Is my asset allocation too conservative?

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Bammerman
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Is my asset allocation too conservative?

Post by Bammerman »

EDIT: I've changed the subject line, deleting "And how should I pay for a big home improvement project?" because I think I muddied the water by combining two subjects in one post. Better to concentrate just on the more important issue, my asset allocation. So please feel free to ignore Question no. 2. Thanks.

I'd appreciate your advice and guidance about my retirement investments generally, and also about how to handle one big home-improvement investment I have coming up very soon (below). I have posted about the latter recently on this forum under personal finance, and a number of people there asked for more information about my overall financial situation in order to better respond, so I'm going to try to do that here.

First, my (mine and my spouse's) overall situation: We will turn 70 this year. We live entirely off my COLA'd government pension plus our social security annuities (plus some "pin" money from small part-time jobs now and then). We have good health insurance and Medicare, and fortunately are in good health. We have long-term care insurance policies. We have adequate life insurance (20-year USAA term, half of that term left; FEGLI; and some small, old Equitable universal policies that pay for themselves from dividends). Our children are grown and self-supporting. We contribute $100 each month to each of four grandchildren's 529 plan. We live in a comfortable house that has appreciated very nicely since we bought it when I retired about 14 years ago. Our mortgage has 10 years to run on a 20-year fixed term at 4.25% with a current balance of $116,000. I have discussed refinancing the mortgage recently with our credit union’s mortgage department but they counseled against this because of the high cost of refinancing relative to the remaining balance and term of the existing loan. Our only other debt is from our one credit card; we pay off whatever the balance is (typically $2-3,000) each month when due.

Our tax-deferred investments, listed below, currently total $1,020,000 (not including about $5,000 in cash or checking accounts). Overall, we have a conservative asset allocation — perhaps very conservative (percentages thanks to Financial Engines):

Cash and Short Term Bonds (mostly G-Fund government securities in the TSP) 56%
Bonds 12%
U.S. Large Cap Stocks 22%
U.S. Mid/Small Cap Stocks 3%
International Stocks 7%

Details:

My Roth IRA
Vanguard Tgt Ret2025;Inv VTTVX $16,201.51
Vanguard Wellington;Adm VWENX $97,226.76
My Thrift Saving Plan*
TSP L Income Fund N/A $746,084.46
Spouse’s 403(b TIAA-Cref
TIAA Traditional Annuity (SRA) N/A $8,894.18
CREF Inflation-Linked Bond Acct R2 N/A $1.76
TIAA Real Estate Account N/A $9,711.33
CREF Equity Index Account R2 N/A $448.43
CREF Equity Index Account R3 N/A $226.67
Spouse’s Roth IRA, etc.
Vanguard Tgt Ret2025;Inv VTTVX $16,043.11
Vanguard Wellington;Adm VWENX $90,453.06
USAA 500 Index;Member USSPX $20,082.35
Spouse’s VOYA Arlington County 457 Def.
T Rowe Price Cap App PRWCX $14,832.36


*Details about TSP investments (L-Income Fund) totaling $746,084

G Fund (government securities) 71.46% $533,152
F Fund (US Bond Market Index) 5.79% $43,198
C Fund (Common stock index) 11.92% $88,933
S Fund (Small-Medium Stocks) 2.87% $21,413
I Fund (Intl. Stock Index) 7.96% $59,388

Question #1: I often wonder if my overall allocation isn’t too conservative. It’s been 32% equity mutual index funds, consistently. It got that way when I retired (i.e. actually stopped working full time) 14 years ago, before starting social security, and just didn’t know how things would work out financially. Whether, in other words, I’d have to start taking distributions from the TSP and/or other investments. Actually things have worked out pretty well. We have sold some investment funds in the last two years to pay for renovating/modernizing/painting bathrooms and kitchen, and painting interior/exterior of the house, and redoing the deck in composite boards. But otherwise we haven’t touched our investments. In two years we’ll have to start taking RMDs, though. Part of me wants to increase our equity allocation, but so far, not enough of me to make me actually make any changes. Comments?

Question #2. We are putting solar panels on our roof. The pre-rebate, gross cost will be $27,000. After federal tax credits and other (possible) incentives, the net cost will be $17,000 - $20,000. The question I am trying to decide is, should I sell from my TSP and pay cash, or take out a HELOC from my credit union? The HELOC itself would cost $850, and of course interest on the outstanding balance. I would hope to pay it off within 2-3 years, perhaps with my first RMDs in two years. I am leaning toward paying cash (from my TSP). $30,000 (what I’d have to take out, accounting for the 20% withholding) is about 4% of my TSP balance. This amount of additional “income” would only add about $100 to my 2021 federal income tax obligation. Does this choice makes sense, given the foregoing financials?

