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I was talking to my dad yesterday who is 56 about asset allocation. He has about 4 more years before retiring and is considering rolling his 403b over into an IRA at Vanguard. He apparently doesn't like the Security Distributors, Inc actively managed funds available. He's currently 100% in an S&P500-like fund (large cap). He has a modest rental house and a would have a modest pension.

We talked about two things and I'd love your input:

1. What % equities vs. bonds?
2. What should his bond funds look like?

A couple of our assumptions are:

* While he has medical issues, we're thinking he'll like a long time. His mom lived close to 90 and his dad was well into 90s. So, investment timeframe and other income could allow him to be more aggressive

* He's not the kind of guy to go online or do active trading/research. Therefore, whatever he chooses has to be a sort of "fix it and forget it" model.

* I had suggested indexes for his equity portion: Vanguard Index funds for a) large cap b) small cap c) int'l and d) REIT. Just plain vanilla.

* Any money he has in cash will most likely be in and out. He's not a saver outside of his retirement funds and would most likely blow any money he tried to save outside of his funds.

Frankly, though, I really don't know what to suggest from a bond pov.

I've read the FAQ's, I've read " the only guide to a winning bond strategy", this board, 4 pillars of investing, etc. And I'm just not sure.

Any thoughts/advice or pointers to other resources to study?

Thanks!
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Most would suggest that your dad work out a budget for his likely living expenses in retirement, total including things like insurance payments, and income taxes due on the total. Then deduct income he will receive from Social Security, Pensions, Annuities, and net rental income etc.

The Foolish minimum at retirement would be 5 years of living expenses after those deductions. That is a minimum however. Depending on circumstances that can be 10% of assets or less. Most wind up going for 30% or so in bonds, but the right answer varies.

Those funds can be conservatively invested in CDs or Treaury bills. A 5 year laddered maturity bond portfolio is considered the ideal. It gives you annual income to keep you from being forced to sell in a down stock market (if you keep the rest of your funds in equities).

As you move beyond the minimum, you have more potential to diversify your fixed income investments. Then your portfolio can include corporate bonds, some higher yielding bonds, REITs, and some of the more exotic types like royalty trusts.

For simplification, some would choose a single bond fund. A bond index fund is one way to do it.
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Paul - thanks. My comments/questions below.

Most would suggest that your dad work out a budget for his likely living expenses in retirement, total including things like insurance payments, and income taxes due on the total. Then deduct income he will receive from Social Security, Pensions, Annuities, and net rental income etc.

Budget? Ha ha ha. Y'know there are some people who just don't budget. They work until they think they can afford not to. That's probably my dad. Seriously, though - yes - he needs to figure out what he plans to do with the money post retirement.

The Foolish minimum at retirement would be 5 years of living expenses after those deductions. That is a minimum however. Depending on circumstances that can be 10% of assets or less. Most wind up going for 30% or so in bonds, but the right answer varies.

You assume he's ready to take cash out now. He's not. He's 5 years away. I told him what Bernstein's book said: 4% Safe withdrawal rate on a mixed equity/bond portfolio. The question is what should he buy for the bond fund?

Those funds can be conservatively invested in CDs or Treaury bills. A 5 year laddered maturity bond portfolio is considered the ideal. It gives you annual income to keep you from being forced to sell in a down stock market (if you keep the rest of your funds in equities).

Yes, I understand the 5yr bond laddering type of thing and talked to him about that. Again, I don't know that there's any point of buying CDs or T-Bills *now* is there?

As you move beyond the minimum, you have more potential to diversify your fixed income investments. Then your portfolio can include corporate bonds, some higher yielding bonds, REITs, and some of the more exotic types like royalty trusts.

I'm looking for a Foolish Maxim here. I *thought* the Foolish maxim was to split the equity portion up to around 1/3 large, 1/3 small and 1/3 int'l with maybe 5% REIT - all indexes. That would be for the equity portion. I understand Foolish Maxim on the 5yr ladder model during withdrawal phase.

For simplification, some would choose a single bond fund. A bond index fund is one way to do it.

I'm still looking for the Foolish Maxim for the Fix-it and Forget bond portion. So, would *one* bond index fund for the bond portion be sufficient? Something like: VBMFX - Vanguard Total Bond Index??

If, for example, Dad choosed an 80/20 split, should he throw 20% into VBMFX? If he chooses a 60/40 split, should he throw 40% into VBMFX?

Or should we slice and dice the bond portion up more? Should we throw in a modest % of VFIIX - Vanguard GNMA Index.

Of the bond portions, should one do 1/3 longterm, 1/3mid-term, 1/3 short-term?

Any input would be appreciated. thank you
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For simplification, some would choose a single bond fund. A bond index fund is one way to do it.

I'm still looking for the Foolish Maxim for the Fix-it and Forget bond portion. So, would *one* bond index fund for the bond portion be sufficient? Something like: VBMFX - Vanguard Total Bond Index??

If, for example, Dad choosed an 80/20 split, should he throw 20% into VBMFX? If he chooses a 60/40 split, should he throw 40% into VBMFX?

