how to conservatively invest Roth?

[bemused]

Hi Scanner, I'm sorry for the recent tumult in your life. But I think I've given you the wrong impression about our marriage. No marriage is perfect, but the hub and I discuss everything, and we end up easily agreeing/compromising on everything. We have a division of labor based not on which of us is more or less risk-tolerant, but based on what each can stand to do in terms of chores.

The hub manages the 403b because he has the interest in rebalancing our funds regularly (usually every 3 months), and has developed a program to help him choose funds each "cycle". I don't have that interest, to follow fund performance and recalculate allocations regularly, and I trust him completely to take care of both of our 403b investments. I manage pretty much everything else that has to do with money, because he's not good with budgeting, paperwork or bills and has no interest in the detailed planning or bookkeeping to minimize surprises. And he's perfectly happy with my doing this. We're paranoid enough that I've prepared a "cheat sheet" with all the things he's going to need to do about money if something happens to me unexpectedly. And everything other than our retirement funds are comingled.

The reason I'm in charge of the newer Roths is because they're new, there's little money in them, I have to make sure to take care of the contributions and conversion in a way that doesn't disturb the rest of our operating finances (the 403b are automatically deducted from our pay so there's no budgeting or thinking there) or incur unplanned tax consequences. I told him this morning that he should start thinking about how to re-invest our Roths in mutual funds. This is going to be a bit of a pain because I'll need to set up automatic investments into an after-tax IRA to minimize fees and then think about how best to convert to Roth (once a year? every month would be tedious).

I don't think either of us wants to invest our retirement funds individually. We have essentially the same amount of risk tolerance. We consider our sum retirement accounts to be family assets rather than personal assets (yes, maybe that's naive in this day and age but there you go), and we're quite comfortable with the division of labor that we currently have.

I don't know anything about AAA insured muni bonds, thanks for that tip. I'll go look up some typical yields.

[Scanner]

Bemused,

Okay, good. . .I know I was being way presumptious but if you both have the same risk tolerance, than everything should be simple.

AAA muni bonds in your state will accumulate earnings tax-free but like all bonds, the yields aren't going to be that impressive.

But the principal and interest are insured and it's a conservative investment. (whatever that means nowadays with Bond rating agencies and the credit bubble)

[jIM_Ohio]

Bemused, think big picture...

You are in excellent shape.

How much is invested in 403(b)- 20% right? (this is 33,000+ per YEAR right?)
Guessing the 10k roth deposits are 6% of income?
does this mean you gross about $166k per year? I backtracked math and rounded, but think I am close

So focus on big picture allocation of retirement monies

Put 30k into 403b (drop the percentage a LITTLE down to 19 or 17%)
put 3k into a taxable account which is invested in muni bonds
put 10k into Roth and put this in equities or commodities
if you are not 75-25, drop the 403b contribution down (a little more) and add to muni bonds in a taxable account.

You want the Roth to grow, you can thank us later for that advice. If you want investments to be conservative, look for these choices

1) 529 accounts should have no more than 50% equities (if kids are younger than 6, maybe, but still probably not)
2) increase cash reserves or taxable accounts with conservative investments
3) look for MODERATE allocation funds. I suggest Permanent Portfolio (PRPFX) for any conservative investment which has long term needs (meaning you don't want to take risk, but you want some growth from investment).

Keep retirement accounts close to 75-25 until you are within 12 years of retirement OR the account has 12X annual expenses (whichever comes first).

Your short term planning should be

a) 529 plans
b) Roth invested for growth
c) how soon can you have 12X expenses in retirement accounts

[Scanner]

JimOhio,

I Have looked at PRPFX and it is certainly not outlandish (a mix of treasuries, gold/silver, and blue chip stocks, right?)but when I was reviewing it's performance, there was a crash in there where it lost about 50% (but then rebounded right away).

The worst 1 year performance though was only -8%. . .but I bet there was a 3 month performance of -50% in there somewhere too.

[bemused]

Hi jIM,

>How much is invested in 403(b)- 20% right? (this is 33,000+ per YEAR right?)
Yes, >$33K/year.

>Guessing the 10k roth deposits are 6% of income?
No, the "new" Roths with recent contributions represent 6% of total current retirement savings, not income.

>does this mean you gross about $166k per year? I backtracked math and rounded, but think I am close
No, our total gross is greater than that.

>Put 30k into 403b (drop the percentage a LITTLE down to 19 or 17%)
We actually recently increased from 18% to 20%, after we saw that during the last year at 18% we had extra savings. So right now 20% is easily manageable, and I don't see the need to drop this. We are still below max, which would be 24% (total of employer contribution and employee supplemental contribution).

>put 3k into a taxable account which is invested in muni bonds
I don't understand why I should decrease our tax-deferred retirement savings and increase our taxable savings.