Thank you.
Last edited by Bammerman on Wed Jun 23, 2021 3:14 pm, edited 1 time in total.
MattB
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Re: Is my asset allocation too conservative? And how should I pay for a big home improvement project?

Post by MattB »

I'm not an authority on these boards so take my thoughts with a grain of salt. But, to answer your questions:

1. Yes. Your allocation may be too conservative.

You have about half of your current tax-exempt investible assets in the G-Fund, which, while being a very interesting and useful fund, is not currently keeping up with inflation. The returns of the G-Fund over the past year are about 1% (https://www.tsp.gov/funds-individual/g-fund/). Inflation in 2020 was about 1.4%, and will likely be higher than that in 2021 (https://www.usinflationcalculator.com/i ... ion-rates/).

Additionally, you may have the appetite for a higher risk/return strategy (i.e., to invest in a higher fraction of equities). You mentioned that you and your wife live off of very stable sources of income, your government pension and social security. Thus, you could invest in a 50/50 or 60/40 stocks/bonds strategy with no significant consequence to your finances if the stock market tanked for a few years.

2. Your choice does seem to make sense, to take money out of your TSP account to pay for the solar panels. This is the option with the fewest moving pieces, which is always nice. And presuming your tax calculation is correct, that withdrawing $30k from your TSP will only result in an additional $100 federal tax obligation, you seem to have the tax-bracket space to make this withdrawal with limited financial pain. Thus, you could just pay for this and be done with it. Instead of having to service a loan for several years.

Best,

Matt

P.S. Thank you for your service. I suspect you spent a long time working for the federal government to amass your TSP account.
Jablean
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Re: Is my asset allocation too conservative? And how should I pay for a big home improvement project?

Post by Jablean »

Credit unions are usually pretty good but check in with somebody else about refinancing your mortgage. Refinancing costs roll-over into the loan so the main thing is if it would be helpful to lower your monthly cost - or keep the same cost but cut it from a 30 year to a 15.

Don't take another loan out to pay for solar panels. You can swing the $27,000 from current investments (and or check with refinanciers to see if include with it.

You don't need your investments to live off of - at least as long as you are in good physical shape. When RMDs come what will you spend them on? Are you trying to leave money for heirs or can you use it up?
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Bammerman
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Thanks

Post by Bammerman »

Thank you, MattB and Jablean!
dbr
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Re: Is my asset allocation too conservative?

Post by dbr »

I understand that you have about $1M in assets, that your allocation is 32/68, and that you do not need to make any more than small withdrawals from your assets to spend what you want to spend.

In that case from the point of view of sustaining your investment against withdrawals you can have any asset allocation you want.

To determine whether or not that allocation is too conservative you have to know what you want. A more aggressive allocation has a wider range of higher amounts of wealth that will grow and a more conservative allocation offers less chance of growth and more certainty of outcome.

RMDs are neither here nor there. Taking an RMD is just a transfer from a tax deferred account to a taxable investment account with a small tax bill.

I think the information most notably missing is planning for increased expenses in old age. However, it would be a fair bet that $1M untouched would leave you with plenty of assets for old age care.

I don't think you have any reason to invest more aggressively than you presently are, but it goes back to what do you want.
Last edited by dbr on Thu Jun 24, 2021 7:33 am, edited 1 time in total.
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retiredjg
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Re: Is my asset allocation too conservative?

Post by retiredjg »

Bammerman wrote: Tue Jun 22, 2021 5:24 pm Question #1: I often wonder if my overall allocation isn’t too conservative.
I don't think it is too conservative. You don't need any more money so there is no need for more risk.

It could be more aggressive if you want and if you both are comfortable with that. This could increase your RMDs (depends on what changes you make) and might mean more money left for your heirs.

I would not borrow money for the solar panels myself. You have plenty of money to pay for them. Borrowing in that situation does not make sense to me with one exception - will taking that money from the TSP increase your IRMAA costs? On the other hand, reducing the TSP will reduce RMDs....this could be an endless decision circle. I certainly do not think it is a mistake to pay cash for the solar panels.

Not sure how you can take out $30k and only pay an extra $100 tax on it, but I suppose it is possible.
DidItMyWay
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Re: Is my asset allocation too conservative?

Post by DidItMyWay »

Asset Allocation is a personal decision, but based on what you've written, I think your AA is fine.

If you go with some of the common formulas such as "age in bonds" or "110 minus age in equities", then that puts you between 30/70 and 40/60. You are already in that range. If you want to take a little more risk, you could increase your equities to 40 or maybe split the difference and do 35/65. Or just stay at 32/68.

