Posted: 2/28/2010 3:22:12 PM EDT
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It's been a few years since I've reallocated my investments in my IRA. There are a lot of ETFs that weren't available last time I did this, so I'm thinking about changing things. I'm 40 years old and plan to work full time for another 25 years. Part time after that. I'm thinking about 25% Vanguard Total Bond Market BND 25% Vanguard Total Stock Market VTI 25% Vanguard Small and Mid Cap Index VXF 12.5% Vanguard All the World ex US VEU 12.5% Dow Jones Commodity Index DJP How do these percentages look? I stuck with Vanguard ETFs when possible because the expense ratios were low. The commodity ETF has a .75% ER which is more than I want to pay but all the commodity ETFs that didn't specialize in one commodity were about .75%.
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That asset allocation is a little too stock heavy, imho. In the next two decades, I don't see stocks returning their historical averages. You need to diversify more.
I favor the "V-8" portfolio model, which is comprised of eight asset classes, divided into eight separate ETF's. This allocation prescribes 12.5% into each of 8 ETF's as follows: - US Stocks - Foreign Stocks - US Bonds - Foreign Bonds - Real Estate - Commodities - Foreign Currencies - "Anything that isn't the above" (Precious metals, private equity/debt, small business, collectables, derivatives, hot sector ETF's, etc.) This provides appropriate diversifiction, sound risk management, and a good chance to achieve a long-term rate of return of 7-9%. Getting that with stocks is going to be harder to do in the coming decades, imho. |
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It's been a few years since I've reallocated my investments in my IRA. There are a lot of ETFs that weren't available last time I did this, so I'm thinking about changing things. I'm 40 years old and plan to work full time for another 25 years. Part time after that. I'm thinking about 25% Vanguard Total Bond Market BND 25% Vanguard Total Stock Market VTI 25% Vanguard Small and Mid Cap Index VXF 12.5% Vanguard All the World ex US VEU 12.5% Dow Jones Commodity Index DJP How do these percentages look? I stuck with Vanguard ETFs when possible because the expense ratios were low. The commodity ETF has a .75% ER which is more than I want to pay but all the commodity ETFs that didn't specialize in one commodity were about .75%. Not anywhere near enough information here if you are asking for advice on investment allocation. You need to know how much money you will need to retire on (out of your assets), you can then figure out what the lump some needs to be in order to provide that income, you can then calculate what kind of return you will need based on your current assets and savings rates with an assumption about a reasonable rate of return. Your allocation needs to be based on whatever will achieve that reasonable rate of return. If you only need 8 and you target 10 then you are taking too much risk. If you need 10% and you only target 8 then you will fall short. For instance, if you want $50,000 (out of your assets) in todays dollars then you would need $135k in 25 years to have the same spendable cash flow based on a 4% rate of inflation. If you used a 4.5% withdrawal rate (an advisor will recommend between 4 and 5 if you want your assets to last) then you will need a little over $3mil as a nest egg ($135k/.045). So for an example, if you need $3mil in the future, you had $250k now and were saving $500 a month for the next 25 years, you would need a little more than 9% average rate of return. Your allocation would need to target that 9%. If someone gives you advice without asking you more questions then they aren't qualified to help you. To answer your questions about ETF's, they will cost you much more than their expense ratio if you use them in the wrong areas. I like them for large cap exposure because most Large Cap managers don't outperform the market so why pay them to do so. Get an ETF and save the 1+% they are getting paid to provide the same result. For small and mid cap areas the managers are worth the extra expense because there is a lot of risk in that market and the good managers pick good companies and can easily net you more return than the extra expense over and above the ETF. This is also true for any international or commodity exposure unless you want a very specific exposure to be weighted heavily because you think that it is a good investment. Think about it like this, if you had all ETF's then you would have got to lose money on Enron in your large cap, mid cap and small cap exposures instead of just the large cap because a manager would have never bought the company as it went down. The other thing to consider is where you are investing your money. If it is in an IRA then don't worry about the turnover in an account for a good manager. If it is non-qualified then a manager that has a high turnover ratio can cause you tax problems in a good or bad market. Hope this helps. |
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I have no idea how much I will need to retire. Who knows what the cost of living will be in 25 years or whether social security will even exist. That's why I'm planning to work part time into my 70s. Think about if every day was Saturday. About how much money do you think you would spend if you could do whatever you want whenever you want? If you don't want to take the time to do that then just figure out the future value of what you make now. A financial calculator will make this easy. I am sure that their is a free one on the internet that you can use. I will be happy to help you if you want to divulge what you make, but a quick google search should yield something. If you use a 4% inflation rate to help figure out the cost of living then take your income times 2.7 and that will give you a rough estimate. The point isn't to know, the point is to have an idea of what you want based on certain assumptions. As you go you need to track your progress. If one of the assumptions change then you need to change something in your plan to stay on track. By the way, most people think that they will live on much less when they retire and that is not typically the case. They have more time to spend more money, there are services that they used to do for themselves that they have to start hiring out (lawn care, snow removal, etc), tax rates will most likely be higher and medical expenses keep increasing. So, don't plan on living on half of what you make unless you make a significant amount of money and you save most of your paycheck. |
