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Hi friends,

Any Foolish advice appreciated --

I have a modest amount in my 403(b) and Roth IRA (TIAA-CREF), about $85K, and my asset allocation has been heavily towards equities.

As I've turned 50, I'm rebalancing on my next birthday to a more conservative mix, although TIAA/CREF calls it "moderately aggressive" -- this new mix is Stock/60% Bond Mkt/15% Infl Linked Bond/10% and Traditional/15%.

My question is: should I also change all future allocations to this mix? And if so, should I transfer assets from the old mix to the new one? The old one, by the way, was

Global Equities/35%
Growth/30%
Social Choice/20%
Traditional/10%
Equity Index/5%

Thanks Fools!

--Sheryl
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Sheryl, it would help if you explain what "Traditional" is. The others are fairly clear.

The right answer for your allocation depends a great deal on what your financial plan for retirement looks like. If you expect to have adequate income from pension and Social Security, then your retirement accounts can be 100% in equities if you wish--because those funds are not essential to you. They will buy you some extras in retirement and stand in reserve for the unexpected.

On the other hand, if your retirement accounts must provide your basic needs in retirement, then you need to be more careful. Fools would suggest you have 5 years of your gross expenses in bonds at retirement. With a 4% burn rate, that can be something like 20%--or even less if your assets far exceed the minimum (allowing a lower burn rate). Others are comfortable with 50% of their assets in fixed income securities.

Your allocation is quite heavy in equities. That is fine if you are comfortable with it. Fools would suggest you keep as much in equities as you can as generally equities give better returns and a better chance of keeping up with inflation.

So there is no "right" answer to your question. Your plan is reasonable, but what is right for you depends on what you want the funds to do for you, how the funds fit into your overall plan, and your risk tolerance.

Good luck.
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Hi Paul,

Thanks for your reply.

"Traditional" means "Guaranteed" in TIAA/CREF.

I see what you mean, it depends on my situation and my goals -- I am concerned about having too much in equities, especially since my other retirement income will come only from Social Security (no pension).

I'm going to do some more research and maybe try to find a fee-only financial advisor who can help.

Thanks again!

--Sheryl

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As I've turned 50, I'm rebalancing on my next birthday to a more conservative mix, although TIAA/CREF calls it "moderately aggressive" -- this new mix is Stock/60% Bond Mkt/15% Infl Linked Bond/10% and Traditional/15%.

Normally the first step in retirment portfolio planning is to figure out how much you plan to spend per year after you retire. Add up all the monthly bills and annual bills. Estimate cost of food, car payment, insurance payments, utility bills, telephone, internet, cell phones, cable tv, health insurance cost, gifts you plan to give (birthdays, Christmas, etc). Then figure out things you won't be spending, like special work clothes, transportation to/from work, retirement savings, other savings, miscellaneous spending money per month, travel costs per year, etc.

Add all that up and figure out the total annual amount you need to live on. Then add the proper amount for taxes, depending on how much of your income will come from an IRA, pension, dividends, etc. A rule of thumb for many people whose income will be in the $50,000 per year range is that they will need about 10% per year over their income to pay taxes. So, for $50,000, that amounts to a total income need of $55,000. However, this varies greatly depending on where the income is coming from. Social security, for instance, is not taxed at all unless you are also working.

Then, figure out how much income you will be getting. Pensions, social security, etc.

Finally you will be able to see how much per year you will need to withdraw from your retirement portfolio per year to live.

If that number is well under 4%, you are in good shape. A 60% Total Stock Market / 40% Total Bond Market mix will support a maximum of about 4% withdrawal per year (indexed upwards with inflation each year thereafter).

Also, you need to evaluate your tolerance to risk. How do you feel when your portfolio drops 30%? Can you still sleep OK? Or will you worry so much that you will be unhappy? If large swings like this will bother you a lot, and your income needs are well below 4%, then you need to shift much more towards bonds; like maybe 60% bonds, 40% stocks. If the volatility bothers you a lot, but you need to take close to 4%, then, you will have to learn to tolerate the large fluctuations, because you must maintain a pretty high percentage in stocks to have a good probability of long term portfolio survival.

You are now into an area that is subjective and different for each person. Some people go into 100% bonds if they don't need much income, just to eliminate the portfolio swings, but if you do this, you risk slowly falling behind inflation over many years. Stocks offset inflation.

Russ
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Social security, for instance, is not taxed at all unless you are also working.

This is just plain not true. 85% of SS payments are taxable.

If SS is your primary income source you may not end up paying any tax, but that is determined by your Form 1040.

In the Four Pillars on Investing, William Bernstein recommends capitallizing any SS payments of other pensions. SS would be capitalized at a rate of about 6%. (Divide your expected annual SS payments by 0.06) This sume is trreated as a bond in our asset allocation.