>put 10k into Roth and put this in equities or commodities
Yes, I think I mentioned already that we've decided to do this, and thank you and other kind posters here again for pointing out the wisdom of investing the Roth aggressively.

>if you are not 75-25, drop the 403b contribution down (a little more) and add to muni bonds in a taxable account.
Again, a little confused about dropping the 403b contribution in favor of a taxable account.

>1) 529 accounts should have no more than 50% equities (if kids are younger than 6, maybe, but still probably not)
These are currently quite conservatively invested, since the first kid is <4 years from college, and the next one will start as soon as the first one is finished.

>2) increase cash reserves or taxable accounts with conservative investments
We have our $40K 6-9 month emergency funds, in addition to an additional savings buffer for other short term expenses (vacations, home improvements, etc. e.g. this year we replaced a car, had substantial home improvement costs, and an annual vacation).

>3) look for MODERATE allocation funds. I suggest Permanent Portfolio (PRPFX) for any conservative investment which has long term needs (meaning you don't want to take risk, but you want some growth from investment).
I don't think Scanner's description of the PRPFX performance behavior fits my definition of "conservative" so I guess I should check out the other earlier suggestions first.

>Keep retirement accounts close to 75-25 until you are within 12 years of retirement OR the account has 12X annual expenses (whichever comes first).
We should hit your target, if our current retirement funds don't lose any money, before the first kid starts college.

Our current financial plan, for what it's worth, is:
- 20% of gross in 403b
- $10K/year in Roth
- untouchable $40K emergency funds
- "buffer savings" that are enough to replace a roof or buy an inexpensive new economy car and cover one nice family vacation a year
- the rest of our income, after all regular living expenses are paid each month, goes to college savings
- we currently have enough saved to cover one kid for 4 years at a state school; he'll start in <4 years. I think we're on track to be able to cover 4 years for both kids at a state school, or if they go somewhere pricier we can pay for half those expenses and help them pay off their loans afterward, assuming they did well enough, and that their degrees are worth the extra expense.

We don't want to have too much in taxable non-retirement, non-college savings because those savings will increase the "expected family contribution" calculated in the college financial aid process. We don't expect our kids will qualify for aid, due to our salaries, but we'd like to minimize our taxable income and assets before the first kid starts college since many colleges use these numbers to calculate the amount of tuition aid they will offer. So we are increasing our 403b contributions a bit each year so that two years from now we will reach the max allowed of 24%, to effectively reduce our salaries as much as possible before the college calculations are made. This will also help shelter some more savings from the tuition aid calculators.

So I guess my homework is to check out TIPS, T-bills, and muni bonds, wrt TIAA traditional, for a small corner of our 403bs. I had not checked out either T-bills or muni bonds before. And the hub's homework is to decide how to invest our "newer" Roths.

Thanks for your thoughts, I really appreciate your time.

[jIM_Ohio]

JimOhio,

I Have looked at PRPFX and it is certainly not outlandish (a mix of treasuries, gold/silver, and blue chip stocks, right?)but when I was reviewing it's performance, there was a crash in there where it lost about 50% (but then rebounded right away).

The worst 1 year performance though was only -8%. . .but I bet there was a 3 month performance of -50% in there somewhere too.

Check it again.

My records show at one point in mid 2008 I was down about 20%- that was worst short term period ever, and I am up 20% from initial deposit (earlier in 2008) without adding any new money.

[jIM_Ohio]

Hi jIM,


>if you are not 75-25, drop the 403b contribution down (a little more) and add to muni bonds in a taxable account.
Again, a little confused about dropping the 403b contribution in favor of a taxable account.

My focus is on maintaining the 75-25 allocation. So all suggestions for retirement funds are based on this direction. I am trying to steer you in direction of keeping same allocation and maximizing Roth gains with growth investments. And because you admitted you did not have a good bond fund in the 403b, I made some decisions:

Invest about 18% of gross into 403b
this will increase take home a little and tax bill a little
invest about 2% of gross into a muni bond fund (save on taxes)
invest 10k per year into Roths into a growth based investment
all of above should be a 75-25 allocation between stocks and bonds
if it is not, lower 403b contribution (a little) and increase muni bond position (a little)

>1) 529 accounts should have no more than 50% equities (if kids are younger than 6, maybe, but still probably not)
These are currently quite conservatively invested, since the first kid is <4 years from college, and the next one will start as soon as the first one is finished.

well done, no modification needed

>2) increase cash reserves or taxable accounts with conservative investments
We have our $40K 6-9 month emergency funds, in addition to an additional savings buffer for other short term expenses (vacations, home improvements, etc. e.g. this year we replaced a car, had substantial home improvement costs, and an annual vacation).

If you believe Roth should be conservative, if the cash savings was 24 months expenses, would you still think that? This is an alternative to lowering 403b... increase cash in taxable accounts then invest Roth for growth.