Or should we slice and dice the bond portion up more? Should we throw in a modest % of VFIIX - Vanguard GNMA Index.

Of the bond portions, should one do 1/3 longterm, 1/3mid-term, 1/3 short-term?

Any input would be appreciated. thank you


If he rolls over to Vanguard, he can get a Vanguard brokerage account within his IRA, which means he can get CDs, Treasuries, etc., instead of a bond fund. It really isn't any harder to do a ladder, and a lot safer during low interest rate periods. If he really can't handle anything as "difficult" as a ladder and must have a fund, go with the Intermediate Index bond fund instead of the Total Bond fund, for reasons that have been discussed here, and on the index fund board, before (and John Bogle agrees).
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If he rolls over to Vanguard, he can get a Vanguard brokerage account within his IRA, which means he can get CDs, Treasuries, etc., instead of a bond fund. It really isn't any harder to do a ladder, and a lot safer during low interest rate periods. If he really can't handle anything as "difficult" as a ladder and must have a fund, go with the Intermediate Index bond fund instead of the Total Bond fund, for reasons that have been discussed here, and on the index fund board, before (and John Bogle agrees).

Ok, there are a couple things here, so I'm going to step through them:

1) So you are saying CD's and Treasuries are better than a bond fund now because of interest rate risk? I can get that...

2) How would you structure them before / after withdrawal phases? ie, just set up a 5yr CD ladder and just buy a new 5yr every year?

3) I know you are 100% bonds, so I won't even ask what % bonds you suggest. :-)

4) Can he handle anything as "difficult" as a ladder? -- Left to himself, no. He can't/won't. Now, I would be happy to do the research and call him once per year. I enjoy finance stuff. BUT, I'm really not sure that it would be a realistic arrangement.

5) So, if a ladder doesn't make sense, then are you suggesting he buy VBIIX, not VBMFX?

Thank you for the clarifications...
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3) I know you are 100% bonds, so I won't even ask what % bonds you suggest. :-)

I'm nowhere near 100% fixed income. I have a lot of money in Total Stock Market Index (I think currently stock assets are about 40%), but I realized I don't need to keep adding, so why risk it (except Roth, which I'll be long dead before I use).

2) How would you structure them before / after withdrawal phases? ie, just set up a 5yr CD ladder and just buy a new 5yr every year?

I just drip money in as I have it and will have good cash flow during withdrawal phase. With a rollover, you are looking at a lump sum, so you need to create an instant ladder. If you can help your father do that, then he can have a CD coming due every year (or 6 moths), which is almost as liquid as a bond fund.

5) So, if a ladder doesn't make sense, then are you suggesting he buy VBIIX, not VBMFX?

This is an analytical argument, not well backed up by the historical statistics, but since Bogle came up with the same argument (unless he stole it from us), it makes sense. The Total Bond Index has mortgage bonds, which subjects it to refinancing risk that costs about 100 basis points return a year. The Intermediate Index has no mortgage bonds. It is slightly more susceptible to interest rate risk.
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Loki

I thought I read somewhere that Bogle was buying the Total Bond Fund for his wife, NO?

brucedoe
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I was talking to my dad yesterday who is 56 about asset allocation. He has about 4 more years before retiring

My husband retired last year. It would have been nice if we had started buying 5-year treasuries five years ago, so we already had a ladder in place.

The definitive retirement study here shows that about 20% should be in fixed income.
http://www.retireearlyhomepage.com/restud1.html



Vickifool
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My husband retired last year. It would have been nice if we had started buying 5-year treasuries five years ago, so we already had a ladder in place.

Good point!!!

The definitive retirement study here shows that about 20% should be in fixed income.

I love the word, "definitive" :-) bingo

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

I'll start reviewing now...


Thank you!
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I love the word, "definitive" :-) bingo

Defimitive means based on the future repeating the past.

The defintive thing to do, which Paul started by recommending, is to figure out expenses and financial resources and what kind of withdrawal rate will be required. The reason my allocation in fixed income seems high to many is because I save a lot and don't spend money on stuff other people think I should want. That means I will retire with less than a 3% initial withdrawal rate and aces in the hole (like Social Security and home equity). You father doesn't sound like he can do that, but if you can't get him to do some basic budgeting and financial planning, the whole thing becomes a wing and a prayer.
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I love the word, "definitive" :-) bingo

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


It makes a big difference to me that Intercst so clearly lays out his assumptions and where he got the data from.

When he first published his web pages, most financial people were recommending much higher withdrawal rates--generally 8% or so--but now most are in line with his study. That's been interesting to watch.

Vickifool
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You father doesn't sound like he can do that, but if you can't get him to do some basic budgeting and financial planning, the whole thing becomes a wing and a prayer.

He might try my version of budgeting. I entered all my spending for several years and assumed that was my budget. It took about a week to enter four year's worth of checks and credit card receipts. These days, you can download at least four months of that.

VickiSpouse thought that was peculiar: He thinks budgets should be prescriptive rather than descriptive. However, our spending is fairly regular, and I did identify a few areas of excess. Who knew "books" could be a major budget category?