Either way, you are in great shape.
Slow and steady wins the race.
ivgrivchuck
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Re: Is my asset allocation too conservative?

Post by ivgrivchuck »

Bammerman wrote: Tue Jun 22, 2021 5:24 pm EDIT: I've changed the subject line, deleting "And how should I pay for a big home improvement project?" because I think I muddied the water by combining two subjects in one post. Better to concentrate just on the more important issue, my asset allocation. So please feel free to ignore Question no. 2. Thanks.
You can choose any asset allocation you want. It's okay to stop playing once you've won. It's also okay to keep playing if you like.
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tennisplyr
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Re: Is my asset allocation too conservative?

Post by tennisplyr »

I've been sharing this tool a lot lately, you might find it useful.

https://retirementplans.vanguard.com/VG ... -YYA4-CW3H
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
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Bammerman
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Re: Is my asset allocation too conservative?

Post by Bammerman »

Many thanks to everyone who responded. This has been very helpful.

dbr, you said, inter alia, "I think the information most notably missing is planning for increased expenses in old age. However, it would be a fair bet that $1M untouched would leave you with plenty of assets for old age care." This is why we took out long-term care insurance when we turned 55, and have maintained those policies, in spite of some premium increases.

Jablean, you said, "When RMDs come what will you spend them on? Are you trying to leave money for heirs or can you use it up?" Well, that's the big question, isn't it. Right up there with "To be or not to be..." Initially we scrimped and saved and invested so we'd have enough for our "golden years", declining years, decrepit years, etc. However, now it looks like we will be able to leave something for our kids and grandkids. Not a lot, but enough to help out. The 529 plans are meant to help our grandchildren with college. But I want to spend some of those investments on us too. We've lived in Italy, and France, and India, and Hong Kong and the former Yugoslavia. I'd like to re-visit some of those places again. Habits are hard to break -- I find it pretty hard to spend money!

Finally -- My wife and I discussed the pay-cash-or-finance-the-solar-panels question on a driving trip to Charlotte* a few days ago, and we have decided to take the money out of the TSP fund (as opposed to financing it with a HELOC). The project will cost a lot of money, with a Cost Recovery Period of 14.3 years, but under the final plan we're going with, the 30-Year Internal Rate of Return (IRR) will be 5.78% and the 30-Year Net Present Value (NPV) will be $21,825.47. And our electric bills will be $19 a month for an estimated Annual Savings of $873 with current electric rates. Thanks to comments by Bogleheads, I feel good about this decision.

*mainly to re-visit the Mint Museum. Great regional art collection!
Outer Marker
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Re: Is my asset allocation too conservative?

Post by Outer Marker »

I would suggest you follow Jack Bogle's portfolio later in life when he had more than he needed: 50/50. "I spend half my time worrying I have too much in stocks; half my time worrying I have too little in stocks."

You could simplify your portfolio greatly by just holding "all in one" funds with approximately a 50/50 allocation accross all of your retirement accounts. The IRA's are a bit of a mess. Clean them up into one-funders and it will be easier to keep track of.

I'd withdraw the money you need for your solar panels from your spouse's 403(b). Your TSP is better, lower cost, and provides access to the unique stability of the G fund for fixed income. No need to be incurring fees and costs messing around with loans. The planet and my daughters thank you for the investment in green energy!
pasadena
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Re: Is my asset allocation too conservative?

Post by pasadena »

I agree with everyone who said - you can do what you want - what gives you a good night's sleep.

My only question would be, what if one of you died? What would happen to the survivor's income with regards to your pension, social security and taxes? Would that income still cover their expenses (including increased tax rates)?
raiderjkwong
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Re: Is my asset allocation too conservative?

Post by raiderjkwong »

We are also very conservative. We are 54 and plan to retire in two years. We have a 3M portfolio with a 30/70 AA. Stocks/bonds. We will have two pensions when we retire. Our pensions and portfolio will pay us 17K a month. Our home (1.4M) and cars are all paid off and we have no debt or loans.

Our pensions alone will cover all of our expenses so we don't need to earn more money. We want to retire with no worries or stress. When the market crashed in March, 2020, we didn't event care.

I think your AA is just right. We are in the same boat where the priority is to preserve our wealth. When you are young, you invest aggressively to get rich, when you are old, you aggressively invest in bonds to stay rich. When you retire, you never lose money! Good luck in your retirement.
HomeStretch
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Re: Is my asset allocation too conservative?

Post by HomeStretch »

Agree that your current asset allocation is reasonable. But you could also increase your equity % if you want to and are comfortable with the additional risk.