>3) look for MODERATE allocation funds. I suggest Permanent Portfolio (PRPFX) for any conservative investment which has long term needs (meaning you don't want to take risk, but you want some growth from investment).
I don't think Scanner's description of the PRPFX performance behavior fits my definition of "conservative" so I guess I should check out the other earlier suggestions first.

Check the fund for yourself- it is conservative- 50% of the fund is in bonds and cash (US bonds and swiss francs as cash), the other 50% is in gold, silver and stocks.

>Keep retirement accounts close to 75-25 until you are within 12 years of retirement OR the account has 12X annual expenses (whichever comes first).
We should hit your target, if our current retirement funds don't lose any money, before the first kid starts college.

This means you are less than 4 years from having 12X expenses saved? Once you hit 12X, if market is up, you should drop to about a 40-60 allocation and create an 8 year plan to retire. In 8 years 12X should double to 25X.

If your 403b does not have good conservative choices, you need to think how you go from 75% equity to 40% equity with 8 years of work left- add that to a mid term financial project to complete.

Our current financial plan, for what it's worth, is:
- 20% of gross in 403b
- $10K/year in Roth
- untouchable $40K emergency funds
- "buffer savings" that are enough to replace a roof or buy an inexpensive new economy car and cover one nice family vacation a year
- the rest of our income, after all regular living expenses are paid each month, goes to college savings
- we currently have enough saved to cover one kid for 4 years at a state school; he'll start in <4 years. I think we're on track to be able to cover 4 years for both kids at a state school, or if they go somewhere pricier we can pay for half those expenses and help them pay off their loans afterward, assuming they did well enough, and that their degrees are worth the extra expense.

We don't want to have too much in taxable non-retirement, non-college savings because those savings will increase the "expected family contribution" calculated in the college financial aid process. We don't expect our kids will qualify for aid, due to our salaries, but we'd like to minimize our taxable income and assets before the first kid starts college since many colleges use these numbers to calculate the amount of tuition aid they will offer. So we are increasing our 403b contributions a bit each year so that two years from now we will reach the max allowed of 24%, to effectively reduce our salaries as much as possible before the college calculations are made. This will also help shelter some more savings from the tuition aid calculators.

So I guess my homework is to check out TIPS, T-bills, and muni bonds, wrt TIAA traditional, for a small corner of our 403bs. I had not checked out either T-bills or muni bonds before. And the hub's homework is to decide how to invest our "newer" Roths.

Thanks for your thoughts, I really appreciate your time.

IMO your impending retirement (in 12 years) trumps the need for financial aid. I would rank problems as

1) retirement and allocation to support this
2) taxes
3) financial aid

If you really really want to do the financial aid thing, best thing I would suggest is this-

1) take excess savings and buy another property (add liabilities to financial statement)
2) not use 529 plan (the 529 plan will probably cause more aid problems than high taxable account balances would- 529 plans are money specifically allocated for education)
3) when your first kid is a junior in HS (the spring of his Junior year), take measures to lower the AGI on tax return (take half the year off or something like that). Do that again when kid 2 is a junior in HS.

The spring of the Junior year is most important YEAR for taxes. So in spring of sophomore year/fall of junior year take steps, because you file that tax return in spring of junior year and send that info in in fall of senior year for financial aid.

[Scanner]

JimOhio/bemused:

Disclosure: That was only looking at a graph that I saw the price share appear to drop about 50% - it appeared to be near 43 and drop to 23.

You can clarify it for bemused.

I do actually think it's a great fund and one that matches a lot of what I think people should be invested in (being the silver maven I am).

[jIM_Ohio]

JimOhio/bemused:

Disclosure: That was only looking at a graph that I saw the price share appear to drop about 50% - it appeared to be near 43 and drop to 23.

You can clarify it for bemused.

I do actually think it's a great fund and one that matches a lot of what I think people should be invested in (being the silver maven I am).

PERMANENT PT Fund Chart - Yahoo! Finance

Nov 2008 it was at 29.12
May of 2008 was at 38, so a drop of 9 points, about 25%

It is now at 42
it does not have many distributions, so that chart is about what a real investment looks like

[Scanner]

JimOhio,

Thanks for clarifying so that was the greatest drop - 6 months it lost 25%.

Is that your definition of conservative though?

I am not trying to be provocative, it's an honest question becuase I actually like the fund so much, I may actually put my EF there (or half of it, knowing I wouldn't probably need all of it at once). . .and just fund any losses. But that's me.

But. .. you know. . .I have 40K there and then in 6 months, it's down to 30K and now I have an emergency. . .will the bounceback return get me back to where I want to be?