My expectation is that you will find you should keep most of your funds in equities when you do this calculation.


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You are right. I was thinking that SS taxation was based on Earned Income. That will teach me to write without checking.

If the total of your taxable pensions, wages, interest, dividends, and other taxable income, plus any tax-exempt interest income, plus half of your Social Security benefits are more than a base amount, some of your benefits will be taxable. The base amount is $0 for marrieds filing separately who lived with their spouses at any time during the year; $25,000 for singles, heads of households, and marrieds filing separately who didn't live with their spouses; and $32,000 for those who are married filing jointly. These dollar amounts are not indexed for inflation.

The amount of your Social Security benefits that you must include in taxable income depends on the total of your income plus half of your benefits. The higher the total, the more benefits that must be included in taxable income. You may have to pay income tax on anywhere from 50 percent to 85 percent of your Social Security benefits.

What this means is:
In 2004 the average Social Security benefit for a married couple was $18,276. A couple, filing jointly, with average benefits and a total income from all sources of less than $41,138, was not subject to tax on any Social Security benefits, while a couple with average benefits and total income over $64,355 must include 85 percent of the Social Security, or $15,535, in taxable income.

Sorry for the confusion.

Russ
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Regarding the threshold for SS payments subject to taxation:

>> These dollar amounts are not indexed for inflation. <<

Which makes it a stealth tax hike, year after year. It can be argued, in this case, that SS is *already* being means-tested a little more with the passing of each year.

#29
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A 60% Total Stock Market / 40% Total Bond Market mix will support a maximum of about 4% withdrawal per year (indexed upwards with inflation each year thereafter).

I've used this ratio as a basis, but MDH & I met w/ a fee-only planner last week and MDH challenged the assumptions.

Can anyone give a link as to why this works?
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PolymerMom asks,

<<A 60% Total Stock Market / 40% Total Bond Market mix will support a maximum of about 4% withdrawal per year (indexed upwards with inflation each year thereafter).>>

I've used this ratio as a basis, but MDH & I met w/ a fee-only planner last week and MDH challenged the assumptions.

Can anyone give a link as to why this works?


A 4% withdrawal survived all 30-year pay out periods examined from 1871-2002 (130 years of historical data) with at least $1 remaining in the account at the end.

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

intercst



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Author: PolymerMom | Date: 2/12/05 12:27 AM | Number: 44521
I wrote:
>>A 60% Total Stock Market / 40% Total Bond Market mix will support a maximum of about 4% withdrawal per year (indexed upwards with inflation each year thereafter).

You answered:
I've used this ratio as a basis, but MDH & I met w/ a fee-only planner last week and MDH challenged the assumptions.

Can anyone give a link as to why this works?


First, the 4% number is just a rule of thumb number based on historical testing. Who knows what the future will bring?

Some studies of historical data show the SWR (Safe Withdrawal Rate) to be 3.5% or even lower depending on the type of analysis. If you use Monte Carlo analysis, which is a collection of worst case conditions all hitting at the same time, it shows a SWR of around 2.0%. Many people feel that this set of conditions is unrealistic and very unlikely to occur. (But it makes sales of fixed annuities much easier).

Also, you have to consider how safe you need to be. The 4% number is normally considered the 90% safe number; ie, 90% of the time your portfolio will survive 30 years. This is what I use, because I figure that I will just cut back a little in bad times to compensate and make sure my money lasts.

I recommend that you read the information at this excellent site: http://www.retireearlyhomepage.com/

There is a calculator that you can download that allow you to vary all the variables and find out historical SWRs. http://www.retireearlyhomepage.com/re60.html

There is also a very nice online SWR calculator at:
http://capn-bill.com/fire/

The authors of these websites also occassionally post here on TMF.

Russ
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PolymerMom:

<<<<A 60% Total Stock Market / 40% Total Bond Market mix will support a maximum of about 4% withdrawal per year (indexed upwards with inflation each year thereafter).>>>>

"I've used this ratio as a basis, but MDH & I met w/ a fee-only planner last week and MDH challenged the assumptions.

Can anyone give a link as to why this works?"


The issue is market volatility and withdrawals in a down market.

I saw that intercst has already responded and linked to his REHP (also check out the REHP board here on TMF, especially its FAQ; the board has been around for awhile so the regulars often digress but a very good about responding to specific questions).

I also saw that Russ has responded with several links, too.

I do not have the links handy, but there is the Trinity Study (and Scott Burns has written about this study and about his couch potato portfolio(s). IIRC, Jaye Jarrett has written about this topic, too.

In addition, Peter Lynch once came out with a 7-8% suggestion, then later he publicly and graciously ate his own words.

Read the other links and fire up Google.

Regards, JAFO


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