with a view to protecting their inheritence. Our investing horizon is now 15 years vs 25-30 years during our late 50's.

I believe that there is no one universal answer to this challenge.

 

[tulak]

I’m at a similar age and have been building a TIPS ladder to deal with SORR when (if) I retire in the next couple of years. I buy individual TIPS, mostly at auction, and plan to hold until maturity. The ladder currently provides me a base level of income that I can live off of comfortably, but depending on how equities perform, I might add more. The ladder is currently 9 years and I’ll likely extend it to 10 later this month with the 10-year TIPS auction. Everything else is invested in US Total.

I would make sure you have a plan on accessing your accounts before 59.5. A 72t can work well (and likely the approach I will use), in addition to Roth contribution withdrawals and taxable. I’d also make sure you account for health insurance, especially if you want to manage your income for a subsidy.

 

[Uncle]

Thanks to all for sharing your thoughts. I'm going to start converting some of my 401k to either a bond ladder, defined maturity bond ETF ladder, or something similar. I like the idea of 4-5 years worth of income. I need to read up on bonds.

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[tulak]

If you’re interested in TIPS, tipswatch.com is a good resource.

 

[Mr_Pink]

Why are you fussing with multiple index funds? Your broker can probably run an analysis to identify stock holdings that overlap and fund holdings that result in tilts towards and away from specific areas.

Be sure your "index" funds are truly what is advertised. Broad and low cost. Total US and Total International in your favorite mix is a good choice. Re S&P 500, that is only 500 stocks out of IIRC 3500 traded in the US market. Are you sure that narrow a sample is what you want? Probably none of the future US market stars are in the 500.

Re market corrections, there is always a market correction in the future. And one after that one. And another one after that ... Worrying about this is a waste of time once you have prepared for SORR.

Check out this overlap finder: Fund Overlap | ETF Research Center