Question: I am 54-years-old and plan on retiring at the age of 56 from a Federal Government position. I currently have approximately 25% of my total assets in aggressive non-IRA mutual funds. The other 75% of my assets are in the Federal TSP account, with 64% in the conservative G and F funds, and 36% in the stock funds. Since I have over half of my total assets in higher risk investments and stocks are at an all-time high currently, should I re-balance my accounts? If I re-balance and want to avoid paying taxes on my non-IRA accounts, should I transfer all of the money in my TSP account stock funds and the G and F funds to 100%?
Answer: We talk with our clients about the “glide path to retirement.” In your 30’s and even 40’s, it is appropriate to have a portion of assets set aside in low risk securities such as cash or short term government bonds for emergencies. The rest, particularly assets you won’t touch until retirement, should be 100% equities. After 50, we start dialing up the percentage of bonds to about 25% when you are 5 years from retirement, 30% or even 35% when you retire for good.
You actually have flipped that strategy with aggressive stock funds in your taxable (and immediately accessible) accounts, conservative bond funds in your TSP (retirement) account. We absolutely would NOT recommend that you place 100% of your TSP account in the G fund (which currently yields only 2.75%) or in the F fund (which is index to the Barclays Aggregate and currently yields 2.61%.) Those funds barely cover inflation, leaving you with a pretty poor retirement income stream. By comparison, we project that a 70% equity/30% bond allocation will earn, after fees, 6.5% over the next 20 years (the projections are derived from Ibbotson’s estimates.)
We would recommend that you rebalance your non-retirement accounts to all bonds over three years. Yes, you will have to pay capital gains taxes, but at least we can spread out the pain. For every $1000 that you reduce your stock exposure in your taxable accounts, invest $500 in the C Fund (large cap-S&P 500 index fund), $350 in the S Fund (mid and small cap index fund) and $150 in the I Fund (international index fund.) Thereafter, in retirement, set your asset allocation across all accounts so that you have 35% bonds (mostly in your taxable accounts, but some in your TSP), 55% US stocks, and 10% international stocks.
When you retire for good, you could draw 4% from your total portfolio assets without ever running out of money. You would draw first from your taxable accounts, probably drawing them down to zero after 10 or 15 years. Meanwhile, your TSP account would continue to grow tax deferred. Eventually (for sure starting at 70 ½) you would draw from your TSP for your retirement income.