Author Topic: Asset allocation for 457b plan?  (Read 957 times)

fallstoclimb

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Asset allocation for 457b plan?
« on: August 11, 2022, 09:21:19 AM »
We are in our late 30s and most of our investment portfolio (TSP, 401k, Roths) are invested in lifecycle plans.  I like the simplicity of the auto rebalancing and am not too concerned with the AA not being perfectly ideal - generally, my investment philosophy is that its always better to be as hands off as possible.

However, our 457 does not have the option of lifecycle funds. My husband has left the job that allowed contributions to it, so it will grow now based on returns alone.  Currently it is at 65K, and the AA is 25% bonds, 55% U.S. stocks, 20% international.

This is more conservative than any of our other funds.  We both should receive some pension income (federal and state, so diversified) and the remainder of our portfolio is 80/20 - I know some would be more aggressive with pensions in the mix, but we are a bit conservative by nature.

We hope to retire at 50 and the 457 will serve a critical role in setting up a well-played Roth pipeline. I am tempted to move closer to 90/10 for this account to give it a chance to grow more, since if the market fails we could just not retire early. But, then I think it would be smarter to keep it conservative, since we will be accessing it first and we have less time to recover from corrections.

I am leaning towards 80/20 and moving towards a more conservative AA when we are within five years of accessing the account, but what are the different considerations for a tax-advantaged account you plan to draw from during early retirement?

Sandi_k

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Re: Asset allocation for 457b plan?
« Reply #1 on: August 11, 2022, 09:39:11 AM »

We hope to retire at 50 and the 457 will serve a critical role in setting up a well-played Roth pipeline. I am tempted to move closer to 90/10 for this account to give it a chance to grow more, since if the market fails we could just not retire early. But, then I think it would be smarter to keep it conservative, since we will be accessing it first and we have less time to recover from corrections.

I am leaning towards 80/20 and moving towards a more conservative AA when we are within five years of accessing the account, but what are the different considerations for a tax-advantaged account you plan to draw from during early retirement?

There are two considerations, to my mind: taxes, and a minimum "floor" of safe investments.

1 - You're going to pay the taxes no matter what - so I'd recommend that you save in a brokerage, after-tax account and pay the taxes NOW, before the tax rates re-assert themselves to the 2016 brackets in 2026. It's not taxes that are the problem - it's the PENALTY for early withdrawals.

The other option is to save in a Roth account, where the withdrawal of contributions is always allowed. Note that if you draw down from this account prior to age 59.5, Roths also have penalties.

We have addressed this by having a 5 year plan of converting DH's SEP-IRA to a Roth. We offset the converted funds by shoveling an equal amount into my 457 account, which is accessible penalty-free after age 55. So he "pays the tax" on the converted dollars, and I "shelter the funds" by putting them into the 457, for a tax net-neutral maneuver. He'll be 59.5 next year, so we're almost there!

2 - The "floor" is what we've done for peace of mind. Our plan is a 3.5% withdrawal from our funds from age 60-65, 3.75% SWR at ages 66-70, and 4% after age 70. So that means I know approximately how much we need to have in TIPS, Cash, and bonds.

For example: if I know that the stock market typically takes 5 years to rebound from a bear market, I need 5 years x 4% (our highest planned withdrawal rate) - which magically means 20% of the portfolio.

So yes - we're 80/20 in our investment portfolio. I also have a pension, so this feels pretty reasonable to us.

You might want to read up on Liability Matching Portfolio (LMP) theory - it's a bit more sophisticated and complicated in its original form, but looking at your MINIMUM need, and stashing that in TIPS, cash and bonds is the crux of it. I just don't feel the need to do that for a 30 year time horizon, since we'll have a pension and 2 SocSec incomes, in addition to the portfolio.

EvenSteven

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Re: Asset allocation for 457b plan?
« Reply #2 on: August 11, 2022, 10:01:43 AM »

We hope to retire at 50 and the 457 will serve a critical role in setting up a well-played Roth pipeline. I am tempted to move closer to 90/10 for this account to give it a chance to grow more, since if the market fails we could just not retire early. But, then I think it would be smarter to keep it conservative, since we will be accessing it first and we have less time to recover from corrections.

I am leaning towards 80/20 and moving towards a more conservative AA when we are within five years of accessing the account, but what are the different considerations for a tax-advantaged account you plan to draw from during early retirement?

There are two considerations, to my mind: taxes, and a minimum "floor" of safe investments.

1 - You're going to pay the taxes no matter what - so I'd recommend that you save in a brokerage, after-tax account and pay the taxes NOW, before the tax rates re-assert themselves to the 2016 brackets in 2026. It's not taxes that are the problem - it's the PENALTY for early withdrawals.

