Author Topic: Retirement 401K Reallocation Planning (mid 60's)  (Read 7255 times)

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Retirement 401K Reallocation Planning (mid 60's)
« on: July 26, 2014, 12:44:44 PM »
Hello everyone,

I posted some time ago that my mom is planning to make the big move to retirement in the near future. She has decided that she plans to retire 18 months from now and would like to get her 401k in order. My dad retired 4 years ago with a pension, so this will be their first venture into managing a 401k on a fixed income.  I would appreciate your thoughts on:
  • How to improve and consolidate her portfolio in terms of complexity and achieving optimal risk/reward
  • A strategy for making withdraws in terms of frequency and which funds to withdraw from (assuming a 3.8% withdraw rate per year)

Details
  • They are both in their 60's and in reasonably good health. Their retirement horizon is about 30 years (hopefully).
  • The portfolio they have now is 62% stocks, 31% bonds, and 7% cash.
  • Mom's desired portfolio is 60% stocks and 40% bonds based on our conversations and her risk level.
  • They would like to reallocate at most 3 - 4 times per year.
  • She has about 650K and will be depending on this money in retirement.

Current Investments
   Fund      Allocation      Type      Notes   
   Vanguard Long-Term Investment-Grade Fund Admiral Shares (VWETX)      9.5%      Bonds      Long-term corporate   
   Vanguard International Growth Fund Admiral Shares (VWILX)      9.6%      Stocks      International Growth   
   Vanguard Prime Money Market Fund (VMMXX)      3.4%      Cash      Money Market   
   Retire Savings Trust III      3.7%      Bonds      Benchmarked to the Citigroup 3-Month US T-Bill Index    
   Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)      11.8%      Stocks      S&P 500 index   
   Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)      3.9%      Bonds      30% in corporate bonds and 70% in U.S. government bonds of all maturities   
   Institutional Total Stock Market Index Fund Institutional Plus Shares (VITPX)      12.0%      Bonds      Total Stock Market Index Fund    
   Wellington Fund Admiral Shares (VWENX)      10.3%      Balanced      2/3 Stocks, 1/3 Bonds (Moderate)   
   Wellesley Income Fund Admiral Shares (VWIAX)      9.7%      Balanced      1/3 Stocks, 2/3 Bonds (Conservative)   
   Vanguard GNMA Fund Admiral Shares (VFIJX)      3.9%      Bonds      Mortgage backed securities   
   Vanguard PRIMECAP Fund Admiral Shares (VPMAX)      12.2%      Stocks      Domestic Growth   
   Vanguard Windsor Fund Admiral Shares (VWNEX)      6.1%      Stocks      Domestic Value   
   Short-Term Inflation-Protected Securities Index Fund Institutional Shares (VTSPX)      3.9%      Bonds      Short-term Treasury   
         100%               

Proposed Portfolio
This is the portfolio that I am using with a slightly different allocation (more bonds). Rick Ferri over at Bogleheads calls this the Core Four (link below). Please feel free to crique. As a person with a 401k at Vanguard, she may have some unique funds which she is definitely fine with retaining if they are worth keeping, though I am not sure if any of those exist in the list above.

http://www.bogleheads.org/forum/viewtopic.php?t=10413#p125261

   Fund      Allocation      Type      Notes   
   Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)      36%      Stocks      Domestic Index   
   Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)      18%      Stocks      International Index   
   Vanguard REIT Index Fund Admiral Shares (VGSLX)      6%      Stocks      REIT   
   Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)      40%      Bonds      Domestic Index   
         100%               

Thank you for your time and assistance. Please feel free to ask any questions as well.
« Last Edit: July 26, 2014, 12:52:43 PM by The Mobile Mustachian »

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 33
  • Location: Colorado
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #1 on: July 26, 2014, 01:19:59 PM »
Proposed Portfolio
This is the portfolio that I am using with a slightly different allocation (more bonds). Rick Ferri over at Bogleheads calls this the Core Four (link below). Please feel free to crique. As a person with a 401k at Vanguard, she may have some unique funds which she is definitely fine with retaining if they are worth keeping, though I am not sure if any of those exist in the list above.

http://www.bogleheads.org/forum/viewtopic.php?t=10413#p125261

   Fund      Allocation      Type      Notes   
   Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)      36%      Stocks      Domestic Index   
   Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)      18%      Stocks      International Index   
   Vanguard REIT Index Fund Admiral Shares (VGSLX)      6%      Stocks      REIT   
   Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)      40%      Bonds      Domestic Index   
         100%               

Thank you for your time and assistance. Please feel free to ask any questions as well.