The other advantage of that method was that it identified the seasonality of our spending so that I could adjust our short-term ladder a little closer.

Vickifool
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1) So you are saying CD's and Treasuries are better than a bond fund now because of interest rate risk? I can get that...

Maybe you already know this but FDIC insured CDs and Treasuries are as safe as you can get in fixed income investments. Risk goes up from there. But the advantage of the bond (or CD or Treasury ladder) is that by holding to maturity you get the full face value of the bond even if interest rates have caused market values to change. This exposure to interest rate variations can be a concern if you hold bond funds, especially if you own only the minimums.

2) How would you structure them before / after withdrawal phases? ie, just set up a 5yr CD ladder and just buy a new 5yr every year?

As Vickifool noted, the easy way to do this is simply to start buying 5 year CDs (or or) 5 years before retirement. Ideally you want to buy 1 year of expenses worth every year. Then as they begin to mature, you continue the process by buying a new 5 yr CD (or or) each time one matures. This way you always have the 5 yr ladder and its interest rate paid tracks the market but with a 5 yr moving average. You avoid peaks and valleys.

4) Can he handle anything as "difficult" as a ladder? -- Left to himself, no. He can't/won't. Now, I would be happy to do the research and call him once per year. I enjoy finance stuff. BUT, I'm really not sure that it would be a realistic arrangement.

See above. It can be quite simple. You can do as little as one CD purchase per year (or you can spread them out to more intervals (3 mo/ 6 mo/ etc) in smaller amounts if you want).

5) So, if a ladder doesn't make sense, then are you suggesting he buy VBIIX, not VBMFX?

Bond fund has a few more risks than ladder, but can be OK. But I would make it more than the minimum to cover some of the market changes likely to happen over the years.
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>I love the word, "definitive" :-) bingo

>>Defimitive means based on the future repeating the past.


And repeating with only S&P returns on stocks and Government Bonds!!!!

If you allocate a portion in Real Estate, Precious Metals (and I personally include 10% in dividend energy stocks that are beaten down) and allow for Municipal or even corporate debt, and since you have ex ante bonds returns (when held to maturity) the SAFE withdrawl rate can be much better than the % mentioned.

So I second Loki, as I usually do, A wing and a prayer!

fixed income is just that - fixed!

The prayer sometimes works, sometimes it doesn't.

Follow Paul: Income, Expenses - make a plan!


d(5.66%)/dT
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If you allocate a portion in Real Estate, Precious Metals (and I personally include 10% in dividend energy stocks that are beaten down) and allow for Municipal or even corporate debt, and since you have ex ante bonds returns (when held to maturity) the SAFE withdrawl rate can be much better than the % mentioned.

would you mind elaborating on:

a) % allocations with vanguard fund names, and

b) Safe withdrawal rates given your prescribed allocations

c) references, links for me to review?

thank you!
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the SAFE withdrawl rate can be much better than the % mentioned.

would you mind elaborating on:

a) % allocations with vanguard fund names, and

b) Safe withdrawal rates given your prescribed allocations

c) references, links for me to review?


I would disagree with Dr. Tarr (I rarely do) in talking about a Safe withdrawal rate.

If you want something really sophisticated about safe withdrawal rates, by somebody who does understand statistics and probability and modeling, look at Gummy's web site (I'll just give the main link, because he talks about safe withdrawal rates a lot of places):

http://gummy-stuff.org/index.html

There are two issues with safe withdrawal:

1) Average rate of return over inflation (real inflation, not to be confused with CPI);

2) Fluctuations in returns, meaning you may have assets that are losing money for periods during your withdrawal stage.

One argument made about asset allocation, which I believe is what Dr. Tarr is suggesting, is that with diversification across higher risk asset classes, you can keep a higher % of total assets in higher risk asset classes, because some will be doing well as others are doing badly. This means, assuming over time higher risk asset classes outperform lower risk asset classes, you will be able to have a higher withdrawal rate, because you will take money from the higher risk assets that are doing well not the ones that are doing badly.

Again, this works better if future market statistics repeat past market statistics.

My view continues to be to save more and that people who are relying on future markets to do their savings for them are playing with fire.
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I was talking to my dad yesterday who is 56 about asset allocation. He has about 4 more years before retiring and is considering rolling his 403b over into an IRA at Vanguard. He apparently doesn't like the Security Distributors, Inc actively managed funds available. He's currently 100% in an S&P500-like fund (large cap). He has a modest rental house and a would have a modest pension.
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I didn't have a lot of experience with asset allocation when i first retired and moved my 403b to Vanguard.  Vanguard has several financial planning services and depending on the amount of the rollover.  The service is well worth the price if you don't have a lot of investing experience. 

I bought a Vanguard investing plan, set it up in a Yahoo port and have followed it now for about six years.  While I didn't implement it, I  have only beaten it by 3 percent a year in the up market years. 

It wouldn't hurt to have them do a plan while you learn.  If your dad has no interest in learning, then he will cause no harm to himself by implementing it.
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Thanks Sally, I'll check it out with him...
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