PP implementation: balancing during accumulation phase

[Btodd3]

I'm 35 and about to implement the PP with all future retirement contributions to two new Schwab Roth IRAs (mine and my wife's, newly-opened for PP purposes) and my Roth TSP (federal govt's version of 401K). I have two questions:

1) Is any of the PP magic lost if my 35/15 balancing comes through future contributions as opposed to selling?

2) My Roth TSP has $55K in a very-secure cash fund. Since I can't feasibly move any of the cash out of the Roth TSP and into the two Roth IRAs to divide things up 25/25/25/25, I'm going to leave the cash as it is. Instead, all future contributions will be 25% cash fund in TSP; 25% stock fund in TSP; 25% TLT in Roth 1 and Roth 2; and 25% SGOL in Roth 1 and Roth 2. Will having a total cash allocation in the TSP that's way over 25% prevent me from effectively balancing the remaining gold, bond, and stocks? It seems like the cash allocation wouldn't fluctuate like the other three categories.  And, as long as I contribute 25/25/25/25, I could simply rebalance-by-buying the gold, bonds, and stocks at 33%, 33%, 33% to achieve a PP that just happens to have extra cash. But I suck at math, and maybe this doesn't make sense.

Any advice to a newbie would be appreciated.

Thank you

[nwagers]

In regards to the first question, there have been a few threads on this forum about whether a "Rebalancing Bonus" exists. There are camps on both sides of that thought. I tend to think there may be a small one, but in either case, it's difficult to quantify. If your annual accumulation is a significant fraction of your total assets then you'll be balancing by buying. It's just the math of the situation. In general, it must be the more efficient way since it's "Buy" vs. "Buy, Sell, Buy".

For the second question, why continue to hold and further contribute to the cash portion inside your TSP? If you are going for a PP, assuming you contribute nothing else to the cash, you'll have to accumulate ~$150k to balance it. If instead, you divided it, you could be balanced immediately. If the issue comes down to fund selection, it sounds like you can at least move half into stocks. That would let you be balanced after only $50k in new money.

Also, it sounds like you're very heavy with Roth accounts. Have you considered balancing that with traditional accounts? By having a nice mix you can be more flexible in future tax planning. Say for example you get laid off or quit, you can do a traditional to Roth conversion at a low tax rate. And at retirement you can take from the traditional up to a modest tax bracket and then take the rest from Roth accounts. Obviously it all depends on your current tax rate.

[Btodd3]

Thanks for the insights, nwagers. I think you must be right: "buy" is more efficient than "buy, sell, buy."

Regarding your comments on the second question. The suggestion seems to complicate things a little too much. I would then have over-allocations to two asset classes, one of which is volatile. It would take about 5 years' worth of IRA contributions to the two IRAs to bring the gold and bonds up to the levels of the cash and stocks--assuming stocks don't tank between now and then. I still tend to think leaving an over-allocation to the cash is less problematic because it wouldn't fluctuate much, and I would simply start contributions to the remaining three classes at the same time. I'll think about your suggestion some more.

I had not considered your traditional IRA idea. I appreciate the suggestion. I will have to research that. I am expecting to receive military and federal-govt pensions, so I need to figure which fits best considering those sources of income.

Thanks again for the input!

[rocketdog]

I wrestled with whether to look at all our (my wife and me) retirement accounts as one "overall" account, or whether to treat each account as an island unto itself.  I decided to do the latter, since you can't rebalance between retirement accounts.  It's a lot more work to track, but I feel it gives me far more flexibility too.

Our Roth IRAs are at Schwab and they are pure PPs.  Incidentally, you can get a commission-free PP at Schwab using these ETFs:

SCHO = Cash
SGOL = Gold
TLO = Bonds
SCHB = Stocks

If you want to add some foreign exposure to the stock portion of your PP (which HB permitted), you can buy SCHF as well (I went 15% SCHB, 10% SCHF myself).  If the .39% expense ratio of SGOL is too steep for you, consider IAU at .25% even though it is not commission free.  If you only rebalance once a year and have more than $6,400 to invest in either SGOL or IAU, it will be cheaper for you to go with IAU because the lower expense ratio will save you more than the cost of the once-per-year commission of $8.95. 

Our 401Ks are a 70/30 stock/bond mix due to limited fund choices.  And our IRAs are a sort of hybrid between a Bogle portfolio, an Ivy Portfolio, and an All-Weather portfolio. 

Incidentally, I have access to Morningstar's database through our local library, and I use their X-Ray tool and Interpreter to analyze our overall holdings.  Morningstar classifies our holdings as "Core", with moderate risk and good diversification.  I found that to be an invaluable tool when trying to decide how to invest within each of our 6 retirement accounts while still holding to an overall investing approach.