Author Topic: Too Conservative in Our Retirement Investments?  (Read 5052 times)

ZMonet

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Too Conservative in Our Retirement Investments?
« on: January 28, 2014, 02:27:41 PM »
I've benefited greatly from everyone's wisdom in various message threads and wanted to post a question of my own.  I'm a believer in JLCOLLINS approach that earlier on you should consider being 100% in VTSAX,  With that in mind, my question is whether my wife and I are too cautious in our investment diversification. 

A little background...My wife and I are both government employees who contribute the max to TSP and our IRAs (then convert to Roth), in addition to $12k/yr allocations to Vanguard and a 529 Plan.  We are also fairly aggressively paying off our home with a 15 year mortgage.   We both enjoy our jobs overall and likely won't leave them for another 15 years minimum.  When we retire, if things hold the same -- yes, BIG IF -- we will get a pension equal to 1% times the number of years we have of government service of the average of our high 3 salary.

Investment allocation:

TSP money -- 100% into 2040 L fund (approx. 13% government securities, 10% fixed income (bond index), 39% common stock (S&P index), 16% small cap (Wiltshire 4500 index) and 22% international (international index))
Roth IRAs -- 100% in VTSAX
Investment Account -- 100% in VTSAX

My question is whether others would think it was preferable for me to replicate VTSAX in our TSP accounts, something like 75% S fund (S&P index) and 25% C (Wiltshire 4500 index)?  I'm thinking that our pensions are comparable to government bonds (maybe some changes -- like continuing to increase employee contributions -- but largely the same) and therefore our net bond-like exposure is too high for our risk tolerance.  Thoughts?

Thegoblinchief

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Re: Too Conservative in Our Retirement Investments?
« Reply #1 on: January 28, 2014, 03:26:35 PM »
You could be more aggressive and go 100% stocks. Historically, given your 15 year timeline, your are leaving some money on the table.

Emilyngh

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Re: Too Conservative in Our Retirement Investments?
« Reply #2 on: January 28, 2014, 04:37:37 PM »
I've benefited greatly from everyone's wisdom in various message threads and wanted to post a question of my own.  I'm a believer in JLCOLLINS approach that earlier on you should consider being 100% in VTSAX,  With that in mind, my question is whether my wife and I are too cautious in our investment diversification. 

A little background...My wife and I are both government employees who contribute the max to TSP and our IRAs (then convert to Roth), in addition to $12k/yr allocations to Vanguard and a 529 Plan.  We are also fairly aggressively paying off our home with a 15 year mortgage.   We both enjoy our jobs overall and likely won't leave them for another 15 years minimum.  When we retire, if things hold the same -- yes, BIG IF -- we will get a pension equal to 1% times the number of years we have of government service of the average of our high 3 salary.

Investment allocation:

TSP money -- 100% into 2040 L fund (approx. 13% government securities, 10% fixed income (bond index), 39% common stock (S&P index), 16% small cap (Wiltshire 4500 index) and 22% international (international index))
Roth IRAs -- 100% in VTSAX
Investment Account -- 100% in VTSAX

My question is whether others would think it was preferable for me to replicate VTSAX in our TSP accounts, something like 75% S fund (S&P index) and 25% C (Wiltshire 4500 index)?  I'm thinking that our pensions are comparable to government bonds (maybe some changes -- like continuing to increase employee contributions -- but largely the same) and therefore our net bond-like exposure is too high for our risk tolerance.  Thoughts?

I personally don't think that's too conservative, but I have a TSP that's 2050 and the rest of our investments in 25% bonds, 75% stocks.   

ZMonet

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Re: Too Conservative in Our Retirement Investments?
« Reply #3 on: January 28, 2014, 05:03:26 PM »
Thanks input so far.  Framed another way, since everyone's risk tolerance is different, are fed. government employees taking on less risk than they should given that their pension is more like a bond?   Maybe I'm just way over thinking this...

Emilyngh

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Re: Too Conservative in Our Retirement Investments?
« Reply #4 on: January 28, 2014, 05:17:01 PM »
Thanks input so far.  Framed another way, since everyone's risk tolerance is different, are fed. government employees taking on less risk than they should given that their pension is more like a bond?   Maybe I'm just way over thinking this...

But, what if you leave before retiring?   I don't remember the particulars, but when I left I basically got back all I contributed to the pension.   If one considered it a bond, how would they account for leaving at various times instead?   Or are you completely sure that you'll stay until retirement?

horsepoor

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Re: Too Conservative in Our Retirement Investments?
« Reply #5 on: January 28, 2014, 07:38:15 PM »
I have a very similar situation to the OP - 2 federal employees, not looking to retire soon, but possibly before full retirement age.