You're proposed portfolio is pretty much what I would have suggested. To me, her current portfolio has too many funds. Simplifying that into a few index funds sounds ideal. Even a 3 fund portfolio would do (no REITs).

I would assume an automatic monthly withdrawal would be the easiest way to withdraw (since most people budget per month). But if she was willing to make manual withdrawals each month (or quarter), she could re-balance with each withdraw.

For example, I'm re-balancing my wife's HSA with each monthly deposit ($275) I make. I set up a document in Excel that tells me what the allocation of her next deposit should be. Here's what my spreadsheet looks like (I just added the bond fund, which is why it's current balance is $0):



You could try to set up something similar for her where she basically just withdraws from the funds that are above their desired allocation. But depending on how big the 401k is, how much it moves each month/quarter, and how big the withdrawals are, more re-balancing might be needed. So a fixed monthly withdrawal from each fund may just be a lot easier with quarterly or yearly re-balancing.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #2 on: July 26, 2014, 02:17:22 PM »
I like your proposed portfolio much more than her current one.

Some Things to consider generically. (Not suggestions )

Perhaps putting some of the money into a SPIA for guaranteed income, and longevity insurance?

Possibly a small allocation(4-5%) to commodities for diversification benefit.

Considering shifting entire bond allocation to 30 yr TIPS when yields get to 3%. (guaranteed 3% real return for 30 years would allow her to shift more of her portfolio to bonds (decreasing downside risk) and get more aggressive with her stock allocation (more emerging market/small-cap value/momentum)

More international diversification. With the US markets CAPE getting near bubble territory, The next 10 year for US large-cap stocks are likely to be less rewarding than past average returns would indicate.(This really comes down to a core belief of whether or not you think the future capital markets in the US are likely to be exceptional.)

I have my own biases with each of these questions, but that is sort of immaterial. The question is what are your mom's biases?




Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #3 on: July 26, 2014, 05:51:49 PM »
I'm close to the age of your parents and I am going to disagree completely with your plan.  This 401k plan has the best offerings I can remember seeing.  Your mom has a well-diversified portfolio with a lot of high quality funds.  The institutional shares are lower cost than anything available to the retail investor.  Primecap is a managed fund that has done extremely well for a long time.  It's closed to new retail investors.  Wellesley and Wellington are conservative, well managed funds appropriate for a retiree.  If your mom is allowed to keep the money in the 401k and take distributions, I would urge you to suggest that course of action.

She will need to raise cash for the distributions in 18 months.  The Windsor fund has been a mediocre performer, and I would consider selling that fund to fund distributions.  You might also have a look at the GNMA fund to see how it is performing.

The portfolio you propose is appropriate for someone in the accumulation phase.  Your mom will be in the distribution (decumulation) phase.  Conservative funds managed for stability and income are her friends.  Volatile international markets are not. 

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #4 on: July 26, 2014, 06:03:19 PM »
You need to relabel VITPX.  It's not a bond fund, it's the institutional share class of the total stock market fund.

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #5 on: August 13, 2014, 09:25:16 AM »
Thanks everyone for your feedback. Based on the feedback I received, I made some adjustments to the portfolio and would appreciate your feedback.

To summarize, I've reduced the number of funds from 13 to 7, increased the international exposure, tilted to small cap, and balanced the allocation to 60% stocks and 40% bonds. I kept a couple actively managed funds in the portfolio because of a minor bias for the funds due to their long history of reasonable returns.