[bemused]

>And because you admitted you did not have a good bond fund in the 403b,

I don't think I said we didn't have a good bond fund. The hub has our 403b funds 75:25 stocks:bonds. From our different jobs, we have a mixture of Fidelity, Vanguard, and a small amount in TIAA-CREF funds. I assume he has some good bond funds in there somewhere. He just doesn't have anything very conservative, at least by our definition, which is essentially risk-free (I know this comes with lower returns, but that was the point of my original question, is there anything essential risk-free that will return more than our current 2.6% cd rates or the 3.35% TIAA traditional rate).

>This means you are less than 4 years from having 12X expenses saved? Once you hit 12X, if market is up, you should drop to about a 40-60 allocation and create an 8 year plan to retire. In 8 years 12X should double to 25X.
We don't actually want to retire early - we kind of love our jobs. So if we have more saved than we need (who ever knows how much they will need?) I guess the kids will have something left to them at some point. I was thinking that about 10 years from now, we need to start thinking about reallocation for eventual retirement.

>If your 403b does not have good conservative choices, you need to think how you go from 75% equity to 40% equity with 8 years of work left- add that to a mid term financial project to complete.
By my definition of very conservative, the only one we have available which is very secure - no risk of loss - is the TIAA traditional. However, there are lots of bond funds available, I just never looked at them because that's what the hub likes to do, and because they don't really match our definition of "very conservative".

>IMO your impending retirement (in 12 years) trumps the need for financial aid. I would rank problems as
Um... we weren't planning on retiring in 12 years.

>If you really really want to do the financial aid thing, best thing I would suggest is this-
>
>1) take excess savings and buy another property (add liabilities to financial statement)
I am just learning about financial aid calculators, but the ones I found online, based on the federal financial aid calculator, ignore liabilities altogether. Even mortgages. The calculators primarily look at:
- income (sheltering only a small amount for a family of 4, iirc it's under $30K)
- non-retirement savings (sheltering a max of under $50K)
- number of children in college
- college savings
- based on the number of children in college, a certain percentage of the college savings is expected to be spent each year, and a different percentage of the non-sheltered non-retirement savings is expected to be spent each year, and in addition the percentage is dependent on whether the funds are in the parents' or the student's name

>2) not use 529 plan (the 529 plan will probably cause more aid problems than high taxable account balances would- 529 plans are money specifically allocated for education)
I actually stopped contributing to the 529s last year, when we saved enough for 4 years of state for the first kid, now I am putting the college savings into cds (still at only 2.75-2.6%), to give us flexibility in case a kid doesn't want to go to college, for some crazy reason. I have toyed with the idea of sheltering the non-529 savings in an annuity to help with the tuition aid calculations, having the kids take loans out if they need, and then helping the kids repay their loans when they are done. I'm not sure whether or not this is a good idea. From what I have read, the only way to shelter assets from the aid calculators is in retirement vehicles.

>3) when your first kid is a junior in HS (the spring of his Junior year), take measures to lower the AGI on tax return (take half the year off or something like that). Do that again when kid 2 is a junior in HS.
This is not a possibility. If I take a year off, my career would end. Also, even if I could, does it really make sense to give up that much income for an amount of college aid which would be much less?

>The spring of the Junior year is most important YEAR for taxes. So in spring of sophomore year/fall of junior year take steps, because you file that tax return in spring of junior year and send that info in in fall of senior year for financial aid.
Yes, I know. That's why we started increasing our 403b contributions last year (our kid is a freshman this year), with a goal of maxing out two years from now when the kid is a junior.

[jIM_Ohio]

without making a long reply which is tough to follow, you have 2-3 "problems" which are very detailed.

One is the 75-25 allocation of retirement monies, and how to deploy this with new Roth deposits and existing 403b monies.

The suggested solution for this is to raise bond fund contributions and holdings in 403b, another retirement account, or create a muni fund position in a taxable account.

A second problem is the financial aid. Even if you put 3k-8k per year into a muni bond fund, that would not make a large taxable position in 4 years or 8 years. However if that was not desireable, you need to look at bigger options. I might consider life insurance- really.

If you project a 160k need for a kid to go to college, you could buy a 160k permanent insurance policy (if you die the money exists) and fund it so when kid enters college, it has a 160k cash value. That entire investment is hidden from the aid calculators (for example).

I don't think the life insurance option is discussed much, but it is something to consider. If taxable accounts are too high, it is easy to spend them to help the calculation.

A third problem is the shifting of assets from aggressive to conservative. Once you hit 12X expenses in retirement accounts, I would strongly advise to lower risk profile- even if you plan to work for another 10-15 years. Life happens fast, and your worst case (job loss or spouse illness) allows both to retire "instantly" once you have 25X- even if the "plan" is to work another 10 years past 25X expenses.

Another option to consider at 25X expenses is to purchase a vacation home, work as a consultant, or start a new career or charitable cause.