Your 4.125% mortgage rate is high. Check no-cost refi rates at online lenders like Better.com. Alternatively, payoff the mortgage from your portfolio’s fixed income allocation which is likely returning less than your mortgage rate (TSP G Fund rate for June 2021 is 1.5%). That would bump your equity % for your remaining portfolio from 32% to 36%, which is still conservative.
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Bammerman
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Experience with Better.com? Or just pay it off from savings?

Post by Bammerman »

pasadena, my widowed spouse would receive 1/2 of my pension for the remainder of her life. That plus my life insurance plus survivor's social security plus paid-off house (from time and/or ins. payout) plus her own LTCI policy, I think she should be fine.

HomeStretch, I have started looking into Better.com. Have you used this vehicle yourself? I've only ever used my credit union for mortgages and refinances, but their refi costs seem high to me. Or perhaps it's that I want to keep a 10-year term. Or that the remaining balance is rather low.

Maybe we should just go ahead and liquidate enough investments to pay off the mortgage, as been suggested. We would have to take out about $150,000 to clear enough after 20% withholding to do this. That would be about 14.5% of our investments.
friar1610
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Re: Is my asset allocation too conservative?

Post by friar1610 »

You may find this article by Rick Ferri regarding AAs for retirees interesting/helpful. Although somewhat dated, it advocates a 30/70 portfolio as the “center of gravity” for retirees.

https://www.forbes.com/sites/rickferri/ ... 4454535dae
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HomeStretch
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Re: Experience with Better.com? Or just pay it off from savings?

Post by HomeStretch »

Bammerman wrote: Tue Jun 29, 2021 1:46 pm HomeStretch, I have started looking into Better.com. Have you used this vehicle yourself? I've only ever used my credit union for mortgages and refinances, but their refi costs seem high to me. Or perhaps it's that I want to keep a 10-year term. Or that the remaining balance is rather low.

Maybe we should just go ahead and liquidate enough investments to pay off the mortgage, as been suggested. We would have to take out about $150,000 to clear enough after 20% withholding to do this. That would be about 14.5% of our investments.
I have not personally used Better.com but a family member recently did and was satisfied. You should be able to see refi quotes for various closing cost $/interest rate combos, including a no-cost option at Better.com or other online lenders. It is possible that your loan amount is too low. If there is no 10-year option, the 15-year option could work if the rate is lower and you pay additional principal to pay it off over 10 years.

You may want to check the recent posts in the BH ‘Mega Refi’ thread to see lenders/rates from posters that recently refinanced:
viewtopic.php?f=2&t=289559

Paying off the mortgage may also make sense especially if combined with a higher equity % afterward as the result of using fixed income investments for the payoff.
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ruralavalon
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Re: Is my asset allocation too conservative?

Post by ruralavalon »

We will turn 70 this year. We live entirely off my COLA'd government pension plus our social security annuities (plus some "pin" money from small part-time jobs now and then). We have good health insurance and Medicare, and fortunately are in good health. . . . . . Our children are grown and self-supporting. We contribute $100 each month to each of four grandchildren's 529 plan.
Given your situation almost any asset allocation is within the range of what is reasonable in my opinion.

You asset allocation of 32% stocks/68% fixed income is certainly appropriate in my opinion.

You have no need to take more risk, you have the ability to take more risk.
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Bammerman
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When retirement is not retirement

Post by Bammerman »

friar1610 -- "You may find this article by Rick Ferri regarding AAs for retirees interesting/helpful. Although somewhat dated, it advocates a 30/70 portfolio as the “center of gravity” for retirees. https://www.forbes.com/sites/rickferri/ ... 4454535dae"

-- Thanks for that article link! Serendipity or whatever, it seems to fit.

I think I was, in part, "led astray" some 15 years ago when I retired by the then-standard guidance for what retirees should do about investment allocations -- or what I understood that guidance to be. Of course it was my mistake for not grasping that "retiring" has several meanings. I had indeed "retired" in the sense that I had left my career employment, with its predictable earned income, for a smaller but equally predictable pension income. But that's not what investment talking-heads mean by retirement. They really mean the stage in life when you start using and relying on your accumulated savings and investments to live on. And I had not "retired" in that sense; I have not really retired yet in that sense, I guess. Maybe this distinction is obvious to everybody else, I hope so. My misunderstanding of "retirement" kept me somewhat more conservative than I might otherwise have been with my asset allocation. Thank goodness that did not lead me to catastrophic mistakes -- just to making a bit less from my investments than I might otherwise have made. But who knows, after all? We might have had another Great Depression. So darn hard to predict the future....
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