   Fund      Allocation      Type      Notes   
   Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)       30.0%      Bonds      30% in corporate bonds and 70% in U.S. government bonds   
   Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares (VITPX)      30.0%      Stocks      Total Stock Market Index Fund    
   Wellington Fund Admiral Shares (VWENX)      5.0%      Balanced      2/3 Stocks, 1/3 Bonds (Moderate)   
   Wellesley Income Fund Admiral Shares (VWIAX)      10.0%      Balanced      1/3 Stocks, 2/3 Bonds (Conservative)   
   Vanguard FTSE All-World ex-US Small-Cap Index Fund Institutional Shares (VFSNX)      10.0%      Stocks      International Small Cap   
   Vanguard Small-Cap Index Fund Institutional Plus Shares (VSCPX)      10.0%      Stocks      Domestic Small Cap   
   Total International Stock Index Fund Institutional Shares (VTSNX)      5.0%      Stocks      Total International Stock Market Fund   
         100%               

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #6 on: August 15, 2014, 02:09:13 PM »
In looking at the allocations again after a few days, I wonder if this should be simplified further. Additionally, I am reconsidering whether a small cap tilt is necessary/appropriate for someone in their 60's who will be making monthly or quarterly withdrawals. What do you all think?

Franklin

  • Stubble
  • **
  • Posts: 204
  • Location: Rochester, NY
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #7 on: August 15, 2014, 02:15:23 PM »
I heard an interesting theory this past week that social security is "bond-like" and should therefore be figured into your bond allocation.  I haven't run the numbers yet but I will probably heed the advice, if for no other reason than to validate my desire to have more in equities. 

GlassStash

  • Stubble
  • **
  • Posts: 122
  • Location: The Arctic Midwest
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #8 on: August 15, 2014, 08:50:25 PM »
I heard an interesting theory this past week that social security is "bond-like" and should therefore be figured into your bond allocation.  I haven't run the numbers yet but I will probably heed the advice, if for no other reason than to validate my desire to have more in equities.

The prevailing wisdom is actually the opposite. As a boglehead poster accurately put it:

"You should certainly include income from social security and pensions. But it's a mistake to consider it as part of your bond allocation.

The basic task in retirement planning is trying to figure out how much income you are going to need. Once you know that, you can begin to figure out how much you have to save and how aggressive you have to be with those savings. Social security and pensions (along with things like paying off your mortgage or moving somewhere with a lower cost of living) reduce that income need and thus give you a wider range of acceptable choices with your savings.

In most cases, the inclusion of social security and pensions should result in a higher bond allocation as there is less need to take on risky assets like stocks to reach your retirement goals. The primary exception would be for those who need only a very small income (as a percentage of their assets at retirement) to top up their pension or ss benefits and wish to take on additional risk in order to try to maximize their estate."

See http://www.bogleheads.org/forum/viewtopic.php?p=541869 and the like for a more thorough discussion.
« Last Edit: August 15, 2014, 08:52:11 PM by GlassStache »

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #9 on: August 15, 2014, 09:06:49 PM »
I would have kept Primecap.  It's one of the better managed funds and it's generally less volatile.  It's a good counterbalance to the small cap tilt.  It's closed to retail investors, or I would own it.

The small cap tilt of 20 percent is ok as long as your mom can tolerate volatility.  As she gets older, she may want to shift away from that.  International is also more volatile.  The total of the more volatile funds is 25 percent.  That would be too high for me if I depended on the portfolio for near term income.  I would dial that down a bit and put the trimmings into Primecap and maybe the two W's, but that's my risk tolerance.

Other than that, I think you are on track for a reasonably conservative portfolio for someone in their 60's.

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #10 on: August 16, 2014, 04:03:30 PM »
I would have kept Primecap.  It's one of the better managed funds and it's generally less volatile.  It's a good counterbalance to the small cap tilt.  It's closed to retail investors, or I would own it.