It looks like if you leave the government after at least 5 years of service, but before your full retirement age (57 for most of us), you can opt for either a lump sum, or you can take a deferred retirement, where you begin to draw a pension at somewhere between age 57 and 62.  Of course the amount of pension is prorated based on years of service.  The benefits get better once you have 20 years of service, but I am still trying to figure out the nuances of that.  The OPM website is rather confusing

ZMonet

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Re: Too Conservative in Our Retirement Investments?
« Reply #6 on: January 29, 2014, 06:59:55 AM »
My understanding is much like horsepoor's, that after 5 years of service you get 1% for every year of service (i.e., 5 years = 5% of the average of your high 3 yearly salary).  Once/If you get to 30 years of service, you get 1.1% for every year.  The basic idea is that your retirement is a 3-legged stool, with TSP(like 401k) being 1/3rd, social security being 1/3rd and your pension (if you make it 30 years) being the last third.  If you take the 3-legged stool analogy, it seems to me that fed workers are heavily weighted in bond-like retirement vehciles (SS, pension and the % of their TSP in bonds). 

I'm wondering if fed workers who don't factor this in, whether they intend/stay only 5 years or make it a full career, are leaving money on the table and should go to all stocks in TSP.  Any additional input is appreciated.

foobar

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Re: Too Conservative in Our Retirement Investments?
« Reply #7 on: January 29, 2014, 07:24:46 AM »
Of course you run into the problem of when you hit the 15 year period where bonds perform well and stocks don't. For example since 2000 stocks are at ~.2% while bonds are at 5.6% in real returns. Obviously that is a bit of a cherry picked number (it was right before a  crash). The purpose of adding bonds and real estate isn't to juice your returns above stock market levels. It is to lower your variance.  In a lot of cases a fixed 7% is better than a 50% chance to 12% and 50% chance of 5%.  As you up your time frame (change it from 15 years to 30 and stocks always win) you can handle more variance.

Given the variance issues, I think sticking 100% of your money in VTSAX is dumb. You don't get enough exposure to the international market (pretty similar performance to the US but it isn't 100% correlated) or real estate (again reits  perform similar to stocks but have different cycles) IMNHO.



You could be more aggressive and go 100% stocks. Historically, given your 15 year timeline, your are leaving some money on the table.

dude

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Re: Too Conservative in Our Retirement Investments?
« Reply #8 on: January 29, 2014, 09:26:24 AM »
The thing about the LifeCycle Funds is they get very conservative over time -- at maturation, when they convert to the L Income Fund, they are 80% in fixed income.  An 80% fixed income portfolio is very unlikely to survive a 30-year payout period.  If you're going to stick with a L Fund, consider gearing it toward your life expectancy instead.  This way, you will still be more heavily invested in equities at retirement.

Here are a couple very good links I think worth considering regarding asset allocations and payout periods (that I recently posted in another thread):

http://www.retireearlyhomepage.com/restud1.html
 
http://www.retireearlyhomepage.com/reallife13.html

And yes, because you have a defined benefit (pension), you certainly can afford to have a higher risk portfolio if you choose.  It all comes down to the "what helps you sleep at night" factor.

P.S. -- the G Fund is a unique animal available only to Fed employees that returns intermediate-term rates on short-term securities (averaging 1.78% higher).  It's a nice, 100% safe fixed income hedge.

mustachianteacher

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Re: Too Conservative in Our Retirement Investments?
« Reply #9 on: January 29, 2014, 03:35:20 PM »
My understanding is much like horsepoor's, that after 5 years of service you get 1% for every year of service (i.e., 5 years = 5% of the average of your high 3 yearly salary).  Once/If you get to 30 years of service, you get 1.1% for every year.  The basic idea is that your retirement is a 3-legged stool, with TSP(like 401k) being 1/3rd, social security being 1/3rd and your pension (if you make it 30 years) being the last third.  If you take the 3-legged stool analogy, it seems to me that fed workers are heavily weighted in bond-like retirement vehciles (SS, pension and the % of their TSP in bonds). 

I'm wondering if fed workers who don't factor this in, whether they intend/stay only 5 years or make it a full career, are leaving money on the table and should go to all stocks in TSP.  Any additional input is appreciated.

My husband and I are both teachers with pensions, and I definitely factor in the bond-like nature of our pension when determining asset allocation for our Roth IRA. I used to have us 100% in stock mutual funds, but now that we're approaching 40, and I have a better sense of how much our pension will supply and how much we'll need annually from our IRA, I've gotten just a touch more conservative. At this point, we're about 80% stocks and 20% bonds. Although I don't recall where I read it, I do remember once seeing a nifty graph that showed that more balanced portfolios tend to do slightly better in the long run than all-stock portfolios, and that made an impression on me as well.