The other option is to save in a Roth account, where the withdrawal of contributions is always allowed. Note that if you draw down from this account prior to age 59.5, Roths also have penalties.

We have addressed this by having a 5 year plan of converting DH's SEP-IRA to a Roth. We offset the converted funds by shoveling an equal amount into my 457 account, which is accessible penalty-free after age 55. So he "pays the tax" on the converted dollars, and I "shelter the funds" by putting them into the 457, for a tax net-neutral maneuver. He'll be 59.5 next year, so we're almost there!

2 - The "floor" is what we've done for peace of mind. Our plan is a 3.5% withdrawal from our funds from age 60-65, 3.75% SWR at ages 66-70, and 4% after age 70. So that means I know approximately how much we need to have in TIPS, Cash, and bonds.

For example: if I know that the stock market typically takes 5 years to rebound from a bear market, I need 5 years x 4% (our highest planned withdrawal rate) - which magically means 20% of the portfolio.

So yes - we're 80/20 in our investment portfolio. I also have a pension, so this feels pretty reasonable to us.

You might want to read up on Liability Matching Portfolio (LMP) theory - it's a bit more sophisticated and complicated in its original form, but looking at your MINIMUM need, and stashing that in TIPS, cash and bonds is the crux of it. I just don't feel the need to do that for a 30 year time horizon, since we'll have a pension and 2 SocSec incomes, in addition to the portfolio.

I'll disagree with parts of this. 457b's are available for withdrawal without penalty at any age after you leave employment, no need to wait till age 55. Also, Roth contributions are available for withdrawal penalty free at any age, and taxable conversions to Roth accounts are available after 5 years if you are under 60.


What I do is keep my overall asset allocation how I want it, but prioritize the bond portion to tax deferred accounts, first to my 457b, then to 403b.

fallstoclimb

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Re: Asset allocation for 457b plan?
« Reply #3 on: August 11, 2022, 10:27:36 AM »

What I do is keep my overall asset allocation how I want it, but prioritize the bond portion to tax deferred accounts, first to my 457b, then to 403b.

What is the rationale behind this?  And does it change if you do not hold any fully taxable accounts?

MustacheAndaHalf

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Re: Asset allocation for 457b plan?
« Reply #4 on: August 11, 2022, 10:43:10 AM »
We hope to retire at 50 and the 457 will serve a critical role in setting up a well-played Roth pipeline. I am tempted to move closer to 90/10 for this account to give it a chance to grow more, since if the market fails we could just not retire early. But, then I think it would be smarter to keep it conservative, since we will be accessing it first and we have less time to recover from corrections.
I assume you've discussed the risk to "not retire early" as a couple and both agree.  In that case, you also seem to have done your research on the allocations life cycle funds use, and I'd agree 90% equities / 10% bonds makes sense.

If you're patient, you could similate the life cycle approach in your 457 plan.  If the goal is 40% bonds at retirement, you could move from 0% to 40% over 10 years.  Every year, rebalance to hold an additional 4% bonds, until at retirement you're at 40%.  You can look at lifecycle plans with various retirement dates (2025, 2030, 2035) to see how they allocate, and I think you'll find their bond allocation goes up well before 5 years from retirement.

EvenSteven

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Re: Asset allocation for 457b plan?
« Reply #5 on: August 11, 2022, 10:58:31 AM »

What I do is keep my overall asset allocation how I want it, but prioritize the bond portion to tax deferred accounts, first to my 457b, then to 403b.

What is the rationale behind this?  And does it change if you do not hold any fully taxable accounts?

(1) The overall asset allocation controls the amount of risk I want.
(2) I want to end up with lower growth in tax deferred and higher growth in Roth, because that will let me pay less tax overall.
(3) I will be withdrawing from the 457b first, so that has the lowest investment horizon, so I keep that one more conservative.

Sandi_k

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Re: Asset allocation for 457b plan?
« Reply #6 on: August 12, 2022, 11:20:41 PM »

I'll disagree with parts of this. 457b's are available for withdrawal without penalty at any age after you leave employment, no need to wait till age 55. Also, Roth contributions are available for withdrawal penalty free at any age, and taxable conversions to Roth accounts are available after 5 years if you are under 60.


The 457(b) withdrawal rule prior to age 55 is specific to plans. Mine allows it after age 55.

And yes, I am aware the Roths are available  for withdrawal penalty-free. I SPECIFICALLY said: "The other option is to save in a Roth account, where the withdrawal of contributions is always allowed."