The small cap tilt of 20 percent is ok as long as your mom can tolerate volatility.  As she gets older, she may want to shift away from that.  International is also more volatile.  The total of the more volatile funds is 25 percent.  That would be too high for me if I depended on the portfolio for near term income.  I would dial that down a bit and put the trimmings into Primecap and maybe the two W's, but that's my risk tolerance.

Other than that, I think you are on track for a reasonably conservative portfolio for someone in their 60's.

Thanks for your feedback, Another Reader. I thought this through and made a couple other modifications. I'm slightly uncomfortable having 25% of the portfolio in actively managed funds, but perhaps that's because I'm an index investor. However, it's hard to heavily critique Primecap and the W's when they have performed well for so long.

Does anyone have any other thoughts? Thanks for your time.

   Fund      Allocation      Type      Notes   
   Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)       30.0%      Bonds      30% in corporate bonds and 70% in U.S. government bonds   
   Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares (VITPX)      30.0%      Stocks      Total Stock Market Index Fund    
   Wellington Fund Admiral Shares (VWENX)      10.0%      Balanced      2/3 Stocks, 1/3 Bonds (Moderate)   
   Wellesley Income Fund Admiral Shares (VWIAX)      10.0%      Balanced      1/3 Stocks, 2/3 Bonds (Conservative)   
   Vanguard FTSE All-World ex-US Small-Cap Index Fund Institutional Shares (VFSNX)      5.0%      Stocks      International Small Cap   
   Vanguard Small-Cap Index Fund Institutional Plus Shares (VSCPX)      5.0%      Stocks      Domestic Small Cap   
   Total International Stock Index Fund Institutional Shares (VTSNX)      5.0%      Stocks      Total International Stock Market Fund   
   Vanguard PRIMECAP Fund Admiral Shares (VPMAX)      5.0%      Stocks      Domestic Large Cap Growth   
         100%               

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #11 on: August 16, 2014, 04:27:32 PM »
I like it.  Wish I had your mom's choices.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5208
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #12 on: August 16, 2014, 05:21:31 PM »
You have not addressed the withdrawal strategy yet.  If she retires at the end of 2015, will she need to withdraw money in 2016?  If so, some cash should be set aside.  While you are reallocating would be a good time to sit down and figure out how much she wants to take out in dollars in those first couple of years.  Trimming some now after the market has been up several years in a row and setting it aside in cash or a stable value fund for the first year or two of withdrawals would be a sensible idea.  That way, if the market corrects, she will be less affected by sequence of returns risk, although she may sacrifice a little upside for the protection.

Franklin

  • Stubble
  • **
  • Posts: 204
  • Location: Rochester, NY
Re: Retirement 401K Reallocation Planning (mid 60's)
« Reply #13 on: August 17, 2014, 09:13:41 AM »
I heard an interesting theory this past week that social security is "bond-like" and should therefore be figured into your bond allocation.  I haven't run the numbers yet but I will probably heed the advice, if for no other reason than to validate my desire to have more in equities.

The prevailing wisdom is actually the opposite. As a boglehead poster accurately put it:

"You should certainly include income from social security and pensions. But it's a mistake to consider it as part of your bond allocation.

The basic task in retirement planning is trying to figure out how much income you are going to need. Once you know that, you can begin to figure out how much you have to save and how aggressive you have to be with those savings. Social security and pensions (along with things like paying off your mortgage or moving somewhere with a lower cost of living) reduce that income need and thus give you a wider range of acceptable choices with your savings.

In most cases, the inclusion of social security and pensions should result in a higher bond allocation as there is less need to take on risky assets like stocks to reach your retirement goals. The primary exception would be for those who need only a very small income (as a percentage of their assets at retirement) to top up their pension or ss benefits and wish to take on additional risk in order to try to maximize their estate."

See http://www.bogleheads.org/forum/viewtopic.php?p=541869 and the like for a more thorough discussion.

I would agree with that stategy if I was planning on a traditional retirement age, where you have many years to reach your retirement number. But to reach early retirement you must have more aggressive growth than that higher bond allocation would provide. So if I viewed my SS as perhaps a $400k bond allocation, I could add more risk on the equities side.