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Quoted: Quoted: I have no idea how much I will need to retire. Who knows what the cost of living will be in 25 years or whether social security will even exist. That's why I'm planning to work part time into my 70s. Think about if every day was Saturday. About how much money do you think you would spend if you could do whatever you want whenever you want? If you don't want to take the time to do that then just figure out the future value of what you make now. A financial calculator will make this easy. I am sure that their is a free one on the internet that you can use. I will be happy to help you if you want to divulge what you make, but a quick google search should yield something. If you use a 4% inflation rate to help figure out the cost of living then take your income times 2.7 and that will give you a rough estimate. The point isn't to know, the point is to have an idea of what you want based on certain assumptions. As you go you need to track your progress. If one of the assumptions change then you need to change something in your plan to stay on track. By the way, most people think that they will live on much less when they retire and that is not typically the case. They have more time to spend more money, there are services that they used to do for themselves that they have to start hiring out (lawn care, snow removal, etc), tax rates will most likely be higher and medical expenses keep increasing. So, don't plan on living on half of what you make unless you make a significant amount of money and you save most of your paycheck. I was counting on my expenses being lower than they are now. I won't have to support my kids at that point, and my mortgage will be paid off. I also plan to move to a state with a lower cost of living and better tax laws on retirement income. That's a good point about increasing tax rates and medical expenses. I hadn't thought about that. If I have to hit 2.7 times my current income, I'll probably never be able to fully retire. |
| I ran the numbers through a calculator and assuming a 4% inflation rate with no social security benefits, I'll need to contribute about 10% of my current income a year, and pull a 8% return to fully retire at 70. I'm doing 10% now, so I'll have to increase that at some point if I want to retire at 65. If they still have social security I should be way ahead, but I not counting on it. |
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I ran the numbers through a calculator and assuming a 4% inflation rate with no social security benefits, I'll need to contribute about 10% of my current income a year, and pull a 8% return to fully retire at 70. I'm doing 10% now, so I'll have to increase that at some point if I want to retire at 65. If they still have social security I should be way ahead, but I not counting on it. If you decide to move to a smaller home and live iin a place with better taxes then you may be able to live on less, but do what you can to plan on replacing income. What rate of return are you using to get your nestegg? Also, I have a little good news and a little bad news. The good news is that as time goes by and the kids leave the house you will be making more money and will be able to save more money. So, 10% of your income now is much different than what you will be able to save in 10 years. An increased savings rate means a bigger nest egg. The longer you can get your money to work for you the better but you will be able to save more as time goes on. The bad news is that you can't possibly take 8% and expect your money to last. A 4-5% withdrawal rate is all that you can pull out of your assets and expect them to last. 5% is aggressive if the early years of your retirement have low returns or negative returns. If you know your way around excel you can put together a pretty solid calculator to figure out future savings with increases in pay. Also, if you save 10%, don't forget any matched contributions your employer might make. I am self employed so my employer is an a-hole and doesn't give me any money for my match but my wife has a match and a lot of times she gets profit sharing. That will make a huge difference in the calculation. |
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Quoted: Quoted: I ran the numbers through a calculator and assuming a 4% inflation rate with no social security benefits, I'll need to contribute about 10% of my current income a year, and pull a 8% return to fully retire at 70. I'm doing 10% now, so I'll have to increase that at some point if I want to retire at 65. If they still have social security I should be way ahead, but I not counting on it. If you decide to move to a smaller home and live iin a place with better taxes then you may be able to live on less, but do what you can to plan on replacing income. What rate of return are you using to get your nestegg? Also, I have a little good news and a little bad news. The good news is that as time goes by and the kids leave the house you will be making more money and will be able to save more money. So, 10% of your income now is much different than what you will be able to save in 10 years. An increased savings rate means a bigger nest egg. The longer you can get your money to work for you the better but you will be able to save more as time goes on. The bad news is that you can't possibly take 8% and expect your money to last. A 4-5% withdrawal rate is all that you can pull out of your assets and expect them to last. 5% is aggressive if the early years of your retirement have low returns or negative returns. If you know your way around excel you can put together a pretty solid calculator to figure out future savings with increases in pay. Also, if you save 10%, don't forget any matched contributions your employer might make. I am self employed so my employer is an a-hole and doesn't give me any money for my match but my wife has a match and a lot of times she gets profit sharing. That will make a huge difference in the calculation. By 8%, I mean the return on my investment needs to average 8% until I retire. I'm putting away 10% now, but do plan to up the amount as I get salary increases. I'd like to be at 16% again within the next 5 years. |
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I ran the numbers through a calculator and assuming a 4% inflation rate with no social security benefits, I'll need to contribute about 10% of my current income a year, and pull a 8% return to fully retire at 70. I'm doing 10% now, so I'll have to increase that at some point if I want to retire at 65. If they still have social security I should be way ahead, but I not counting on it. If you decide to move to a smaller home and live iin a place with better taxes then you may be able to live on less, but do what you can to plan on replacing income. What rate of return are you using to get your nestegg? Also, I have a little good news and a little bad news. The good news is that as time goes by and the kids leave the house you will be making more money and will be able to save more money. So, 10% of your income now is much different than what you will be able to save in 10 years. An increased savings rate means a bigger nest egg. The longer you can get your money to work for you the better but you will be able to save more as time goes on. The bad news is that you can't possibly take 8% and expect your money to last. A 4-5% withdrawal rate is all that you can pull out of your assets and expect them to last. 5% is aggressive if the early years of your retirement have low returns or negative returns. If you know your way around excel you can put together a pretty solid calculator to figure out future savings with increases in pay. Also, if you save 10%, don't forget any matched contributions your employer might make. I am self employed so my employer is an a-hole and doesn't give me any money for my match but my wife has a match and a lot of times she gets profit sharing. That will make a huge difference in the calculation. By 8%, I mean the return on my investment needs to average 8% until I retire. I'm putting away 10% now, but do plan to up the amount as I get salary increases. I'd like to be at 16% again within the next 5 years. My misunderstanding about the 8%. Sounds like you might be on track. Congrats! Find some software to allocate to target the return you need. Keep in mind that the investments that you use need to net 8% return after fees and taxes (taxes only apply to non-qualified accounts). |